Actual cost in capital gains includes acquisition-related interest, but excludes post-purchase ground rent on the plot.

For capital gains computation under section 12B(2) of the Indian Income-tax Act, 1922, actual cost includes amounts necessarily laid out to acquire the capital asset, not merely the bare purchase price. Interest paid on borrowed funds used to buy the plot was treated as directly connected with acquisition and therefore part of actual cost. Ground rent, however, was paid to retain possession after acquisition and was treated as a maintenance-type expense, not an acquisition cost. The text explains the distinction between acquisition expenditure and post-acquisition retention expenditure for determining actual cost.

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Issues: (i) whether interest paid on borrowed funds used to purchase the plot formed part of the actual cost of the capital asset for capital gains purposes; and (ii) whether ground rent paid on the plot formed part of the actual cost of the capital asset.

Issue (i): whether interest paid on borrowed funds used to purchase the plot formed part of the actual cost of the capital asset for capital gains purposes.

Analysis: For computation of capital gains under section 12B(2) of the Indian Income-tax Act, 1922, the actual cost to the assessee is not confined to the bare purchase price on the date of acquisition. Amounts necessarily laid out for acquiring the asset are part of actual cost, provided they are not deductible under sections 8, 9, 10 or 12. The interest was incurred to obtain the funds needed for acquisition of the plot and was therefore directly connected with acquiring the asset, not with its retention or maintenance.

Conclusion: The interest amount of Rs. 16,878 formed part of the actual cost of the plot and was rightly included in computing capital gains.

Issue (ii): whether ground rent paid on the plot formed part of the actual cost of the capital asset for capital gains purposes.

Analysis: Ground rent was not incurred to acquire the plot but to keep the asset in possession after acquisition. Such expenditure is analogous to maintenance or preservation expense and does not represent part of the purchase or acquisition cost of the capital asset under section 12B(2) of the Indian Income-tax Act, 1922.

Conclusion: The ground rent of Rs. 3,793 did not form part of the actual cost of the plot and was wrongly included.

Final Conclusion: The reference was answered by including the interest in the actual cost of the plot but excluding the ground rent, leaving each side successful only in part.

Ratio Decidendi: For capital gains under section 12B(2), actual cost includes expenditure necessarily incurred to acquire the capital asset, but not expenditure incurred merely to retain or maintain it after acquisition.

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