The Commissioner Of Income Tax, Delhi v. Mithlesh Kumari

M.R.A. ANSARI, J.

( 1 ) THE following question has been referred to this Court by the Income-tax

Appellate Tribunal, Delhi Bench a, (hereinafter referred to as the Tribunal) under

section 66 (1) of the Income-tax Act, 1922 (hereinafter referred to as the Act):-

"whether on the facts and in the circumstances of the case the interest amount of

Rs. 16,878. 00 and the ground rent of Rs. 3,793. 00 constituted part of the actual

cost of the plot to the assessee for the purpose of determining the capital gain"

The relevant facts as can be gathered from the statement of the case may be briefly

stated. On 6-12-1957 Smt. Mithlesh Kumari (hereinafter referred to as the assessee)

purchased the perpetual lease-hold rights in an open plot of land from one H. R.

Gandhi for a consideration of Rs. 95,000. 00. The sale deed, inter alia, provided that

in addition to the payment of the price of Rs. 95,000. 00, the assessee shall deposit

a sum of Rs. 5,000. 00 either in cash or security on account of building security in

the Delhi Improvement Trust within 15 days of the sale deed and that the vendor

will be entitled to take back refund of Rs. 5,000. 00 deposited by him with the said

authority as building security. The sale deed further provided that under the terms

of the perpetual lease under which the vendor held the plot from the Government,

he was required to construct a plot on the said plot within a stipulated period which

he had failed to do and that the vendor was not liable for any consequences

whatsoever of the aforesaid default. As the vendor had committed a breach of the

condition of the perpetual lease regarding the construction of a building within the

stipulated period, the Government had imposed a penalty of Rs. 5,000. 00 upon the

vendor under the terms of the said deed and had recovered the said penalty by

appropriating the building security deposited by him. The vendor called upon the

assessee to make good the said loss and the assessee complied by paying Rs.

5,000. 00 to the vendor. "the assessee had raised a loan from her mother-in-law,

Smt. Ramawati Sanghi, for paying the price of the land. The assessee paid Rs.

16,878. 00 to her mother-in-law by way of interest on the amount borrowed by her.

She also paid ground rent amounting to Rs. 3,793. 00. Ultimately, in November

1960 the assessee sold away the land to her mother-in-law for Rs. 1,50,000. 00. In

her return for the assessment year 1961-62, the relevant previous year being the

year ended on 31-3-1961, the assessee worked out her cost of the land as under :-

Rs.

"cost of plot purchased on 6-12-1957. . . . . 95,000

Interest from December 1957 to November 1960 on the

Deducting this amount from the sale price of Rs. 1,50,000. 00. the assessee

disclosed a sum of Rs. 27,829. 00 as capital gains resulting from the purchase and

sale of the plot of land.

( 2 ) THE Income-tax Officer held that only the sum of Rs. 1,500. 00 representing

the brokerage for the sale of the land could be added to the purchase price of Rs.

95. 000. 00 and that the other items claimed by the assessee could not be added to

the cost of the land. He, therefore, computed the capital gains at Rs. 53,500. 00 The

assessee preferred an appeal to the Appellate Assistant Commissioner against the

order of the Income-tax Officer, but the Assistant Commissioner dismissed the

appeal. The assessee thereupon preferred a second appeal to the Tribunal and the

Tribunal held that the following items claimed by the assessee were also includable

in the cost of the land :-"interest Rs. 16,878. 00 Ground rent Rs. 3,793. 00 Penalty

Rs. 5,000. 00"

( 3 ) THE Tribunal, therefore, determined the capital gains at Rs. 27,829. 00 as

disclosed by the assessee. The Revenue have obviously not disputed the finding of

the Tribunal with regard to the penalty of Rs. 5,000. 00 but are challenging the

Tribunals finding with regard to the other two items, namely, Interest-Rs. 16,878.

00 and Ground rent-Rs. 3,793. 00.

( 4 ) SECTION 12b (2) of the Act under which capital gains have to be computed

reads as follows:-"the amount of the capita] gain shall be computed after making

the following deduction from the full value of the consideration for which the sale,

exchange, relinquishment or transfer of the capital asset is made, namely :- (i)

expenditure incurred solely in connection with such sale, exchange, relinquishment

or transfer; (ii) the actual cost to the assessee of the capital asset, including any

expenditure of a capital nature incurred and borne by him in making any additions

or alterations thereto, but excluding any expenditure in respect of which any

allowance is admissible under any provision of sections 8, 9, 10 and 12:"

( 5 ) THE provisos to sub-section (2) need not be reproduced at this stage, but will

be referred to at a later stage when considering the contentions urged on behalf of

the Revenue.

( 6 ) BEFORE considering the claim of the assessee, it may have to be stated that

although the loan for the purpose of purchasing the plot is said to have been raised

from her mother-in-law and the interest on this loan is also said to have been paid

to her mother-in-law and ultimately the plot of land is also said to have been sold to

her mother-in-law, the genuineness of these transactions has not been disputed by

the Revenue. There is also no dispute regarding the payment of the ground rent of

Rs. 3,793. 00, and the statement of the case submitted by the Tribunal proceeds on

amount of loan taken for the purchase of the land. . . . 16,878

Ground rent from 7-12-1957 to November 1960 Penalty

paid to the Improvement Trust. . . . . 5,000

Brokerage on the sale of land. . . . . . . 1,500

TOTAL 1,22,171. 00

the footing that all these transactions were genuine. The question for consideration,

therefore, is whether the interest paid by the assessee to her mother-in-law and the

ground rent paid to her may be included in the actual cost of the land to the

assessee within the meaning of section 12b (2) (ii) of the Act.

( 7 ) WE shall first consider the admissibility of the assessees claim with regard to

the interest paid by her. The Income-tax Officer has. excluded this amount from the

actual cost of the land the following observations:-"this interest accrued cannot be

allowed as a capitalized expenditure and the very words of section 12b (2) (ii) stated

that the capital gains shall be computed after deducting from the sale price the

actual cost of the capital asset including only such expenses of a capital nature

incurred and borne by him but excluding any expenditure in respect of which

allowance is admissible under any provisions of sections 8, 9, 10 and 12. The claim

of interest is one which is admissible under these sections and as such cannot be

allowed as a deduction. "

( 8 ) THE Appellate Assistant Commissioner did not give any reasons in his order for

disallowing the assessees claim with regard to the interest. There can be no doubt

that if the interest paid by the assessee to her mother-in-law is admissible under any

provisions of sections 8, 9, 10 and 12 of the Act, then it cannot be included in the

actual cost of the capital asset under clause (ii) of sub-section (2) of section 12b of

the Act. We have, therefore, to consider whether the interest is admissible under

any provisions of sections 8, 9, 10 and 12 of the Act. The capital asset in this case is

on open plot of land on which there is no building. It would, therefore, not come

under the category of property. Under section 9 of the Act, property means property

consisting of any buildings or lands appurtenant thereto. Under clause (iv) of subsection (1) of section 9 of the Act, the interest payable on capital borrowed for the

construction of the building is an allowable item in computing the income from the

property. Since the property in this case does not consist of any building, the

interest on the capital borrowed for the purpose of purchasing the land is not

allowable under clause (iv) of sub-section (1) of section 9 of the Act. The transaction

of the purchase and sale of the land by the assessee has not been treated as a

business transaction and the profit derived by the assessee from such transaction

has not been treated as business income assessable under section 10 of the Act nor

has the land in question been treated as a capital asset of the business of the

assessee. Therefore, there is no question of the interest paid by the assessee being

allowed as an admissible expenditure under section 10 (2) of the Act. The profit

derived by the assessee by the purchase and sale of the land has also not been

assessed under section 12 of the Act and, therefore, the interest paid by the

assessee to her mother-in-law is not an expenditure which is admissible under

section 12 of the Act. Therefore, the interest paid by the asscssee is not an

expenditure which is admissible under any provisions of sections 8. 9, 10 and 12 of

the Act and is not excluded from the computation of the actual cost of the capital

asset to the assessee. The question, however, is whether it can be included in the

computation of the actual cost of the asset.

( 9 ) THE learned counsel for the Revenue, Sh. B. N. Kirpal, contends that the actual

cost of the capital asset to the assessee is the actual cost of the assessee as on the

date of the acquisition of the capital asset and does not include an expenditure

which the assessee may have incurred subsequently except the expenditure which is

specifically mentioned in clause (ii) of sub-section (2) of section 12b of the Act,

namely, the expenditure of a capital nature incurred and borne by him in making

any additions or alterations to the capital asset. The interest paid by the assessee,

argues the learned counsel, does not come within the category of expenditure

incurred by her for making any additions or alterations to the capital asset and

cannot, therefore, be included in the actual cost of the capital asset. In support of

this contention, the learned counsel has referred to some of the provisos to subsection

(2) of section 12b of the Act which, according to him, indicate in what cases

the Legislature intended an expenditure incurred by the assessee subsequent to the

date of the acquisition of the capital asset to be taken into consideration in

computing the actual cost. Reference is made to the 2nd proviso which reads as

follows :-"provided further that where the capital asset is an asset in respect of

which the assessee has obtained depreciation allowance in any year, the actual cost

of the asset to the assessee shall be its written down value, as defined in section 10,

increased or diminished, as the case may be, by any adjustment made under clause

(vii) of sub-section (2) of that section :"

( 10 ) REFERENCE is also made to the 3rd proviso to sub-section (2) which reads as

follows :-"provided further that where the capital asset became the property of the

assessee, or of the previous owner where the cost of the capital asset to the

previous owner is to be taken in accordance with sub-section (3), before the 1st day

of January, 1954, he may, on proof of the fair market value thereof on the said date

to the satisfaction of the Income-tax Officer, substitute for the actual cost such fair

market value which shall be deemed to be the actual cost to him of the asset, and

which shall be reduced by the amount of depreciation, if any, allowed to the

assessee after the said date and increased or diminished, as the case may be, by

any adjustment made under clause (vii) of sub-section (2) of section 10 :"

( 11 ) ALTHOUGH the 2nd proviso referred to above does provide for the

computation of the capital asset not only on the basis of the actual cost as on the

date of the acquisition of the capital asset but also on the basis of the addition or

subtraction of certain other amounts as a result of the assessee obtaining

depreciation allowance subsequent to the date of the acquisition of the capital asset,

still this proviso does not necessarily indicate that other items of expenditure

incurred by the assessee subsequent to the date of the acquisition of the capital

asset but which are directly connected with the actual cost of the asset cannot be

included in the actual cost. The 3rd proviso referred to above really is not relevant,

because it pertains to a capital asset which became the property of the assessee

under sub-section (3) of section 12b of the Act.

( 12 ) WE really see no justification for putting the construction on the words "the

actual cost to the assessee of the capital asset" which the learned counsel for the

Revenue seeks to put on them, namely, that the actual cost of the asset is its cost

on the date of its acquisition. By putting such a construction we would be qualifying

the words used in clause (ii) in a manner which could not have been intended by the

Legislature. We cannot also accept the construction sought to be put by the learned

counsel for the Revenue on the words "including any expenditure of a capital nature

incurred and borne by him in making any additions or alterations thereto" as

meaning that it is only the expenditure incurred in making additions or alterations to

the capital asset that can be included in the actual cost of the capital asset and that

other similar items of expenditure cannot be so included. It would be reasonable, in

our view, to include in the actual cost of the capital asset all expenses which were

incurred by the assessee in acquiring the capital asset as distinct from the items of

expenditure which were incurred by him for retaining or maintaining the capital

asset. In Commissioner of Income Tax. v. Fort Gloster Industries Ltd. , (1971) 79. T.

R. 48 (i) the assessee had placed an order with a British concern for the purchase of

machinery worth Rs. 48 lakhs. The British supplier required a guarantee to be given.

The Allahabad Bank Ltd. agreed to be the guarantor for the sum of Rs. 48 lakhs for

a consideration of Rs. 36,000. 00 to be paid to the bank as guarantee commission.

The Calcutta High Court held that this sum of Rs. 36,000. 00 should be treated as

part of the actual cost to the assessee of the new machinery acquired by it for the

purpose of allowance of development rebate in terms of section 10 (2) (vi) (b) of

the Act. The reasoning of the High Court was that costs which were essentially

necessary for a particular assessee to incur for acquiring a capital asset should be

included in his actual cost. In so holding, the Calcutta High Court followed a decision

of the Bombay High Court in Habib Hussein v. Commissioner of Income-tax, (1963)

48. T. R. 859, in which it was held as follow:-"the dictionary meaning of the word

cost is what is laid out or suffered to obtain anything xx. xx. xx. In our opinion,

therefore, the meaning of the expression actual cost to the assessee as used in

sub-section (5) of section 10 of the Act would be what the assessee has, in fact,

expended or laid out for the purpose of acquiring the depreciable assets. "

( 13 ) WE are in respectful agreement with the observations of the Calcutta and the

Bombay High Court in the decisions referred to above. In the present case, we find

that the assessee in order to purchase the land had not only to borrow the amount

of Rs. 95,000. 00 which was the consideration for the purchase of the land but also

had to pay interest of Rs. 16, 878. 00 on the amount borrowed by her. The amount

of Rs. 95,000. 00 plus the interest paid by the assessee constitutes the actual cost

to the assessee of the land. The fact that the amount of Rs. 95,000. 00 was paid by

the assessee to the vendor and the amount of interest of Rs. 16,878. 00 was paid to

a different person, namely, her mother-in-law, does not make any difference so far

as the assessee is concerned in respect of the actual cost of the land to her. It will

not also make any difference whether the interest was paid on the date of the

purchase or whether it is paid subsequently. To exclude the interest amount from

the actual cost of the assets would lead to anomalous results. Supposing she had

purchased the land for Rs. 1,00,000. 00 by raising a loan of that amount and had

paid interest of Rs. 20,000. 00 on the said loan and had sold the land for Rs.

1,20,000. 00. It would be unreasonable to hold under such circumstances by

excluding the interest amount from the actual cost of the land that she had made a

capital gain of Rs. 20,000. 00 when, as a matter of fact, she had not made any

profit at all by the transaction. Applying the said observations of the Calcutta and

the Bombay High Courts to the present case, we hold that the Tribunal was right in

adding the interest amount of Rs. 16,878. 00 towards the actual cost of the land.

( 14 ) WITH regard to the ground rent of Rs. 3,793. 00, the assessees claim, in our

view, stands on a different footing. This expenditure was riot incurred by the

assessee for the acquisition of the capital asset. It was incurred by her for keeping

the capital asset in her possession. It is in the nature of any other expenditure that

the assessee might have incurred to maintain the capital asset. It is similar to the

salary which the assessee might have paid to a Chowkidar engaged for keeping

watch on the land. Such item of expenditure cannot be said to be expenditure

incurred by the assesee for the acquisition of the capital asset and they cannot,

therefore, be included in computing the actual cost to the assesee of the capital

asset. The Tribunal, in our view, was wrong in adding this amount of Rs. 3,793. 00

also in computing the actual cost of the capital asset.

( 15 ) THEREFORE, the question referred to us is answered as follows :- The interest

amount of Rs. 16,878. 00 constituted part of the actual cost of the plot to the

assessee for the purpose of determining the capital gain; but the ground rent of Rs.

3,793. 00 did not constitute part of such actual cost.

( 16 ) IN view of the fact that both the Revenue as well as the assessee have

succeeded in part in this reference, there shall be no orders as to costs.