The Kolkata Tribunal held that interest paid on borrowed funds utilized for the acquisition of the property be treated as part of the “cost of acquisition” for the purpose of calculating Long-Term Capital Gains (LTCG)

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The Income Tax Appellate Tribunal (ITAT) decision in the case of Bani Broto Banerjee pertains to the computation of long-term capital gains on the sale of property and the treatment of interest expenditure incurred on loans used for acquiring the property. Below is an interpretation of the decision:

Background and Core Dispute:

The assessee sold a property and computed long-term capital gains by including two items as deductible costs:

  • The written-down value of furniture.
  • Interest expenditure incurred on loans taken for acquiring the property.

The Assessing Officer (AO) disallowed both these claims while determining the capital gains. However, the Commissioner of Income Tax (Appeals) [CIT(A)] partially accepted the assessee’s contention and allowed the deduction of furniture-related costs while disallowing the interest expenditure.

 Tribunal’s Findings:

The Tribunal analyzed whether the interest on loans used for acquiring the property should form part of the cost of acquisition under Section 48 of the Income Tax Act.

Relying on earlier judicial precedents, the ITAT concluded that:

  • Interest incurred on loans for acquiring the property directly contributes to the cost of acquisition.
  • The cost of acquisition under Section 48 is independent of the deductions available under Section 24(b) (which applies to income from house property).
  • Judicial decisions (e.g., CIT vs. Mithilesh Kumari) support the view that interest on borrowed capital forms part of the cost of acquisition for computing capital gains.

Reference to Amendments in Finance Bill, 2023:

The Tribunal acknowledged the amendment to Section 48 in the Finance Bill, 2023, applicable prospectively from Assessment Year 2024-25. This amendment prevents taxpayers from claiming interest under both Section 24(b) and Section 48.

However, since the current case pertained to Assessment Year 2014-15, the existing legal framework allowed the interest to be included in the cost of acquisition under Section 48.

Conclusion:

The ITAT allowed the assessee’s appeal, holding that the interest expenditure incurred on loans used to purchase the property is deductible as part of the cost of acquisition under Section 48.

Consequently, the addition made by the Assessing Officer was deleted, and the assessee’s computation of capital gains was accepted.

Implications:

This decision reinforces the principle that interest on loans used for acquiring an asset can be considered part of the cost of acquisition for computing capital gains, provided the law applicable during the relevant assessment year permits it.

Taxpayers must note the amendment in the Finance Bill, 2023, which eliminates the possibility of double deductions from AY 2024-25 onward.