Law:

Section:

Section 48(ii) of the Income-tax Act, 1961 - Capital gains - Computation of - Cost of acquisition of capital assets - Whether interest paid by assessee-firm to its partners on capital contribute by them for purchase of a capital asset could be treated as cost of acquisition of that capital asset for purposes of Section 48(ii) - Held no Facts The assessee-firm purchased a certain piece of land. Subsequently, it Bold that piece of land, and while calculating capital gains deducted from the sale price the interest paid to the partners on capital contributed by them from the date of purchase to the date of sale. The ITO, however, while computing the capital gains, did not permit deduction of the interest paid to partners on capital. The AAC and the Tribunal also dismissed the appeal preferred by the assessee. On reference, the assessee contended that interest paid on borrowed capital for the purpose of acquiring the asset would go to increase the cost of acquisition and, therefore, should be deducted. Held Though the capital contributed by the partners was utilised for purchasing the asset of the partnership firm, but it was not the same thing to state that the interest paid on such capital out of the profits would go to the cost of acquisition of the capital asset. Accordingly, the Tribunal was justified in disallowing the interest paid to partners while computing capital gains. G. Sarangan for the Applicant. K. Srinivasan and H. Raghavendra Rao for the Respondent. ORDER Shetty, J. - This is a reference under section 256(2) of the Income-tax Act, 1961 ('the Act'). The following question has been referred by the Tribunal : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the interest paid to partners, while computing the capital gains ?" 2. The assessment year is 1971-72. The assessee which is an unregistered firm had purchased a piece of land on 2-9-1964 with an intention to construct a theatre thereon. But that proposal was given up, as there was no hope of getting a licence. But the levelling work was carried out for improving the property although no construction took place. After lapse of nearly six years, the…

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