In case of Capital gains on sale of residential flat, when considering the cost of acquisition, is Interest on housing loan is also taken into account?For eg. My flat cost is Rs 15L. I have Hsg loan of Rs 10L & total Hsg Lona interest paid till date of sale (5 yrs after buying flat) is Rs 7L. Can I show my cost of acuisition as Rs 15L+Rs7L = Rs 22L? Asked by Sanjay

Meaning of  cost of improvement and cost of acquisition are given under  section 55 (1) and 55(2) respectively. While the definition of ‘cost of improvement ‘ expressly excludes ‘interest paid ‘ on loan taken for any kind of improvement in capital asset. Read below

55. (1) For the purposes of sections 48 and 49,—

b) “cost of any improvement”,—

(1) …..

(2) in relation to any other capital asset,—]

(i) ………………………..

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in ¹⁶[sub-section (1) of] section 49, by the previous owner,

but 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”, and the expression “improvement” shall be construed accordingly.

However , no such restriction has been in the definition of cost of acquistion given u/s 55(2) of the I T Act.

The issue of allowance of interest came up in a number of cases . In case of Income-tax Officer V. Smt. Pushpaben B. Wadhwan  16 ITD 704 , Ahmedabad Tribunal held as under

Similar issue had come up before the Hon’ble High Court 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. Maitheryi Pai [1985] 152 ITR 247 (Kar.). In the case of Maitheryi Pai (supra), the Hon’ble High Court has held that the interest paid on the borrowed capital for the purpose 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 assess acquried 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 eariler years, then in view of the decision in the case of Maitheryi Pai (supra), the interest should from part of ‘the cost of acquisition’ of the set sold by her.

So, if the interest was already taken as deduction under I T Act, the interest can not be claimed as deduction, but if the interest was not taken as deduction under I T Act , it becomes cost of acquisition of asset and accordingly will be deducted while computing capital gains.