1973 (2) TMI 11 - HC - Income Tax

Interest on loan to buy land included in capital asset's actual cost; ground rent excluded as maintenance

Whether interest and ground rent formed part of the 'actual cost' of the capital asset: HC construes 'actual cost' to include expenses incurred in ... Claim with regard to the interest - computation of the actual cost of the capital asset - purchase and sale of the land - Whether, the interest amount of Rs. 16,878 and the ground rent of Rs. 3,793 constituted part of the actual cost of the plot to the assessee for the purpose of determining the capital gain? - HELD THAT:- We really see no justification for putting the construction on the words ' the actual cost to the assessee of the capital asset ' which the learned counsel for the revenue seeks to put on them, namely, that the actual cost of the asset is its cost on the date of its acquisition. By putting such a construction we would be qualifying the words, used in clause (ii) in a manner which could not have been intended by the legislature. We cannot also accept the construction sought to be put by the learned counsel for the revenue on the words ' including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto ' as meaning that it is only the expenditure incurred in making additions or alterations to the capital asset that can be included in the actual cost of the capital asset and that other similar items of expenditure cannot be so included. It would be reasonable, in our view, to include in the actual cost of the capital asset all expenses which were incurred by the assessee in acquiring the capital asset as distinct from the items of expenditure which were incurred by him for retaining or maintaining the capital asset. In the present case, we find that the assessee in order to purchase the land had not only to borrow the amount of Rs. 95,000 which was the consideration for the purchase of the land, but also had to pay interest of Rs. 16,878 on the amount borrowed by her. The amount of Rs. 95,000 plus the interest paid by the assessee constitutes the actual cost to the assessee of the land. The fact that the amount of Rs. 95,000 was paid by the assessee to the vendor and the amount of interest of Rs. 16,878 was paid to a different person, namely, her mother-in-law, does not make any difference so far as the assessee is concerned in respect of the actual cost of the land to her. It will not also make any difference whether the interest was paid on the date of the purchase or whether it is paid subsequently. We hold that the Tribunal was right in adding the interest amount of Rs. 16,878 towards the actual cost of the land. With regard to the ground rent of Rs. 3,793, the assessee's claim, in our view, stands on a different footing. The expenditure was not incurred by the assessee for the acquisition of the capital asset. It was incurred by her for keeping the capital asset in her possession. It is in the nature of any other expenditure that the assessee might have incurred to maintain the capital asset. It is similar to the salary which the assessee might have paid to a chowkidar engaged for keeping watch on the land. Such items of expenditure cannot be said to be expenditure incurred by the assessee for the acquisition of the capital asset and they cannot, therefore, be included in computing the actual cost to the assessee of the capital asset. The Tribunal, in our view, was wrong in adding this amount of Rs. 3,793 also in computing the actual cost of the capital asset. The interest amount of Rs. 16,878 constituted part of the actual cost of the plot to the assessee for the purpose of determining the capital gain ; but the ground rent of Rs. 3,793 did not constitute part of such actual cost. Issues Involved:1. Whether the interest amount of Rs. 16,878 constituted part of the actual cost of the plot to the assessee for the purpose of determining the capital gain.2. Whether the ground rent of Rs. 3,793 constituted part of the actual cost of the plot to the assessee for the purpose of determining the capital gain.Issue-wise Detailed Analysis:1. Interest Amount of Rs. 16,878:The assessee purchased a plot for Rs. 95,000 and raised a loan from her mother-in-law to make the payment. She paid Rs. 16,878 as interest on this loan. The Income-tax Officer excluded this interest from the actual cost of the land, reasoning that section 12B(2)(ii) of the Indian Income-tax Act, 1922, excludes any expenditure in respect of which allowance is admissible under sections 8, 9, 10, and 12. However, the Tribunal included this interest in the actual cost, leading to the dispute.The court examined whether the interest could be included in the actual cost under section 12B(2)(ii). The court determined that the interest paid was not admissible under sections 8, 9, 10, and 12, as the property was an open plot of land without any building, and the transaction was not treated as a business transaction. The court referred to the definitions and interpretations of 'actual cost' and concluded that the interest paid by the assessee was a necessary expenditure for acquiring the capital asset. Thus, it constituted part of the actual cost of the land.The court referred to previous judgments, including Commissioner of Income-tax v. Fort Gloster Industries Ltd. and Habib Hussein v. Commissioner of Income-tax, which supported the inclusion of necessary costs for acquiring a capital asset in the actual cost. Therefore, the court held that the interest amount of Rs. 16,878 should be included in the actual cost of the plot for determining capital gains.2. Ground Rent of Rs. 3,793:The assessee also claimed Rs. 3,793 as ground rent paid for the plot. The Income-tax Officer excluded this amount, and the Tribunal included it, leading to the dispute.The court distinguished the ground rent from the interest payment, stating that the ground rent was incurred to maintain the capital asset in possession, not for acquiring it. The court compared it to other maintenance expenses, such as paying a chowkidar to watch over the land, which are not included in the actual cost of a capital asset. Therefore, the court held that the ground rent of Rs. 3,793 did not constitute part of the actual cost of the plot for determining capital gains.Conclusion:The court answered the reference by stating that the interest amount of Rs. 16,878 constituted part of the actual cost of the plot for determining capital gains, while the ground rent of Rs. 3,793 did not. Both the revenue and the assessee succeeded in part, and there was no order as to costs.