Interest Paid on Borrowings to Acquire Property deductible from Sale Consideration: ITAT directs to Re-Compute Capital Gain [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) has directed that interest paid on borrowings to acquire property should be deductible from the sale consideration, ordering the re-computation of capital gains.

The ITAT allowed the appeal concerning the addition of Long-Term Capital Gains (LTCG) for the assessment year 2006-07.

The case involves the legal heir Diyya Krishnasayee representing the deceased assessee, Jayanthi Krishnamurthy.

The deceased assessee, Ms. Jayanthi Krishnamurthy, was involved in real estate activities. During a search under Section 132 of the Income Tax Act on May 16, 2007, she admitted to receiving cash of Rs. 2 Crores from one Shri Duraipandian on May 15, 2007. The primary contention arose from the disposal of certain properties for Rs. 350 Lacs, acquired in the financial year 1991-92 for Rs. 28.63 Lacs. Due to non-payment of loans, the bank sold the property and retained the proceeds, leaving no amount for the assessee.

The primary issue was the confirmation of LTCG of Rs. 295.91 Lacs by the Assessing Officer (AO), despite the assessee's claim that no capital gains were chargeable as the sale proceeds were fully utilised to repay bank loans.

In the first round of appeals, the case was remanded back to the Commissioner of Income Tax (Appeals) [CIT(A)] for fresh consideration. In the set-aside proceedings, the CIT(A) confirmed the addition of LTCG, rejecting the claim that interest paid on the loan should be allowed as a cost of acquisition. The assessee’s request for rectification was also denied.

The appellant, represented by Y. Sridhar, argued that the loan taken for acquiring the property and the interest paid should be included in the computation of capital gains. They cited the decisions of the Karnataka High Court in CIT vs. Sri Hariram Hotels P Ltd. and the Delhi High Court in CIT vs. Mithlesh Kumari, which supported the inclusion of interest paid in the cost of acquisition.

The respondent, represented by Nilay Baran Som, contended that the loan was not taken for the acquisition of the property but for business needs, and there was no nexus between the loan and the capital asset. Thus, the interest paid could not be allowed as a cost of acquisition.

The Tribunal found that the deceased assessee had purchased 69.92 grounds of land for a real estate project. Despite the project not materialising, resulting in a one-time settlement with the bank where the entire sale proceeds were retained by the bank, the Tribunal upheld the inclusion of the interest component in the computation of capital gains.

A two-member bench of Manoj Kumar Aggarwal (Accountant Member) and Manu Kumar Giri (Judicial Member) concluded that the interest expenditure was allowable in the computations of capital gains. The AO was directed to re-compute the income of the assessee, allowing the impugned interest expenditure.

The ITAT allowed the appeal, providing significant relief to the legal heir of the deceased assessee by directing the re-computation of LTCG, inclusive of the interest component as a cost of acquisition.

To Read the full text of the Order CLICK HERE

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