Acquisition Cost Dispute in Sadhna Aggarwal vs ACIT: Capital Gains Assessment

Acquisition Cost Dispute in Sadhna Aggarwal vs ACIT: Capital Gains Assessment

Case Number: ITA 6620/DEL/2019

Appellant: ACIT Circle-20(2), New Delhi

Respondent: Sadhna Aggarwal, Delhi

Assessment Year: 2016-17

Case Filed On: 2019-08-08

Order Type: Final Tribunal Order

Date of Order: 2023-03-15

Pronounced On: 2023-03-15

Introduction

The case of Sadhna Aggarwal vs ACIT revolves around the contentious issue of acquisition costs and the inclusion of interest on borrowed funds in the calculation of capital gains. This dispute, brought before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, highlights the complexities involved in determining the accurate cost of acquisition for tax purposes, particularly when loans and interest payments are involved.

Background

Smt. Sadhna Aggarwal, the respondent, filed her return of income for the assessment year 2016-17, declaring a Long Term Capital Loss of Rs. 5,34,61,155/-. The loss arose from the sale of a penthouse located at Omaxe the Forest, Noida. The property was initially acquired jointly by Smt. Aggarwal and her late husband, Shri Mahesh Aggarwal, with the ownership being transferred solely to her name after her husband’s demise in 2010.

To finance the purchase, Smt. Aggarwal had taken a housing loan from DHFL (NBFC) and paid interest on this loan. In her return, she claimed the interest paid on the loan as part of the cost of acquisition for the purposes of computing capital gains. However, the Assessing Officer (AO) raised objections to the inclusion of this interest in the cost of acquisition and made several disallowances, leading to a dispute that ultimately reached the ITAT.

Legal Issues

The primary legal issue in this case was whether the interest paid on the housing loan could be included as part of the cost of acquisition under Section 48 of the Income Tax Act, 1961. Additionally, the AO had reduced the basic cost of the property and disallowed other related expenses, leading to a significant reduction in the Long Term Capital Loss claimed by the respondent.

Arguments Presented

Respondent’s Arguments:

Smt. Aggarwal argued that the interest paid on the housing loan should be considered as part of the cost of acquisition. She contended that the loan was directly related to the purchase of the property, and without it, the acquisition would not have been possible. The respondent also argued that the increase in the property’s area from 6500 sq. ft. to 6610.84 sq. ft. justified the higher acquisition cost claimed in her return. Furthermore, she challenged the AO’s decision to reduce the cost of the flat and the disallowance of interest paid to the builder for delayed payments.

Appellant’s Arguments:

The AO, representing the Revenue, argued that the interest paid on the housing loan should not be included in the cost of acquisition under Section 48, as it should be claimed under Section 24(b) of the Income Tax Act, which deals with deductions from income from house property. The AO also maintained that the basic cost of the flat should be restricted to the amount mentioned in the original allotment letter and that the interest paid to the builder should be proportionately reduced.

ITAT’s Observations

The ITAT, comprising Shri Kul Bharat (Judicial Member) and Shri Pradip Kumar Kedia (Accountant Member), carefully considered the arguments and evidence presented by both parties. The tribunal noted that the issue of whether interest on borrowed funds could be included in the cost of acquisition had been addressed in several judicial pronouncements, including the landmark case of CIT vs. Mithilesh Kumari (92 ITR 9) by the Delhi High Court.

The tribunal observed that the interest paid on the housing loan was indeed directly related to the acquisition of the property. Without the borrowed funds, the respondent would not have been able to purchase the penthouse, and therefore, the interest should be considered part of the acquisition cost. The ITAT also took note of the recent proposed amendments in the Finance Bill, 2023, which aimed to prevent double deduction of interest under both Sections 24(b) and 48. However, the tribunal clarified that these amendments were prospective and did not affect the current case.

Final Judgment

In its final judgment, the ITAT ruled in favor of Smt. Sadhna Aggarwal, upholding the inclusion of the interest on borrowed funds in the cost of acquisition. The tribunal also reversed the AO’s decision to reduce the basic cost of the flat and disallow other related expenses. The ITAT found that the respondent’s claims were justified and that the AO’s adjustments were not warranted.

The tribunal’s order emphasized that the interest paid on borrowed funds should be included in the cost of acquisition for the purposes of computing capital gains, provided there is a direct nexus between the loan and the acquisition of the property. The ITAT’s decision aligns with the existing legal framework and judicial precedents, providing clarity on the treatment of interest in capital gains calculations.

Conclusion

The case of Sadhna Aggarwal vs ACIT serves as an important reminder of the complexities involved in determining the cost of acquisition for capital gains purposes, particularly when loans and interest payments are involved. The ITAT’s ruling reinforces the principle that interest on borrowed funds used for acquiring property can be included in the cost of acquisition, provided there is a clear connection between the loan and the purchase.

This decision provides valuable guidance for taxpayers and tax professionals alike, highlighting the importance of accurately determining acquisition costs and understanding the implications of interest payments on capital gains assessments. The ruling also underscores the need for careful consideration of the applicable legal provisions and judicial precedents when dealing with similar issues in the future.

As tax laws continue to evolve, it is essential for taxpayers to stay informed about the latest developments and ensure compliance with the relevant regulations. The ITAT’s decision in this case sets a significant precedent that will likely influence future cases involving similar disputes over acquisition costs and interest deductions.

In conclusion, the judgment in Sadhna Aggarwal vs ACIT reaffirms the taxpayer’s right to include interest on borrowed funds in the cost of acquisition, provided the necessary conditions are met. This ruling provides clarity on a critical aspect of capital gains taxation and ensures that taxpayers are not unfairly penalized for legitimate expenses incurred in the acquisition of property.

Acquisition Cost Dispute in Sadhna Aggarwal vs ACIT: Capital Gains Assessment