Borrowing costs linked to property acquisition can form part of cost of acquisition for capital gains computation.

Interest and related mortgage expenses on a loan used to discharge the original housing loan were treated as part of the cost of acquisition for capital gains computation, because the later borrowing remained directly linked to funding the purchase of the property. On those facts, the post-acquisition loan was not viewed as an independent expense disconnected from acquisition. The ruling applies section 48 of the Income-tax Act, 1961 to permit deduction of borrowing costs where the borrowing either finances the acquisition or merely substitutes the original acquisition loan. The contrary view of the tax authorities was rejected.

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Issues: Whether interest and related mortgage expenses paid to the lender on a loan taken after purchase of the property, and used to substitute the earlier housing loan, could be included in the cost of acquisition while computing capital gains.

Analysis: The property had been acquired first, and the later loan from the financier was found to have been used to discharge the earlier housing loan that had financed the purchase. On these facts, the later borrowing did not represent an independent post-acquisition expenditure disconnected from the purchase of the asset. The computation of capital gains under section 48 of the Income-tax Act, 1961 permits deduction of the cost of acquisition, and interest paid on borrowings used for acquiring the property forms part of that cost when the borrowing is directly linked to the acquisition or merely substitutes the original acquisition loan. The authorities below had treated the mortgage-related payments as unrelated to acquisition, but that view was rejected on the ground that the borrowings were intrinsically connected with the purchase funding.

Conclusion: The interest paid to the financier on the loan used for acquiring the property was allowable as part of the cost of acquisition, and the assessee succeeded.

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