2015 (5) TMI 1125 - AT - Income Tax

Determining the capital gain derived from the sale of land - interest on borrowed funds used for acquiring shares capitalization - whether the interest paid by the assessee on loans taken for acquiring the shares in the past can be allowed as a deduction u/s 48 as cost of acquisition while computing capital gain on sale of such shares? - Held that - Notably it is not disputed by the Revenue that the interest costs in question were incurred on the funds utilized for acquisition of shares in the past. In fact as per the Statement of Facts filed before the CIT(A) the assessee had tabulated the amount of interest capitalized along with the cost of shares which were purchased in the past. The assessee had also asserted before the CIT(A) without rebuttal that the interest cost so incurred in the past was not claimed as a deduction against any other income. Be that as it may in so far as the factual position is concerned there is no denial by the Revenue that monies borrowed have been utilized for acquisition of shares in question. Therefore having regard to the factual findings of the CIT(A) in our view the legal position as propounded by the Hon ble Madras High Court in the case of Trishul Investments Ltd (2007 (7) TMI 252 - MADRAS HIGH COURT ) supports the plea of the assessee that interest paid for acquisition of the shares would partake the character of cost of shares and therefore assessee had rightly capitalized the interest along with the cost of acquisition for the purpose of computing capital gains. The conclusion of the CIT(A) thus deserves to be affirmed. Appeal of the Revenue is dismissed.

Summary

Issues:
- Whether interest on borrowed funds used for acquiring shares can be capitalized with the purchase cost of shares and indexation claimed for computation of capital gain at the time of sale.

Analysis:
1. The appeal by the Revenue was against the order of the Commissioner of Income Tax (Appeals) regarding the treatment of interest on borrowed funds used for acquiring shares in the computation of capital gains for assessment year 2005-06. The Revenue contended that interest on borrowed funds cannot be capitalized with the purchase cost of shares and indexation cannot be claimed for computing capital gains at the time of sale of shares. The Assessing Officer disagreed with the assessee's computation of capital gains, resulting in a discrepancy in the amount of Long Term Capital Gain. The CIT(A) accepted the assessee's plea, stating that all expenses incurred for asset acquisition constitute its cost, including interest paid on borrowings for purchasing shares. The CIT(A) relied on a Delhi High Court judgment to support this conclusion, leading to the Revenue's appeal before the ITAT Mumbai.

2. The ITAT Mumbai considered whether interest paid on loans for acquiring shares could be allowed as a deduction under section 48 as the cost of acquisition in computing capital gains. The respondent assessee cited a Madras High Court judgment in a similar case, where interest paid for acquisition of shares was considered part of the cost of shares. The ITAT Mumbai found that the interest costs were indeed incurred on funds used for acquiring shares, and the assessee had correctly capitalized the interest along with the cost of acquisition for computing capital gains. The legal position from the Madras High Court judgment supported the assessee's position, and the ITAT affirmed the CIT(A)'s conclusion.

3. The ITAT also addressed the Revenue's reliance on decisions from the Mumbai and Ahmedabad Benches of the Tribunal, which were found to be inapplicable to the present case. The Mumbai Bench's decision highlighted the issue of interest expenses for holding shares as investments, while the Ahmedabad Bench's decision concerned interest paid as a revenue expenditure against non-taxable dividend income. The ITAT distinguished these cases from the current situation and emphasized the relevance of the Madras High Court judgment. Ultimately, the ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s decision based on the legal precedent and factual findings supporting the assessee's treatment of interest on borrowed funds for acquiring shares in the computation of capital gains.