2019 (4) TMI 1912 - AT - Income Tax

Disallowance of interest expenditure - computation of long term capital gain and short term capital - whether interest expenditure incurred by an assessee for acquiring the capital assets deserves to be capitalized and on its sale, required to be considered as cost of acquisition for the purpose of computation of capital gain? - HELD THAT - If a capital asset is being purchased by way of borrowed funds, the interest expenditure are to be capitalized and on transfer of the capital assets, it is to be treated as part of cost of acquisition. A perusal of the order of the ld.CIT(A) would indicate that the ld.CIT(A) also did not dispute with regard to this proposition and has not rejected the claim of the assessee on legal aspect rather confirmed the disallowance on the ground that the assessee failed to establish nexus between borrowed funds vis- vis investment. Revenue authorities have failed to appreciate the facts and circumstances in right perspective while holding that nexus has not been proved. The assessee has demonstrated that interest free funds were used for acquiring assets and interest expenditures were capitalized. Unsecured loans were remained outstanding at the end of every accounting year. It cannot be construed that nexus has not been demonstrated. We have noticed the order of the AO, which is absolutely silent on any of the aspects though the ld.CIT(A) has made reference to the details in order to demonstrate that the assessee failed to prove the nexus, but on re-appreciation of these very details we are of the view that the ld.CIT(A) has not appreciated the facts in right perspective, and considered them half-heartedly. Therefore, we allow the appeal of the assessee and delete the disallowance. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenditure amounting to ?34,76,144.
2. Nexus between borrowed funds and the investment in capital assets.
3. Capitalization of interest expenditure for the purpose of computation of capital gain.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure:
The primary grievance of the assessee was the confirmation of the disallowance of interest expenditure totaling ?34,76,144 by the CIT(A). The assessee had claimed a deduction of this amount, arguing it was interest paid on unsecured loans used to purchase land. The AO disallowed this claim, asserting that the assessee failed to provide sufficient evidence to establish a nexus between the borrowed funds and the purchase of the sold properties. The AO's brief finding stated that the assessee agreed to the disallowance of the interest portion, which was added to the income.

2. Nexus Between Borrowed Funds and Investment:
The CIT(A) upheld the AO's decision, emphasizing that the assessee failed to demonstrate a specific link between the borrowed funds and the investment in land. The CIT(A) analyzed the bank statements and balance sheets, noting discrepancies and lack of outstanding loans from certain individuals at the relevant times. For instance, loans taken from individuals like Shri Mukesh Kumar T. Padhiyar and Shri Mahesh Kumar T. Padhiyar were not reflected in the balance sheets after certain dates, leading to the conclusion that the interest debited could not be directly linked to the loans taken.

3. Capitalization of Interest Expenditure:
The Tribunal considered whether interest expenditure incurred for acquiring capital assets should be capitalized and included in the cost of acquisition for capital gain computation. The Tribunal referenced several judgments, including the ITAT Mumbai Bench in Global Assets Holding Corporation and the Delhi High Court in Mithleshkumar, which supported the inclusion of interest on borrowed funds as part of the actual cost of acquisition. The Tribunal noted that both the AO and CIT(A) did not dispute this legal principle but rather focused on the failure to establish the nexus between the borrowed funds and the investment.

Tribunal's Findings:
The Tribunal found that the Revenue authorities failed to appreciate the facts correctly. The assessee had demonstrated that unsecured loans were used for acquiring assets and that interest expenditures were capitalized. The Tribunal criticized the CIT(A)'s expectation that loans from specific individuals should remain invested in the capital asset without considering the overall outstanding unsecured loans at the end of each accounting year. The Tribunal concluded that the nexus between the borrowed funds and the investment was sufficiently demonstrated and that the Revenue authorities had not appreciated the details in the right perspective.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the disallowance of ?34,76,144. It emphasized that the assessee had adequately demonstrated the use of borrowed funds for acquiring capital assets and that the interest expenditure should be capitalized for the purpose of computing capital gains.

Order Pronouncement:
The order was pronounced in the Court on 30th April 2019, allowing the appeal of the assessee.