I borrowed to buy a plot, paid interest on the loan for three years, then sold it. Can I add that interest to my cost when I compute capital gains?
Yes for interest, no for ground rent. The Delhi High Court held that interest of Rs 16,878 paid on money borrowed to buy the plot formed part of the actual cost of the plot for computing capital gains. What the assessee laid out to acquire the asset is its cost, and it makes no difference that the interest went to a different person or was paid after the purchase. Ground rent of Rs 3,793 stood on a different footing: it was paid to keep the asset in her possession, not to acquire it, and could not be added.
Decided by the High Court (Delhi High Court - M.R.A. Ansari, J (judgment delivered by Ansari, J)) on 1973-02-05, reported as ILR 1973 Delhi 383; (1973) 92 ITR 9 (Delhi); 1973 RLR 213. It bears on section 12B(2)(ii) of the Indian Income-tax Act, 1922, section 48, section 55(2), section 24(b) of the Income Tax Act 1961, in Capital Gains matters.
This is the decision practitioners cite when the Assessing Officer refuses to capitalise borrowing costs on an asset sold at a gain. It draws the line that matters - expenditure incurred in acquiring the asset goes into cost, expenditure incurred in retaining or maintaining it does not - and it refuses the Revenue's narrower reading that cost is frozen at the date of acquisition. The Court's practical point carries the argument: if you borrow a lakh, pay twenty thousand of interest and sell for a lakh and twenty, you have made nothing, and it would be unreasonable to tax you on twenty thousand. It also confirms that where no deduction for the interest is available under any other head, nothing in the statute keeps it out of cost.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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On 6 December 1957 the assessee bought perpetual leasehold rights in an open plot from H.R. Gandhi for Rs 95,000. The vendor had failed to build within the time the perpetual lease allowed, the Government had appropriated his building security of Rs 5,000 as a penalty, and the assessee made that loss good by paying him Rs 5,000. She had borrowed the purchase price from her mother-in-law and paid Rs 16,878 of interest on the loan between December 1957 and November 1960. She also paid ground rent of Rs 3,793. In November 1960 she sold the plot, to the same mother-in-law, for Rs 1,50,000. For assessment year 1961-62 she computed her cost at Rs 1,22,171 - the price, the interest, the ground rent, the Rs 5,000 penalty and Rs 1,500 of brokerage on sale - and returned a capital gain of Rs 27,829. The Income-tax Officer allowed only the brokerage and computed the gain at Rs 53,500. The Appellate Assistant Commissioner dismissed her appeal without giving reasons on the interest. The Tribunal added back the interest, the ground rent and the penalty and restored her figure. The Revenue did not challenge the penalty and the reference to the High Court under section 66(1) concerned only the interest and the ground rent. Genuineness of the transactions was not in dispute.
The reference was answered partly each way, with no order as to costs. The interest of Rs 16,878 constituted part of the actual cost of the plot for computing capital gain; the ground rent of Rs 3,793 did not. Section 12B(2)(ii) of the 1922 Act allowed deduction of the actual cost of the capital asset, including capital expenditure on additions or alterations, but excluding expenditure for which an allowance was admissible under sections 8, 9, 10 or 12. The Court first held that no such allowance was available here: the plot was open land with no building, so interest on borrowed capital was not allowable under section 9(1)(iv); the purchase and sale had not been treated as a business transaction, so section 10(2) did not apply; and the profit had not been assessed under section 12. The interest was therefore not excluded, and the question was whether it could be brought in. It could. On the ground rent, the expenditure was for keeping the asset in her possession rather than acquiring it, and was no different from a watchman's salary.
The Court rejected the Revenue's construction that 'the actual cost to the assessee of the capital asset' means the cost as on the date of acquisition, with the only later additions being those the clause expressly names. Reading the words that way would qualify them in a manner the legislature cannot have intended. Nor did the express mention of expenditure on additions and alterations exclude other, similar expenditure directly connected with the cost. The second proviso, dealing with depreciated assets, showed that the statute did contemplate post-acquisition adjustments, and the third proviso, on assets held before 1 January 1954, was beside the point. The test the Court adopted is that all expenses incurred in acquiring the asset go into actual cost, as distinct from expenditure incurred in retaining or maintaining it. For the meaning of cost it followed Habib Hussein (Bombay), where cost was taken as what the assessee in fact expended or laid out to acquire the asset, and Fort Gloster Industries (Calcutta), where a guarantee commission paid to a bank to secure the supply of machinery was held part of actual cost, on the reasoning that costs essentially necessary for the particular assessee to incur to acquire the asset belong in it. Applying that, the assessee had to borrow and had to pay interest in order to buy the plot; that the interest went to a third person, and after the purchase, made no difference. The Court illustrated the point with an example in which excluding interest would tax a gain on a transaction that produced no profit at all.
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
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Handle my notice → Ask a CA on WhatsAppYes for interest, no for ground rent. The Delhi High Court held that interest of Rs 16,878 paid on money borrowed to buy the plot formed part of the actual cost of the plot for computing capital gains. What the assessee laid out to acquire the asset is its cost, and it makes no difference that the interest went to a different person or was paid after the purchase. Ground rent of Rs 3,793 stood on a different footing: it was paid to keep the asset in her possession, not to acquire it, and could not be added. This was decided by the High Court (Delhi High Court - M.R.A. Ansari, J (judgment delivered by Ansari, J)) and bears on section 12B(2)(ii) of the Indian Income-tax Act, 1922, section 48, section 55(2), section 24(b) of the Income Tax Act 1961. It is reported as ILR 1973 Delhi 383; (1973) 92 ITR 9 (Delhi); 1973 RLR 213. This is the decision practitioners cite when the Assessing Officer refuses to capitalise borrowing costs on an asset sold at a gain. It draws the line that matters - expenditure incurred in acquiring the asset goes into cost, expenditure incurred in retaining or maintaining it does not - and it refuses the Revenue's narrower reading that cost is frozen at the date of acquisition. The Court's practical point carries the argument: if you borrow a lakh, pay twenty thousand of interest and sell for a lakh and twenty, you have made nothing, and it would be unreasonable to tax you on twenty thousand. It also confirms that where no deduction for the interest is available under any other head, nothing in the statute keeps it out of cost. If it applies to you, the first step is this: Separate the borrowing costs of acquiring the asset from the running costs of holding it - ground rent, maintenance, watchman's wages and the like will not go into cost on this reasoning.
On 6 December 1957 the assessee bought perpetual leasehold rights in an open plot from H.R. Gandhi for Rs 95,000. The vendor had failed to build within the time the perpetual lease allowed, the Government had appropriated his building security of Rs 5,000 as a penalty, and the assessee made that loss good by paying him Rs 5,000. She had borrowed the purchase price from her mother-in-law and paid Rs 16,878 of interest on the loan between December 1957 and November 1960. She also paid ground rent of Rs 3,793. In November 1960 she sold the plot, to the same mother-in-law, for Rs 1,50,000. For assessment year 1961-62 she computed her cost at Rs 1,22,171 - the price, the interest, the ground rent, the Rs 5,000 penalty and Rs 1,500 of brokerage on sale - and returned a capital gain of Rs 27,829. The Income-tax Officer allowed only the brokerage and computed the gain at Rs 53,500. The Appellate Assistant Commissioner dismissed her appeal without giving reasons on the interest. The Tribunal added back the interest, the ground rent and the penalty and restored her figure. The Revenue did not challenge the penalty and the reference to the High Court under section 66(1) concerned only the interest and the ground rent. Genuineness of the transactions was not in dispute. The matter was decided on 1973-02-05 by the High Court (Delhi High Court - M.R.A. Ansari, J (judgment delivered by Ansari, J)). On those facts the High Court held as follows. The reference was answered partly each way, with no order as to costs. The interest of Rs 16,878 constituted part of the actual cost of the plot for computing capital gain; the ground rent of Rs 3,793 did not. Section 12B(2)(ii) of the 1922 Act allowed deduction of the actual cost of the capital asset, including capital expenditure on additions or alterations, but excluding expenditure for which an allowance was admissible under sections 8, 9, 10 or 12. The Court first held that no such allowance was available here: the plot was open land with no building, so interest on borrowed capital was not allowable under section 9(1)(iv); the purchase and sale had not been treated as a business transaction, so section 10(2) did not apply; and the profit had not been assessed under section 12. The interest was therefore not excluded, and the question was whether it could be brought in. It could. On the ground rent, the expenditure was for keeping the asset in her possession rather than acquiring it, and was no different from a watchman's salary.
The Court rejected the Revenue's construction that 'the actual cost to the assessee of the capital asset' means the cost as on the date of acquisition, with the only later additions being those the clause expressly names. Reading the words that way would qualify them in a manner the legislature cannot have intended. Nor did the express mention of expenditure on additions and alterations exclude other, similar expenditure directly connected with the cost. The second proviso, dealing with depreciated assets, showed that the statute did contemplate post-acquisition adjustments, and the third proviso, on assets held before 1 January 1954, was beside the point. The test the Court adopted is that all expenses incurred in acquiring the asset go into actual cost, as distinct from expenditure incurred in retaining or maintaining it. For the meaning of cost it followed Habib Hussein (Bombay), where cost was taken as what the assessee in fact expended or laid out to acquire the asset, and Fort Gloster Industries (Calcutta), where a guarantee commission paid to a bank to secure the supply of machinery was held part of actual cost, on the reasoning that costs essentially necessary for the particular assessee to incur to acquire the asset belong in it. Applying that, the assessee had to borrow and had to pay interest in order to buy the plot; that the interest went to a third person, and after the purchase, made no difference. The Court illustrated the point with an example in which excluding interest would tax a gain on a transaction that produced no profit at all. In the words reproduced by the source cited on this page: "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"
It was decided by the High Court on 1973-02-05 and is reported as ILR 1973 Delhi 383; (1973) 92 ITR 9 (Delhi); 1973 RLR 213. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 12B(2)(ii) of the Indian Income-tax Act, 1922, section 48, section 55(2), section 24(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The reference was answered partly each way, with no order as to costs. The interest of Rs 16,878 constituted part of the actual cost of the plot for computing capital gain; the ground rent of Rs 3,793 did not. Section 12B(2)(ii) of the 1922 Act allowed deduction of the actual cost of the capital asset, including capital expenditure on additions or alterations, but excluding expenditure for which an allowance was admissible under sections 8, 9, 10 or 12. The Court first held that no such allowance was available here: the plot was open land with no building, so interest on borrowed capital was not allowable under section 9(1)(iv); the purchase and sale had not been treated as a business transaction, so section 10(2) did not apply; and the profit had not been assessed under section 12. The interest was therefore not excluded, and the question was whether it could be brought in. It could. On the ground rent, the expenditure was for keeping the asset in her possession rather than acquiring it, and was no different from a watchman's salary. It arises in Capital Gains matters, on section 12B(2)(ii) of the Indian Income-tax Act, 1922, section 48, section 55(2), section 24(b) of the Income Tax Act 1961, and was decided by Delhi High Court - M.R.A. Ansari, J (judgment delivered by Ansari, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check first that the same interest has not been claimed or allowed under another head; the deduction is lost to cost if it is allowable elsewhere, and on these facts the plot was vacant so no house property claim arose. Keep the loan trail: the borrowing, its application to the purchase price, and the interest actually paid, since the Revenue did not dispute genuineness here and that carried a good deal. Treat this as a High Court view on a point on which other High Courts have taken their own line, and check the current position before relying on it.
Still good law. A citedby search returns 59 later citing documents; 6 are High Court or Supreme Court. Applied by the Andhra Pradesh High Court in Addl. CIT v K.S. Gupta (25 August 1976), which recorded that 'the Delhi High Court has also taken a view similar to the one which we are taking in this case' and held interest of Rs 11,344 on money borrowed to buy the asset to be part of its actual cost for capital gains. The Kerala High Court in CIT v Travancore-Cochin Chemicals Ltd (12 September 1974) cites it to the same effect on actual cost. Practitioners must note a limit: in CIT v Maithreyi Pai (Karnataka High Court, 15 November 1983) the Bench held that interest already allowed under s.57 cannot be deducted a second time under s.48, and declined the Tribunal's reliance on Mithlesh Kumari - 'We are firmly of the opinion that if an amount is already allowed under s.57 while computing the income of the assessee, the same cannot be allowed as deduction for computing capital gains under s.48.' That is a bar on double deduction rather than a rejection of the ratio, which on its own facts concerned an open plot yielding no income (the point the Mumbai Tribunal drew out in Macintosh Finance Estates Ltd v Addl. CIT, 27 February 2006). The Calcutta High Court in CIT v L.N. Dalmia (5 March 1993) distinguished it, not followed it. Nothing overruling it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment construes section 12B(2)(ii) of the Indian Income-tax Act, 1922, and the reference came under section 66(1) of that Act; the batch line's sections 48, 55(2) and 24(b) of the 1961 Act are the corresponding provisions, whose wording differs, and they were not before the Court. The harvested text renders 'assessee' as 'assessed' throughout, an artefact of the source; the key quote has been given with the word as the Court would have written it. The Court did not consider what would happen if the interest had been allowable under another head and had actually been claimed, nor whether the position differs where the asset is let or used in business. The ground rent finding rests on a short passage and no authority. The transactions were all with the assessee's mother-in-law but their genuineness was not in issue. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The reference was answered partly each way, with no order as to costs. The interest of Rs 16,878 constituted part of the actual cost of the plot for computing capital gain; the ground rent of Rs 3,793 did not. Section 12B(2)(ii) of the 1922 Act allowed deduction of the actual cost of the capital asset, including capital expenditure on additions or alterations, but excluding expenditure for which an allowance was admissible under sections 8, 9, 10 or 12. The Court first held that no such allowance was available here: the plot was open land with no building, so interest on borrowed capital was not allowable under section 9(1)(iv); the purchase and sale had not been treated as a business transaction, so section 10(2) did not apply; and the profit had not been assessed under section 12. The interest was therefore not excluded, and the question was whether it could be brought in. It could. On the ground rent, the expenditure was for keeping the asset in her possession rather than acquiring it, and was no different from a watchman's salary.
TaxSphere, “CIT v Mithlesh Kumari”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-mithlesh-kumari/ (validity last checked 2026-08-29)
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