2012 (12) TMI 630 - AT - Income Tax

Interest and Service charges incurred for acquisition of share - Capital or Revenue Held that - The assessee is a limited Company claiming income from capital gains of ₹ 8,40,047 when the AO tried to bring down the cost of acquisition @ ₹ 67 per share to ₹ 62 per share was to be deriving income of ₹ 11,71,834 under the head capital gains when the difference being ₹ 3,31,787 was brought to tax by the AO was purely an imaginary figure having no basis whatsoever either in the books of account for the purpose of computation of capital gains nor for the purpose of disallowance of expenditure on the purported earning of dividend income under the provisions of Section 14A r.w.r. 8DD of the I.T.Rules - the expenditure incurred through the Portfolio Manager to acquire share, is a capital expenditure and attributable to cost of acquisition of share. In view of the matter, at no point of time can it be said that the assessee was to make an extra income of ₹ 3,31,787 which was a total imaginary figure brought to tax by the AO. When two imaginary figures could overlap for disallowance to taxation and it was only the case of the AO to disallow expenditure which has been legitimately claimed capitalised by the assessee which stands otherwise disclosed in the P & L account could not become a hypothetical figure on assumption and presumption when computation of Capital Gains has to necessarily include cost of acquisition also. This makes the addition fit for deletion - appeal of the assessee is allowed.

Summary

Issues involved:
1. Disposal of cross appeals for Assessment Year 2005-06 filed by the assessee and the Revenue.
2. Capitalization of interest and service charges incurred for acquisition of shares.

Analysis:

Issue 1: Disposal of cross appeals
The Appellate Tribunal ITAT CUTTACK addressed cross appeals for the Assessment Year 2005-06 filed by the assessee and the Revenue arising from the order of the CIT(A). The Tribunal decided to dispose of both appeals simultaneously for convenience as different issues were raised by each party. The Revenue's appeal was dismissed as the Tribunal had previously ruled in favor of the assessee on the same issue. The Tribunal found no new material presented by the Revenue to challenge the previous decision, leading to the dismissal of the Revenue's appeal.

Issue 2: Capitalization of interest and service charges
The primary issue raised by the assessee was the refusal by the CIT(A) to capitalize interest and service charges amounting to a specific sum incurred for the acquisition of shares. The assessee argued that these expenses should be treated as capital expenditure based on general accounting principles and accounting standards. The Tribunal reviewed the facts, including the investment in shares of NTPC Ltd. through Kotak Mahindra Investment, and the subsequent sale of shares. The Assessing Officer had added a differential amount to the assessee's income based on the cost of acquisition per share. The CIT(A) upheld this addition, considering the nature of the expenses as revenue in nature. However, the Tribunal disagreed with this approach, stating that the addition made by the Assessing Officer was an imaginary figure with no basis in the books of account. The Tribunal highlighted that the expenses incurred through the Portfolio Manager for share acquisition should be considered capital expenditure attributable to the cost of acquisition. Therefore, the Tribunal directed the Assessing Officer to delete the enhanced addition made by the Assessing Officer. Consequently, the appeal of the assessee was allowed, while the Revenue's appeal was dismissed.

In conclusion, the Tribunal ruled in favor of the assessee regarding the capitalization of interest and service charges, emphasizing the distinction between capital and revenue expenditures in the context of share acquisition. The judgment provided clarity on the treatment of expenses related to asset acquisition and their impact on income computation, ensuring adherence to accounting principles and tax regulations.