Mr Sandesh Kumar (Practice Leader, Guru & Jana) discusses the proposed amendment in Section 48 by Finance Bill, 2023 to provide that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under Section 24 or Chapter VIA. The author apprises that the objective of the proposed amendment is to prevent double deduction of interest by the taxpayers. He highlights that Section 55 already provides for plugging of double deduction in the context of ‘cost of improvement’, stating that it does not include any expenditure which is deductible in computing the income chargeable under the head Interest on securities, Income from House Property, Profits and Gains of Business or Profession, or Income from Other Sources. He points out that, contrary to its objective, the proposed amendment still gives an opportunity to claim double deduction of expenditure other than interest and double deduction of interest, which has been claimed as expenditure under Income from Other Sources and Profit and gains from Business or Profession. He is of the view that, “the taxpayers deserve a tax break in respect of post-acquisition interest while computing capital gains. Otherwise, the resultant capital gains would be an overstated number, which would be unfair from a taxpayers perspective”.  

Budget 2023: Proposed Amendment in Cost of Acquisition

The Union Budget 2023 presented by the Finance Minister has proposed plethora of amendments in the Income-tax Act, 1961 (‘the Act’). One interesting amendment, which has been proposed is in section 48 of the Act.

Section 48 of the Act deals with capital gains computation. As per section 48, capital gains on transfer of a capital assets shall be computed, by deducting the cost of acquisition and the cost of improvement from the full value of consideration. The Finance Bill 2023 has proposed to insert a proviso after clause (ii) of section 48, so as to provide that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under section 24 or Chapter VIA. 

As per the memorandum to the Finance Bill 2023, the objective of the proposed amendment is to prevent double deduction of interest by the tax payers

- firstly in the form of deduction from income from house property under section 24, and in some cases under Chapter VIA of the Act; and

- secondly in the form of inclusion of such interest in cost of acquisition or cost of improvement under section 48 of the Act for computing capital gains.

It is pertinent to note that existing provisions of section 55 of the Act already has a provision to plug double deduction in the context of “cost of improvement”. As per this provision, the “cost of improvement” does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources".

What the proposed amendment would mean in the context of cost of acquisition and cost of improvement?

From the Government’s perspective, if the intent was to plug the double deduction, then the amendment similar to the provisions of section 55 in the context of “cost of improvement” would have been more meaningful. The proposed amendment, in its existing form, still gives an opportunity to claim double deduction of expenditure other than interest and double deduction of interest, which has been claimed as expenditure under IFOS and PGBP.

Having discussed about the proposed amendment, one larger question which also needs some deliberation here is whether the cost of acquisition can ever include interest on borrowed capital, especially the interest cost post acquisition of the capital asset.

If the provisions of PGBP and IFOS are perused, it is clear that the interest on loan for acquisition of an asset should be capitalized till the date the asset is first put to use. Thereafter, the interest can be claimed as a revenue expenditure. However, the capital gains provision is silent on the issue of capitalisation of interest to the cost of the capital asset.

In our view, the assessee should be able to include the interest cost till the date of acquisition/construction in the cost of acquisition, given that there is no specific restriction in the law for inclusion of such interest in the cost of capital asset.

However, the post-acquisition interest stands on a different footing. First question here is whether the post-acquisition interest is a cost of acquisition at all? Given that the law is silent, one could contend that it is part of cost of acquisition. Further, there are rulings including High Court rulings, where the inclusion of interest in the cost of acquisition has been upheld^[2]. Moreover, Sampath Iyengar Commentary^[3] in the context of section 48 of the Act has commented positively on inclusion of interest in the cost of acquisition/improvement.

However, the counter view is that the post-acquisition interest would accrue only post completion of acquisition. As such, it cannot be characterised as cost of acquisition. Moreover, if post acquisition interest is included in cost of acquisition, it would result in higher indexation benefit for the taxpayer, than what is intended in the law.

Then, should the post-acquisition interest be characterised as “cost of improvement”? As per section 55 of the Act, cost of improvement means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset. The post-acquisition interest does not result in any additions or alterations to the capital asset. Hence, the inclusion of such interest in cost of improvement is very likely to be challenged by the Revenue.

As such, there is still no clarity in the law as far as treatment of post-acquisition interest for the purpose of capital gains computation. In our view, the taxpayers deserve a tax break in respect of post-acquisition interest while computing capital gains. Otherwise, the resultant capital gains would be an overstated number, which would be unfair from a taxpayers perspective.

Way Forward 

In light of the proposed amendment, what is that the taxpayers should do? The following are some of the aspects that should be considered by the taxpayers -

- Individual taxpayers should keep a tab of their interest payment on loans. To the extent such interest paid is greater than the amount dedictible under section 24 and Chapter VIA claim, they should include it as cost of acquisition while computing capital gains in the future. Post acquisition interest could still be on a sticky wicket for the reasons mentioned above. However, given some of the favourable rulings, taxpayers should consider including such interest in cost of acquisition.

- The businesses which have borrowed funds and to the extent interest thereon is neither capitalized not deducted under PGBP and IFOS could consider including such interest in the cost of acquisition of capital asset. However, it would be necessary to demonstrate that the borrowed funds are indeed used for acquisition of capital asset. Post acquisition interest could still be on a sticky wicket.

- Given that the proposed amendment if codified is applicable prospectively, whether the taxpayers should consider double deduction for the tax year 2022-23? In our view, double deduction of expenditure would be an aggressive position. Given that there are negative High Court rulings^[4] on this issue, it may not be prudent to take the aggressive position.

- Taxpayers who did not include the interest expense in the cost of acquisition in the past can consider lodging a claim, if assessment or appeals are pending for those years. Alternatively, a possibility of making claim with CBDT under section 119 of the Act can also be explored.

The proposed amendment is a welcome step to bring in some level of tax certainty. However, there are still multitude of issues in the context of cost of acquisition and cost of improvement (as explained above), which if remains unaddressed could lead to more tax disputes in the years to come. A food for thought for the Government before passing the Finance Act 2023.

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[1] ACIT v. C Ramabrahmam  [TS-6376-ITAT-2012(CHENNAI)-O]; Ashok Kumar Shahi vs ACIT [TS-8441-ITAT-2019(DELHI)-O]

[2] CIT v. Maithreyi Pai [TS-5594-HC-1983(Karnataka)-O]; CIT v. Sri Hariram Hotels (P.) Ltd. [TS-5968-HC-2009(Karnataka)-O]

[3] Law of Income-tax, Twelfth Edition, Volume 4 - Page 5902,

[4] CIT v. Maithreyi Pai [TS-5594-HC-1983(Karnataka)-O]; CIT v. Sri Hariram Hotels (P.) Ltd. [TS-5968-HC-2009(Karnataka)-O]