Interest expenditure on loans for acquiring capital assets forms part of cost of acquisition for long-term capital gains computation

The ITAT Chennai-AT held that interest expenditure is allowable in computing long-term capital gains. The assessee, engaged in real estate projects, acquired land through bank loans but the project failed and the bank sold the land retaining all proceeds. Following precedents from Sri Hariram Hotels P Ltd. and Mithlesh Kumari cases, the tribunal ruled that interest paid on loans for acquiring capital assets forms part of the cost of acquisition. The AO was directed to re-compute the assessee's income including the interest expenditure in capital gains calculations.

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Issues:
1. Confirmation of addition of Long-Term Capital Gains (LTCG) by the Assessing Officer.
2. Allowability of interest component in the computation of capital gains.
3. Re-computation of income by the Assessing Officer.

Detailed Analysis:
1. The appeal before the Appellate Tribunal ITAT Chennai for Assessment Year 2006-07 arose from the confirmation of certain additions of LTCG by the Assessing Officer under section 153A read with section 143(3) of the Income Tax Act. The deceased assessee's legal heir represented her, challenging the additions made by the Assessing Officer.

2. The case involved the disposal of properties by the assessee, with the Assessing Officer computing LTCG despite the entire sale proceeds being retained by the bank to settle loan dues. The matter had been previously remanded to the CIT(A) for fresh consideration, where it was observed that the loan taken was for business needs, not for acquiring the property, leading to the denial of the claim for cost of acquisition.

3. The Tribunal analyzed the facts, noting that the assessee was engaged in real estate projects and had acquired land with loans that defaulted in repayment. The Tribunal referred to relevant case laws, including decisions from the High Courts of Karnataka and Delhi, where interest components were allowed in the computation of capital gains when the property was purchased with borrowed funds. Based on these precedents and the circumstances of the case, the Tribunal allowed the appeal, directing the Assessing Officer to re-compute the income considering the interest expenditure as allowable.

In conclusion, the Appellate Tribunal ITAT Chennai allowed the appeal, directing the Assessing Officer to re-compute the income of the assessee by considering the interest expenditure as allowable in the computation of capital gains.

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