Introduction

The Delhi Bench of the Income Tax Appellate Tribunal, in ACIT, Circle-20(2), New Delhi Vs Smt. Sadhna Aggarwal, dealt with an important capital gains issue: whether interest paid on a housing loan used for acquiring a property can be included in the cost of acquisition while computing capital gains or capital loss under Section 48 of the Income-tax Act, 1961.

The ruling is particularly relevant for taxpayers selling residential properties purchased through borrowed funds, especially where substantial interest cost has been incurred over the holding period. However, the decision must now be read along with the amendment made to Section 48, which restricts double deduction of interest already claimed under Section 24(b) or Chapter VIA.

Case Details

The official ITAT order records that the Revenue filed appeal against the CIT(A)’s order, which had deleted various disallowances made while computing long-term capital loss on sale of a penthouse at Omaxe The Forest, Noida. (Income Tax Appellate Tribunal)

Facts of the Case

Smt. Sadhna Aggarwal, along with her late husband Shri Mahesh Aggarwal, was originally allotted a penthouse at Omaxe The Forest, Noida through an allotment letter dated 21.12.2004. After the death of her husband, the ownership was transferred in her name in August 2010. During AY 2016-17, the property was sold and the assessee claimed a long-term capital loss of ₹5,34,61,155. (Income Tax Appellate Tribunal)

The assessee included the following amounts as part of cost of acquisition:

1. Enhanced basic cost of flat due to increase in area from 6,500 sq. ft. to 6,610.84 sq. ft.
2. Interest paid on housing loan taken from DHFL/NBFC.
3. Interest paid to the builder for delayed payment.
4. Loss on stamp papers purchased for registration of the flat.

The Assessing Officer did not accept the full claim and restricted the long-term capital loss to ₹2,08,46,527 as against the assessee’s claim of ₹5,34,61,155. (Income Tax Appellate Tribunal)

Issues Before the ITAT

The Revenue challenged the relief granted by the CIT(A) on the following major issues:

1. Whether housing loan interest of ₹1,82,53,834 could be included in cost of acquisition.
2. Whether loss on stamp paper of ₹1,35,930 could be treated as part of acquisition cost.
3. Whether enhanced basic cost of the flat could be accepted due to increased area.
4. Whether full interest paid to the builder for delayed payment could be allowed.

The primary and most important issue was the allowability of interest on borrowed funds as part of cost of acquisition under Section 48.

Revenue’s Stand

The Assessing Officer held that interest on housing loan was deductible, if at all, under Section 24(b) under the head “Income from House Property” and could not be claimed again while computing capital gains under Section 48.

Accordingly, the Assessing Officer excluded the housing loan interest from the cost of acquisition and reduced the capital loss claimed by the assessee.

Assessee’s Stand

The assessee submitted that the housing loan was directly used for acquiring the property and the loan disbursement was made directly to the builder. Therefore, there was a clear nexus between the borrowed funds and the acquisition of the flat.

The assessee also submitted that she had not claimed the housing loan interest under Section 24. The CIT(A) accepted this factual position and held that the interest paid on borrowed funds constituted part of the actual cost of acquiring the property. (Income Tax Appellate Tribunal)

ITAT Delhi’s Decision

The ITAT Delhi upheld the order of the CIT(A) and dismissed the Revenue’s appeal.

The Tribunal held that the reasoning of the CIT(A) was sound and in consonance with the judgment of the jurisdictional Delhi High Court in CIT v. Mithlesh Kumari (1973) 92 ITR 9 (Del) and other judicial precedents. In Mithlesh Kumari, the Delhi High Court had accepted that interest paid on borrowed funds used for acquisition of a capital asset can form part of the actual cost of that asset. (Income Tax Appellate Tribunal)

The ITAT further noted that the amendment proposed by the Finance Bill, 2023, restricting inclusion of interest already claimed under Section 24 in cost of acquisition under Section 48, was prospective from AY 2024-25. Therefore, for the relevant AY 2016-17, the assessee was entitled to include interest on borrowed capital used for acquisition of property as part of cost of acquisition. (Income Tax Appellate Tribunal)

Treatment of Stamp Paper Loss

The Tribunal also accepted the assessee’s claim regarding loss on stamp papers. Since the stamp papers were purchased specifically for registration of the flat and the transaction had to be modified due to the death of the assessee’s husband, the loss was directly connected with acquisition of the property.

Accordingly, the ITAT held that such cost was attributable to acquisition and could be included in the cost of acquisition. (Income Tax Appellate Tribunal)

Enhanced Basic Cost Due to Increased Area

The original allotment mentioned the area as 6,500 sq. ft., but the final area handed over to the assessee was 6,610.84 sq. ft. The builder had also confirmed the enhanced payment.

The ITAT agreed that the cost of acquisition should relate to the actual area vested in the assessee and not merely the tentative area mentioned in the original allotment letter. Therefore, the enhanced basic cost was allowed. (Income Tax Appellate Tribunal)

Current Legal Position After Amendment to Section 48

This ruling is favourable to taxpayers, but it must be read carefully in the light of the current law.

Section 48 of the Income-tax Act, 1961 now provides that cost of acquisition or cost of improvement shall not include deductions claimed on interest under Section 24(b) or under Chapter VIA. The official Income Tax Department text of Section 48 reflects this restriction. (Etds)

Therefore, from AY 2024-25 onwards:

1. If housing loan interest has already been claimed as deduction under Section 24(b), the same amount should not be again added to cost of acquisition.
2. If the interest has not been claimed under Section 24(b) or Chapter VIA, and it is directly linked to acquisition of the capital asset, the assessee may still rely on the principle of this ruling, subject to facts and documentation.
3. Proper evidence of loan utilisation, builder payment, interest certificate, ledger account and computation is essential.

The Income-tax Act, 2025, applicable from 01.04.2026, also carries a similar concept. Section 72 deals with computation of capital gains and specifically disallows interest claimed as deduction under Section 22(1)(b) or Chapter VIII while computing capital gains.

Updated Note on Capital Gains on Property After 23 July 2024

For property transfers on or after 23.07.2024, the capital gains regime has also changed. The Income Tax Department’s capital gains guidance states that indexation has generally been removed for long-term capital assets transferred on or after 23.07.2024. However, resident individuals and HUFs can still apply indexation for land or building acquired before 23.07.2024 if the old 20% with indexation method results in lower tax than 12.5% without indexation. (Etds)

Therefore, while applying the Sadhna Aggarwal ruling today, taxpayers must examine:

1. Date of acquisition of property.
2. Date of transfer.
3. Whether the seller is resident individual/HUF.
4. Whether interest was already claimed under Section 24(b) or Chapter VIA.
5. Whether indexation benefit is available or beneficial under the current capital gains regime.

Practical Takeaways for Taxpayers

This decision provides important guidance for taxpayers dealing with capital gains or capital loss on sale of property:

1. Interest on borrowed funds may be capitalised if the loan was directly used for acquisition of property.
2. Double deduction is not permissible under the amended law where the interest has already been claimed under Section 24(b) or Chapter VIA.
3. Documentation is critical — loan sanction letter, disbursement proof, builder receipts, interest certificate and bank statements should be preserved.
4. Additional builder charges due to increase in area may form part of cost if supported by builder confirmation.
5. Stamp duty or stamp paper loss may also be considered where it is directly linked to acquisition or registration of the property.
6. In case of scrutiny or mismatch, taxpayers should take proper advice before filing a reply to the Department.

For professional assistance in capital gains computation, property sale taxation, or notice response, taxpayers may refer to our services on ITR filing in Dwarka, income tax demand notice response, faceless assessment representation, and Income-tax Act 2025 section finder.

Conclusion

The ITAT Delhi decision in ACIT Vs Smt. Sadhna Aggarwal confirms that interest paid on borrowed funds directly used for acquiring a property can form part of the cost of acquisition under Section 48, at least for years prior to the specific statutory restriction introduced from AY 2024-25.

However, under the current law, the same interest cannot be claimed twice. If interest has already been claimed under Section 24(b) or Chapter VIA, it cannot again be added to the cost of acquisition. The ruling remains useful where interest has not been separately claimed and there is a clear nexus between borrowed funds and acquisition of the property.

Taxpayers selling property should carefully compute capital gains, verify past interest deductions, preserve supporting documents and evaluate the impact of the amended capital gains provisions before filing the return or responding to any tax notice.