ORDER
U.T. Shah, Judicial Member
1. The grounds taken up by the revenue in this appeal read as under :
1 The learned AAC has erred in law and on facts in directing the ITO to allow interest paid on loan while working out the capital gain.
2 On the facts of the case AAC ought to have upheld the order of the ITO.
3 It is, therefore, prayed that the order of the AAC may be set aside and that of the ITO be restored to the above extent.
2. The assessee is an individual. The assessment year is 1977-78 and the relevant previous year ended on 31-3-1977.
3. The facts of the case, the assessee’s contentions and the decision of the ITO thereon, could be gathered from the following relevant portion of the assessment order :
Assessee has shown only income from capital gain on sale of flat at Bombay. Assessee purchased a flat in Navjivan Co-operative Housing Society, Bombay for Rs. 7,700. Assessee was granted a loan of Rs. 11,000. The amount of Rs. 7,700 was paid by the assessee in instalments. The said flat was sold out in 1976 for Rs. 45,000. Assessee has claimed cost of flat at Rs. 22,000 which has been arrived at as under:
Rs.
Initial contribution 7,700 Amount paid towards loan in monthly instalment 5,587 Interest of loan 6,476 Cost of fans & Geysor 1,077 Brokerage 900 22,000From the details mentioned above it is clear that the assessee has paid interest on the instalments of loan at Rs. 6,476. Out of total interest paid by the assessee she received rebate of Rs. 300 in interest. Assessee has claimed interest of loan as capital expenditure, which is not correct. Since the loan on instalment for construction of house property will be a revenue expenditure, same will not be allowable while computing cost of flat. The cost of flat will be as under :
Rs.
Initial contribution 7,700 Amount of loan paid in instalment 5,847 Cost of fan and geysor, etc. 2,277 15,824Thus, the cost of flat will be Rs. 15,824 and not Rs. 22,000 as claimed by the assessee. I, therefore, allow the cost of flat at Rs. 15,824. Total income is computed as under :
Rs.
Sale price 45,000 Less : Cost of flat as discussed 15,824 29,176 Less : Exemption under Section SOT 5,000 24,176 Further deduction at the rate of 25 per cent 6,044 Total income 18,132 r/o 18,1304. Before the AAC, the assessee contended that the ITO was not justified in excluding the amount of interest paid on the loan taken for construction of the property in question, in determining the cost of acquisition of the assets sold by her. For this purpose, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 1TR 167. It was, therefore, urged that the cost of acquisition of the property in question should be taken as shown by her. The AAC accepted the assessee’s contention in the following manner :
On verification of the facts I find that the figure arrived at by the ITO is not correct, because whatever expenses incurred for creating an asset forms the part of the cost and depreciation and development rebate and/ or investment allowance is allowable on the interest etc. Since the expenses incurred by the appellant are for the acquisition of flat and for creating an asset, I am of the view that the ITO was not justified in rejecting the claim of the appellant. The ITO is directed to accept to adopt the cost of the flat as shown by the appellant.
5. Being aggrieved by the order of the AAC, the revenue has come up in appeal before the Tribunal. The learned representative for the department strongly supported the action of the ITO and urged that the order of the AAC should be reversed. According to him, neither the decision in the case of ChaUapalli Sugars Ltd. (supra) nor in the case of CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 (Guj.) would be applicable to the facts and circumstances obtaining in the instant case. It may be mentioned that the assessee in her written submissions dated 5-11-1985, has urged that the order of the AAC should be confirmed. For this purpose, reliance is placed on the decision in the case of Tensile Steel Ltd. (supra).
6. On due consideration of the rival submissions of the parties, I do not find any force in the stand taken on behalf of the revenue. In my view, the ITO has failed to appreciate the assessee’s case in proper perspective vis-a-vis the definitions of ‘cost of improvement’ and ‘cost of acquisition’ contained in Section 55(1)(b) and 55(2) read with Section 48(ii) of the Income-tax Act, 1961. The restriction about the disallowance of interest is in respect of ‘cost of improvement’ and not in respect of ‘cost of acquisition’. Therefore, I am of the opinion that the assessee would be entitled to claim that the interest paid by her should be considered in determining the ‘cost of acquisition” of the asset sold by her. Again, the ratio laid down in the aforesaid two reported cases clearly supports the stand taken by the assessee. Similar issue had come up before the Hon’ble High Courts in the cases of CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi), CIT v. Travancore-Cochin Chemicals Ltd. [1975] 99 ITR 24 (Ker.)(FB), Addl. CIT v. K.S. Gupta [1979] 119 ITR 372 (AP) and CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.). In the case of Maithreyi Pai (supra), the Hon’ble High Court has held that the interest paid on the borrowed capital for the purposes of purchase of shares should form part of ‘the cost of acquisition’ provided the assessee has not got deduction, in respect of such interest payment in earlier years. In the instant case, from the order of the ITO it is not clear as to when the assessee acquired the flat in question and whether she was allowed deduction of interest payments in computing the income from the said flat under the head ‘Income from house property’ in earlier years. If that be so, then the interest paid on the loan cannot be treated as part of ‘the cost of acquisition’. However, if the assessee has not been allowed such deduction in earlier years, then in view of the decision in the case of Maithreyi Pai (supra), the interest should form part of ‘the cost of acquisition’ of the asset sold by her. Since this aspect of the matter requires investigation, I set aside the orders of the income-tax authorities on this point and restore the case once more to the file of the ITO with a direction to give his decision afresh keeping in mind the observations made in this order and after giving an opportunity of being heard to the assessee in this regard.
7. For statistical purposes, the appeal is allowed.