Cost of acquisition for capital gains can include purchase interest, legal fees, and land tax under commercial accounting principles.

For short-term capital gains, expenditure incurred in acquiring and perfecting title to a capital asset may be capitalised into the cost of acquisition when commercial accounting principles require it. Interest on borrowed purchase money, advocate's fees for completing the acquisition, and urban land tax treated as a charge on the land were included as acquisition cost. Section 55(1)(b) was held inapplicable because it concerns cost of improvement, not the composition of cost of acquisition under sections 45 and 48. The computation of capital gains was therefore governed by ordinary commercial and accountancy principles, supporting inclusion of the claimed expenditure in the acquisition cost.

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Issues: Whether interest on borrowed funds, advocate's fees, and urban land tax paid in connection with acquisition of land could be capitalised and added to the cost of acquisition for computation of short-term capital gains.

Analysis: Section 45 of the Income-tax Act, 1961 taxes profits and gains arising from transfer of a capital asset, and section 48 requires computation by deducting the cost of acquisition and expenditure incurred in connection with the transfer. The expression "actual cost" and the computation of capital gains were held to be governed by commercial principles and ordinary accountancy practice. Interest on borrowed capital used for purchase, fees paid to the advocate for finalising the acquisition, and urban land tax charged as a first charge on the land were treated as expenditure properly forming part of the acquisition cost. The contention based on section 55(1)(b) was rejected because that provision concerns cost of improvement and does not control what can be included in cost of acquisition. The legislative background of capital gains taxation also supported a commercial computation of short-term gains.

Conclusion: The entire expenditure claimed by the assessee was rightly capitalised and added to the cost of acquisition. The assessee's computation of short-term capital gains was correct, and the Revenue's objection failed.

Ratio Decidendi: For short-term capital gains, expenditure incurred in acquiring and perfecting title to the capital asset, including interest on borrowed purchase money, acquisition-related legal fees, and taxes constituting a charge on the asset, may form part of the cost of acquisition where commercial accounting principles so require.

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