2019 (4) TMI 101 - AT - Income Tax

Capital gain computation - Allowability of the interest on borrowed capital employed by the assessee for purchasing a capital asset - Mode of computation - computing short-term capital gain (STCG) arising on its transfer, which in the present case is by way of sale of a house property in January, 2007, i.e., within a period of less than ten months of its purchase by the assessee in April, 2006 - HELD THAT - Why, the borrowed capital may be repaid immediately, while the acquisition, since complete, and thus its cost, would remain unaltered. Again, the borrowed capital may not be repaid even after the asset is sold, and interest may continue to be incurred, deploying the sale proceeds for any other purpose. In a given case, the asset may be sold on credit, so that interest cost continues to be incurred. The same, in short, it needs to be appreciated, is a holding cost, i.e., cost of holding the asset, post acquisition, allowable as a revenue expenditure where the asset is to be used for the purpose of business. As explained in CIT v. Tata Iron and Steel Co. Ltd. 1997 (12) TMI 5 - SUPREME COURT reference to which was also made during hearing, there is a fundamental difference between the cost of an asset and the means of its financing. The manner or mode of repayment of the loan obtained to acquire an asset has, therefore, nothing to do with the cost of the asset acquired for the purpose of the business. There is, in view of the fore-going, no basis either on facts or in law to consider the interest cost for the period for which the capital asset was retained or held by the assessee prior to being sold/transferred as a capital cost and, thus, deductible u/s. 48 in computing capital gain u/s. 45 - Decided against assessee.

Summary

Issues:
1. Allowability of interest on borrowed capital in computing short-term capital gain.

Analysis:
The appeal was directed against the Commissioner of Income Tax (Appeals) order partly allowing the assessee's appeal contesting her assessment under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2007-08. The main issue in the appeal was the allowability of interest on borrowed capital employed by the assessee for purchasing a capital asset and its impact on computing short-term capital gain arising from the asset's transfer.

The assessee relied on previous decisions in support of her claim, while the Departmental Representative cited contrasting judgments. Section 48 of the Income Tax Act provides the manner of computation of capital gains. The cost incurred by the assessee, deductible in computing capital gains, is that incurred on the acquisition or improvement of the capital asset transferred.

The judgment emphasized that only costs incurred on acquisition or improvement of a capital asset qualify as part of its capital cost and can be deducted in computing capital gains. Costs incurred for holding or maintaining the asset post-acquisition are not allowed. The interest cost on borrowed capital for the period after acquisition and up to the date of sale was not considered a part of the acquisition cost and hence not deductible in computing capital gains.

The judgment highlighted that the interest cost represents the time cost of funds and is incurred irrespective of the asset's purpose. The cost of acquisition should not vary with the period for which the asset is held, as the interest cost would. The manner of loan repayment has no bearing on the asset's cost. Therefore, interest costs incurred for holding the asset after acquisition are considered a revenue expenditure, not a capital cost.

Ultimately, the Tribunal found no basis in fact or law to consider the interest cost for the period the capital asset was held by the assessee before being sold as a capital cost deductible in computing capital gains. As a result, the assessee's appeal was dismissed.