TAX FORUM: QUESTIONS & ANSWERS
Interest on borrowed capital and cost of improvement
In the Tax Forum dated July 6, 2009, while giving reply on computation of long-term capital gains, you have stated that the interest paid for acquiring a flat could be treated as cost of improvement if interest had not been allowed as a deduction of computation of income. Since such interest is deductible from property and there is no option for giving up a deduction, is the inference that it can be treated as cost of improvement legally valid? If so, is it a good source of tax planning?
Interest paid is deductible for acquiring a property under Sec. 24 out of the income of such flat, where such income is assessed as income from property.
Where the income from property is assessed and there is income therefrom, interest is bound to be allowed against such an income so that the question of treating it as cost in such cases does not arise.
There is no option not to claim interest as opined by the reader, C. Baskaran, Chennai. But where property like land or property not fully constructed or otherwise unusable, interest is not deductible, it can be part of capital cost.
Similarly, where the property is treated as an asset of the business and interest on borrowings for acquisition of the flat is not deductible as in the case of business not set up or where it was not used for business, such interest can be cost of improvement.
There is scope for claiming interest as part of cost in such cases as decided in a number of cases as in CIT v Mithlesh Kumari (1973) 92 ITR 9 (Del), Addl. CIT v K.S. Gupta (1979) 119 ITR 372 (AP), CIT v Maithreyi Pai (1985) 152 ITR 247 (Kar) and Naozar Chenoy v CIT (1998) 234 ITR 95 (AP). There is, therefore, no scope for tax planning.
Printer friendly
page
Send this article to Friends by
E-Mail
Business
