2014 (8) TMI 1125 - AT - Income Tax

Disallowance of interest paid - interest not allowable as part of the cost of shares - Held that - As already held by the Hon ble High Court in the case of CIT vs. Mithlesh Kumari (1973 (2) TMI 11 - DELHI High Court) the actual cost of capital asset should include interest paid on borrowed amounts at the time of purchase. The Hon ble High Court of Madras in the case of CIT vs. Trishul Investment Ltd. 2007 (7) TMI 252 - MADRAS HIGH COURT held that interest paid on money borrowed for acquiring the shares would partake the character of cost of shares. There are host of other judgments also and there is no dispute principally to include interest on borrowals as cost of shares when the said shares are sold. Since assessee is not in the business of purchase and sale of shares investment in shares and subsequent sale thereof was shown under the head Capital Gains and since there was short term capital gains the same was disclosed as such after claiming interest paid as cost of shares. We do not find any reason to differ from the findings of the Ld. CIT(A). - Decided against revenue.

Summary

Issues:
Disallowance of interest paid by assessee at Rs. 65,29,462 for assessment year 2008-2009.

Analysis:
The case involved a dispute regarding the disallowance of interest paid by the assessee amounting to Rs. 65,29,462 for the assessment year 2008-2009. The assessee had borrowed funds to invest in the initial public offer of various companies, immediately selling the shares post-allotment and paying interest for a short period of 15 to 20 days on the borrowed monies. The Assessing Officer disallowed the interest based on a previous ITAT decision and added it to the income returned. However, the CIT(A) disagreed with this decision, citing that there was no exempt income received from the shares and that the interest expenditure should be allowed as a deduction in computing short-term capital gain.

Regarding Section 14A, the CIT(A) emphasized that there must be a direct nexus between the expenditure incurred and the income not forming part of the total income for disallowance to apply. In this case, as no exempt income was received from the shares due to the short holding period, the provisions of Section 14A were deemed inapplicable. The CIT(A) referred to various case laws supporting the contention that no disallowance under Section 14A was warranted when the expenditure was not incurred for earning exempt income.

Under Section 48, the CIT(A) held that the interest expenditure on the acquisition of shares should be included in the actual cost of acquisition of the capital asset, as it had a direct nexus with the purchase of shares. Citing multiple case laws, the CIT(A) concluded that the interest paid on borrowed amounts for purchasing shares should be considered as part of the cost of shares and allowed as a deduction in computing short-term capital gain.

The Tribunal upheld the CIT(A)'s order, emphasizing that interest paid on borrowed amounts should be considered as part of the cost of shares when sold. The Tribunal disagreed with the Assessing Officer's interpretation of the law, highlighting that the previous case cited by the AO was not relevant to the current issue. The Tribunal concurred with the CIT(A)'s decision and dismissed the Revenue's appeal, affirming that the interest expenditure of Rs. 65,29,462 should not be disallowed.

In conclusion, the Tribunal's decision supported the assessee's position that the interest paid on borrowed amounts for acquiring shares should be treated as part of the cost of shares and allowed as a deduction in computing capital gains, ultimately dismissing the Revenue's appeal in this case.