2011 (11) TMI 788 - AT - Income Tax

Summary

Issues Involved:
The judgment involves the issue of whether interest attributable to shares applied for but not allotted can be considered as part of the cost of acquisition for computing short-term capital gains.

Facts of the Case:
The appellant, an individual, derived income from LIC through commission, capital gains on sale of shares, and income from other sources. The Assessing Officer (AO) noted that the appellant had returned short-term capital gains from the purchase and sale of securities/units of mutual funds, some of which were acquired through the IPO mechanism. The AO observed that the appellant had capitalized interest costs related to shares applied for but not allotted, treating them as part of the purchase price of the shares actually allotted. Consequently, the AO added a certain amount as short-term capital gain to the appellant's income.

Decision of the CIT(A):
The Commissioner of Income Tax (Appeals) held that interest attributable to shares applied for but not allotted is not allowable as there was no capital asset acquired subject to capital gain, and thus dismissed the appellant's appeal.

Appellant's Challenge:
The appellant challenged the addition made by the AO as short-term capital gain before the Appellate Tribunal, arguing that the issue was covered in favor of the assessee by previous Tribunal decisions.

Tribunal's Analysis and Decision:
After considering the submissions and reviewing the facts, the Tribunal found merit in the appellant's plea that the issue was covered by previous Tribunal decisions. Referring to the case of Smt. Neera Jain and Harshad N. Patel, the Tribunal held that interest paid on money borrowed for IPO application should be considered as part of the cost of acquisition for computing short-term capital gains. The Tribunal emphasized that the interest expenditure had a direct nexus with the acquisition of shares and should be allowed as a deduction. As there were no distinguishing features or contrary decisions presented by the Revenue, the Tribunal ruled in favor of the appellant, allowing the grounds raised and directing accordingly.

Outcome:
The Tribunal allowed the appellant's appeal, holding that the interest paid on money borrowed for IPO application should be considered as part of the cost of acquisition for computing short-term capital gains. The decision was pronounced on November 25, 2011.