B.J. Divan, C.J.
1. In this case, at the instance of the revenue, thefollowing question has been referred to us by the Income-tax AppellateTribunal for our opinion :
'Whether, on the facts and in the circumstances of the case, the interest amount of Rs. 11,344 constituted part of the actual cost of the plots to the assessee for purposes of determining the capital gains for the assessment year 1967-68 ?'
2. The facts leading to this reference are as follows : We are concerned with the assessment year 1967-68. The assessee is an individual and during the year ending on November 12, 1966, which was the relevant accounting year for the assessment year 1967-68, the assessee sold plots of land to two persons for a total consideration of Rs. 32,100. The assessee had purchased these two plots of land from the Andhra Co-operative Housing Society Ltd. for a sum of Rs. 9,138. Before the ITO, the assessee claimed that the cost of the said property to the assessee amounted to Rs. 20,434, viz., the amount of Rs. 9,138, which was the purchase price and the amount of Rs. 11,344, which was the interest paid by the assessee on the borrowals by him for purchasing the property. He had, according to him, paid this amount of interest of Rs. 11,344 every year from January 1, 1957, to August 11, 1966. He, therefore, contended that the aggregate amount of Rs. 20,434 should be deducted from the sale proceeds of Rs. 32,100 and as such the net capital gains came to only Rs. 11,666. The ITO, however, took the view that the assessee's computation was incorrect; because, according to him, the assessee has claimed interest on the borrowals for the purchase of the said plots of the land and the same amount was allowed as revenue expenditure by the department. Under these circumstances, the ITO treated only a sum of Rs. 9,138 as the cost of acquisition and deducted only that amount from the sale proceeds of Rs. 32,100 and computed the capital gains at Rs. 22,962.
3. The assessee took the matter in appeal and the AAC in his order pointed out that the ITO had erred in considering that the interest, as a matter of fact, has been allowed as revenue expenditure year after year. The AAC found as a fact that this was not allowed by the ITO at any time in the past. On the other hand, the interest claimed was restricted to the annual letting value of Rs, 1,800 and the balance of the interest amount had also been disallowed. The AAC held that the assessee was entitled to the interest claim also in computing the cost of the land and directed the ITO to recompute the capital gains after taking into consideration the interest claim.
4. Against the decision of the AAC, the revenue took the matter in appeal before the Income-tax Appellate Tribunal and the assessee filed cross-objections supporting the order of the AAC. Before the Tribunal, the department's representative conceded that the interest of Rs. 11,344 paid by the assessee on borrowed funds from January 1, 1957, to August 11, 1966, was neither claimed by the assessee nor allowed by the department year after year. The Tribunal held that the amount of interest was included in the total cost of acquisition along with the original price of Rs. 9,138, and the Tribunal upheld the order of the AAC, dismissing the departmental appeal. Thereafter, at the instance of the revenue, the question herein-above set out has been referred to us for our opinion.
5. In Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) , Khanna J., speaking for the Supreme Court, observed as follows (headnote) :
'As the expression 'actual cost' has not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure.'
6. In the instant case, from the concession made by the department's representative before the Tribunal, it is clear that the interest of Rs. 11,344paid by the assessee from January 1, 1957, to August 11, 1966, was neither claimed by the assessee nor allowed by the department year after year. Under these circumstances, in order to find out what was the cost of acquisition to the assessee in respect of these plots one has to take into account not only the original price paid by the assessee for these two plots of land at Adarshnagar, but also to include in that cost of acquisition the capitalised interest paid by him on the borrowings by him for paying the purchase price of Rs. 9,138 when he originally purchased the two plots in 1957.
7. In CIT v. Mithlesh Kumari : 92ITR9(Delhi) , the Delhi High Court has also taken a view similar to the one which we are taking in this case. The Delhi High Court there has held that the interest paid by the assessee on money borrowed for the purchase of an open plot of land constituted part of actual cost of the assessee within the meaning of Section 12B(2)(ii) of the Indian I.T. Act, 1922, for the purpose of determining the capital gain derived from the sale of the land. The basic principle, in cases of this kind, is to ascertain the actual cost of acquisition to the assessee and in arriving at the figure of actual cost of acquisition the interest which has been capitalised must be included; otherwise, from the commercial point of view and the principles of accountancy, one cannot get a correct idea of the cost of acquisition. The Tribunal, in the instant case, has, therefore, applied the correct principle and come to the correct conclusion.
8. Under these circumstances, it is obvious that the amount of Rs. 11,344 was part of the actual cost of acquisition for purposes of determining the capital gains for the assessment year 1967-68.
9. We, therefore, answer the question referred to us, viz., whether on the facts and in the circumstances of the case, the interest amount of Rs. 11,344, constituted part of the actual cost of the plots to the assessee for purposes of determining the capital gains for the assessment year 1967-68, in the affirmative, i.e., in favour of the assessee and against the revenue.
10. The Commissioner will pay the costs of this reference to the assessee.
11. Advocate's fee Rs. 250.