While calculating capital gains tax on sale of a house property, can we consider the housing loan interest as a cost of acquisition?
This is a question we received recently from a reader of this blog. The argument is that one takes a housing loan and pays interest on the loan only for the purpose of acquiring the house property. Hence, when the property is sold, shouldn’t interest payment be considered as a cost of acquisition?
Section 24 of the Income Tax Act, explicitly allows us to consider interest on housing loan as a deduction while calculating income from house property. But what about while calculating capital gains tax? The law permits reduction of capital gains by adding certain expenses to the cost of acquisition of a house property. Can interest be considered for this?
Interest Expense as Cost of Acquisition – Legal Basis
Sections 48, 49 and 55 of the Income Tax Act specify issues related to the cost of acquisition of a capital asset while calculating capital gains. However, these sections do not explicitly state whether interest on housing loan can be considered as cost of acquisition for the purpose of calculating capital gains when a house property is sold.
We have a couple of case laws in which legal authorities have declared that interest can be considered as cost of acquisition in case of property acquisition.
a. CIT Vs. K. Raja Gopala Rao (2001 252 ITR 459 Mad)
This case concerns sale of a hotel property and the court declared that the interest on capital borrowed for the purpose of acquisition of the property shall be considered as cost of acquisition.
Payment of consideration for the sale indisputably having been made with the borrowed funds, the borrowing directly related to the acquisition and, interest paid thereon would form part of the cost of acquisition.
b. CIT Vs. Sri Hariram Hotels (P.) Ltd. (2010 229 CTR 455 Kar)
The Tribunal after hearing the parties and having considered the case of the assessee held that out of the borrowed loan from the directors, the property has been acquired and any interest paid thereon would also be accounted towards the cost of acquisition of the asset.
A Case of Double Benefit?
Let us say a person buys a house property on borrowed capital and uses the interest paid on capital as a deduction while calculating income from house property. When the person sells the house property, he uses interest as a cost of aquisition in order to reduce the capital gains tax liability. Is this not a case of double deduction?
A judgement delivered by a Chennai Tribunal (ACIT v C.Ramabrahmam) in 2012, states that a person can claim benefit under both Section 24 and Section 48.
After perusing the above said provisions, we are of the opinion that deduction under section 24(b) and computation of capital gains under section 48 of the “Act” are altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operative of the other. In other words, a deduction under section 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under section 48 of the “Act”.
What About Indexation?
There is a small issue related to considering interest as a cost of acquisition while calculating capital gains. If the interest amount is paid across years on account of the loan schedule, how does one look at indexation? Should interest amounts paid across years be simply added up to arrive at the total cost of acquisition?
There does not seem to be any explicit reference to this in any of the judicial pronouncements on this issue.