2022 (4) TMI 1686 - AT - Income Tax

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 ... Cost of acquisition - Capitalisation of interest on borrowed funds - Substituted loan retaining nexus with acquisition of propertyCost of acquisition - Capitalisation of interest on borrowed funds - Substituted loan retaining nexus with acquisition of property - Section 48 deduction - Interest paid on the loan taken from India Bulls, which replaced the earlier borrowing used for purchase of the property, was includible in the cost of acquisition while computing capital gains. - HELD THAT: - The Tribunal found that the original borrowing had been taken for acquiring the property and that the subsequent loan from India Bulls was used only to repay that earlier acquisition loan. On the material placed, the later borrowing was not shown to have been diverted for any other purpose, and the mere substitution of one lender by another, or the fact that the later advance was secured by mortgage, did not break the nexus with acquisition. Applying the principle that interest on borrowed funds used for acquiring the asset forms part of the cost of acquisition, the Tribunal held that interest paid on the substituted loan, to the extent relatable to purchase of the property, was deductible in computing capital gains. The decision relied on by the first appellate authority was held inapplicable because, in that case, the liability discharged out of sale proceeds had no direct nexus with acquisition of the property, whereas in the present case the interest was directly connected with the borrowing used for purchase and replacement of that purchase loan. [Paras 9, 10, 12]The disallowance was unsustainable, and the assessee was entitled to deduction of the interest paid on the substituted acquisition loan while computing capital gains.Final Conclusion: The Tribunal allowed the appeal and held that interest paid on the India Bulls loan, being a substituted borrowing used to discharge the earlier acquisition loan, formed part of the cost of acquisition for computation of capital gains. 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.