2007 (12) TMI 313 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of deduction under Section 54EA of the Income-tax Act.
2. Disallowance of stock borrowing charges amounting to Rs. 1,73,25,000.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 54EA:
The primary issue was whether the assessee was entitled to a deduction under Section 54EA of the Income-tax Act, given that the investment in specified securities was made using borrowed funds rather than the actual sale proceeds from the capital asset.

Facts and Arguments:
- The assessee sold properties for Rs. 6,31,31,00,000 and claimed a long-term capital gain exemption of Rs. 32,27,37,795 under Section 54EA by investing the sale proceeds in specified securities.
- The Assessing Officer (AO) disallowed the exemption, arguing that the investment was made using borrowed funds, not the actual sale proceeds, as required by Section 54EA.
- The assessee contended that the term "net consideration" in Section 54EA is quantum-related and does not necessitate a direct nexus between the sale proceeds and the investment in specified securities.

CIT(A) Findings:
- The CIT(A) held that the requirement under Section 54EA is to invest the quantum of "net consideration" within six months, not necessarily the same physical money received from the sale.
- It was noted that once the sale proceeds are deposited in a bank account, they lose their individual identity and become part of a common pool.
- The CIT(A) concluded that as long as the equivalent amount of the net consideration is invested within the specified period, the deduction under Section 54EA is justified.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, stating that the primary condition is the investment of an equivalent amount of the sale consideration in specified securities, not the same currency.
- The Tribunal emphasized that the funds were deposited in a bank account and then invested in specified securities within the statutory period, thereby fulfilling the requirements of Section 54EA.

2. Disallowance of Stock Borrowing Charges:
The second issue was whether the assessee could claim stock borrowing charges amounting to Rs. 1,73,25,000 as a deductible business expenditure.

Facts and Arguments:
- The assessee borrowed shares of Larsen & Toubro Ltd. from Reliance Capital Ltd. under a stock lending scheme and sold them.
- The AO disallowed the stock borrowing charges, arguing they were unascertained liabilities and not debited to the profit and loss account.
- The assessee argued that the stock borrowing charges were period costs and had been paid during the year, making them ascertainable and deductible as business expenditure.

CIT(A) Findings:
- The CIT(A) disagreed with the AO, stating that the stock borrowing charges were a period cost and had been paid during the year, making them ascertainable.
- It was noted that the accounting treatment in the books of accounts does not determine the allowability of an expense under the Income-tax Act.
- The CIT(A) cited the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, which held that the nature of the claim, not the accounting entries, determines its allowability.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, referencing similar cases where stock borrowing charges were allowed as deductible expenses.
- The Tribunal found that the facts of the present case were identical to those in earlier cases decided in favor of the assessee, and thus, the CIT(A)'s decision was confirmed.

Conclusion:
The Tribunal dismissed the appeal filed by the department, confirming the CIT(A)'s decisions on both issues. The assessee was entitled to the deduction under Section 54EA, and the stock borrowing charges were allowable as business expenditure.