The Pune bench of the Income Tax Appellate Tribunal ( ITAT ) observed that Interest expenditure incurred on capital allowable as deduction under Section 24 of Income Tax Act 1961 and not part of cost acquisition.
An appellant company under the Companies Act, 1956, engaged in hospitality. For the 2015-16 assessment, the company had reported nil income. Subsequently, the Income Tax Officer assessed a total income of Rs.41, 68,080/ on 28.11.2017. The dispute centered on the Assessing Officer’s addition of Rs.41, 68,078/- under section 50C of the Income Tax Act, 1961, concerning the sale of two Mumbai flats. The Assessing Officer had argued that the Stamp Duty Valuation Authority had overvalued them at Rs.2, 21, 10,000/-, while the actual value was Rs.50, 00,000/-. The company had proposed a Departmental Valuation Officer referral, resulting in a fair market value of Rs.77, 11,300/ per flat. Subsequently, the Assessing Officer taxed capital gains at Rs.41, 68,078/-.
Counsel for the assesse Hari Krishan contended that the Assessing Officer’s addition was untenable, exceeding the scope of the limited scrutiny assessment. The disallowed indexed cost of interest expenditure, which formed the basis of the addition, was asserted to have fallen beyond the intended scrutiny.
Additionally, on substantive grounds, it was argued that the gains from the sale of the flats, now taxed under ‘capital gains,’ were obtained through funds borrowed from directors. Since no deductions were claimed under Sections 24(b) or 36(1)(iii), of the Income Tax Act 1961,it was argued that the indexed cost of interest expenditure should have been allowed as a deduction.
Counsel for the Respondent A. K. Mahala contended that the cost of interest expenditure on loans used to acquire two flats was later sold, resulting in taxable gains categorized as “capital gains.” The assessment order didn’t explicitly address the allow ability of this indexed cost. Despite this, the appellant initially sought a deduction for interest expenditure in the capital gains computation.
The National Faceless Assessment Centre ( NAFC ) citing the Tata Iron & Steel Co. case, upheld the disallowance. Notably, the acquired flats were treated as capital assets, making the income accessible under “Income from house property” Section 22 of the Income Tax Act 1961. Section 24 of the Income Tax Act 1961, allowed a deduction for interest on borrowed capital, distinct from the cost of acquisition. The legal principle underscored that statutory deductions had to align with the Income Tax Act, validating the Assessing Officer’s approach.
The single member bench of the tribunal comprising Inturi Rama Rao ( Account member ) concluded that the cost of acquisition of property also forms an integral part of the sale of property. Therefore, it cannot be said that the Officer had traveled beyond the items for which the case was selected for scrutiny assessment. Accordingly, the grounds of appeal/additional grounds of appeal filed by the assessee stood dismissed.
In the result, the appeal filed by the assessee was dismissed.
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