Commissioner of Income Tax vs K. Raja Gopala Rao

R. Jayasimha Babu, J.—The question referred is as to whether, on the facts and in the circumstances of the case and having regard to the

provisions of sections 48 and 55(2) of the income tax Act, 1961 (''the Act''), the Tribunal was right in holding that the mortgage expenses incurred

in connection with the acquisition of the property and the interest payable on the mortgaged amounts which have been utilised as part of the

consideration, would form part of the cost of acquisition of the property for the purpose of computation of capital gains in the assessee''s case?

The assessee is an individual who was carrying on the business of running a hotel. During the assessment years 1973-74 and 1974-75, the

assessee received capital gains on the sale of his property at No. 4, Cathedral Road, Madras, which he had purchased for Rs. 5,45,349 on 6-12-

1970. On the same day, he had mortgaged the property to secure a loan of Rs. 4,00,000 which had been raised solely for the purpose of paying

his vendor and for meeting the cost of the stamp duty on the sale deed. The revenue did not dispute the correctness of the claim of the assessee

that all the money borrowed under the mortgage was utilised solely for the purpose of paying a part of the consideration for the same and for

meeting the cost of the stamp papers.

The assessee claimed that the cost of execution of the mortgage as also the amount of interest paid to the mortgagee till the date of the sale of

the property, a part of which was sold in the assessment year 1973-74 and the remaining part in the assessment year 1974-75, were required to

be added to the purchase price while computing the cost of acquisition. That claim was disallowed by the Assessing Officer as also by the first

appellate authority, but was allowed by the Tribunal on further appeal.

The Tribunal did so and rightly by relying upon the law laid down by the Supreme Court in the case of Challapalli Sugar Ltd. Vs. The

Commissioner of Income Tax, A.P., Hyderabad, The Apex Court, in the case held, as stated in the headnote in the report, that:

As the expression ''actual cost'' has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this

purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in

commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such

assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of

constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and

added to the cost of the fixed assets....

Here, there can be no doubt that the cost of acquisition to the assessee was not merely the amount that he had paid to the vendor but also the

cost of the borrowing made by him for the purpose of paying the vendor and obtaining the sale deed. The fact that the mortgage was executed

after the sale deed was obtained even though both the documents were signed and registered on the same day, does not render the mortgage and

the borrowing made thereunder irrelevant to the task of determining the cost of acquisition. Without the money borrowed, the assessee would not

have been in a position to buy the property. The purchase not having been made with his own funds, he was required to pay interest for the

borrowed fund and secure the borrowing by creating a mortgage. Such mortgage could not have been created earlier as he had to first acquire title

before encumbering the same. Payment of consideration for the sale indisputably having been made with the borrowed funds, the borrowing

directly was related to the acquisition and, interest paid thereon would form part of the cost of acquisition. The facts of the case, therefore, clearly

fall within the ratio of the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. (supra).

The question referred to us is, therefore, required to be and is answered in favour of the assessee and against the revenue.