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2017 (9) TMI 660 - AT - Income TaxDisallowance of interest expenses - inclusion of the interest expenditure in the cost of acquisition - whether the cost of acquisition of capital assets under Section 48(2) would include interest amount qua borrowed funds used for acquiring such assets ? - Held that - We are satisfied that the assessee has demonstrated the availability of funds. She has taken the funds from Riddhi Trade Services Pvt. Ltd. and Navkar Broking Services Pvt. Ltd. These funds were deposited in Centurion Bank. Out of these funds, payments were made to five individuals viz. (1) Govindbhai Shankerbhai, (2) Patel Kantaben Govindbhai, (3) Patel Mukeshbhai Govindbhai, (4) Patel Anandiben Mukeshbhai and (5) Divesh G. Patel. Payments to these persons were made from Centurion Bank account. Bank statements of this bank were submitted before the ld. CIT(A). After receiving the funds from Rupen M. Modi, the amounts were repaid to Riddhi Trade Services Pvt. Ltd. and Navkar Broking Services Pvt. Ltd. The assessee has submitted the details as to how the funds have been received by her from Shri Rupen M. Modi and how these funds have been travelled to Riddhi Trade Services Pvt. Ltd. and Navkar Broking Services Pvt. Ltd. Thus, the assessee has demonstrated her stand of acquiring funds as well as its uses. If these details are looked into in the light of proposition propounded then it would reveal that the assessee is entitled for inclusion of the interest expenditure in the cost of acquisition. The same cost is to be set off against the short term capital gain arose to the assessee. It is pertinent to observe that on page No.84 of the paper-book the assessee has placed a working of interest expenditure incurred by her for purchase of land at Jodhpur. She has worked out a sum of ₹ 23,29,085/-. This interest expenditure deserves to be set off against the short term capital gain. We direct the Assessing Officer to allow the set off of this expenditure against the short term capital gain. In this way, the appeal of the assessee is partly allowed.
Issues Involved:
1. Disallowance of interest expenses amounting to ? 24,93,646/-. 2. Alternative plea for treating interest expenses as part of the cost of acquisition under Section 48 of the Income-tax Act, 1961. Detailed Analysis: Disallowance of Interest Expenses: The primary issue in the appeal is the disallowance of interest expenses amounting to ? 24,93,646/-. The assessee had filed a return of income declaring a total income of ? 16,04,748/- for the Assessment Year 2011-12. During scrutiny, the Assessing Officer (AO) observed that the assessee claimed a deduction of ? 25,09,546/- under Section 57 of the Income-tax Act, 1961, which included ? 24,93,646/- as interest expenses. The AO disallowed the interest expenditure on the grounds that there was no direct nexus between the expenditure incurred and the income earned under the head "income from other sources." Alternative Plea for Treating Interest Expenses as Part of Cost of Acquisition: The assessee raised an alternative plea before the First Appellate Authority, contending that the interest expenditure should be treated as part of the cost of acquisition of capital assets under Section 48 of the Act. This plea was based on the Hon’ble Supreme Court’s decision in the case of National Thermal Power Co. Ltd. vs. CIT. The assessee argued that the interest expenses were incurred for funds borrowed for acquiring capital assets, which were subsequently sold. Despite providing written submissions and additional evidence, the CIT(A) rejected this contention, stating that sufficient opportunities were given during the assessment proceedings. Tribunal's Consideration: The Tribunal considered the rival contentions and the records carefully. The first question was whether the cost of acquisition of capital assets under Section 48(2) includes the interest amount on borrowed funds used for acquiring such assets. The Tribunal referred to decisions by the ITAT, Mumbai Bench, and Ahmedabad Bench, which supported the inclusion of interest expenses in the cost of acquisition for computing capital gains. Nexus Between Borrowed Funds and Acquisition: The Tribunal also examined whether the assessee demonstrated the nexus between the borrowed funds and the acquisition of the asset. Although the assessee did not raise this plea before the AO, she elaborated on it before the First Appellate Authority with detailed written submissions and supporting documents. The First Appellate Authority called for a remand report and provided an opportunity for rebuttal. The Tribunal found that the assessee successfully demonstrated the availability and use of funds borrowed from Riddhi Trade Services Pvt. Ltd. and Navkar Broking Services Pvt. Ltd. for acquiring the asset, thus satisfying the requirement for inclusion of interest expenses in the cost of acquisition. Conclusion: Based on the analysis and the legal precedents, the Tribunal concluded that the assessee is entitled to include the interest expenditure in the cost of acquisition. The interest expenditure of ? 23,29,085/- should be set off against the short-term capital gain. The Tribunal directed the AO to allow this set-off, thereby partly allowing the appeal filed by the assessee. Order: The appeal filed by the assessee is partly allowed, and the order was pronounced on 7th September 2017 at Ahmedabad.
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