2020 (11) TMI 744 - AT - Income Tax

Long Term Capital gain recomputation - not allowing deduction towards cost on account of interest capitalized to cost of asset - no nexus between the capital borrowed and its utilization for acquisition of the property - assessee was selected for scrutiny assessment under CASS - HELD THAT - AO did not assign any reason as to why the explanation of the assessee was not acceptable when under the similar facts and circumstances, claim of the assessee regarding capitalization of interest was allowed in the earlier year. This approach of the AO is contrary to the settled principles of law. It is incumbent upon the assessing officer at least assign the reason as to why he was adopting a different view then the adopted by its predecessor in earlier years. CIT(A) recorded the finding that the issue of capitalization was not examined by AO as the assessee capitalized the interest without routing through its profit and loss account and the case as relied by the Ld. DR is on a different set of facts are not applicable on the facts and circumstances of the present case. We cannot affirm this view of the Ld. CIT(A) where he made guesswork by using word it appears that means the finding is not based upon correct appreciation of the facts. There is no dispute so far issue regarding allowability of interest paid on the borrowed capital used for acquisition of property. Hence cost of acquisition would also include the interest paid on such borrowed capital. Both the authorities below have disallowed the claim of the assessee, on the ground that there is no nexus between the capital borrowed and its utilization for acquisition of the property. It is not in dispute that the property was acquired by a borrowed capital initially borrowed from the relatives of the Directors. Thereafter, the loan taken from such persons was repaid out of the loan received from ICICI bank. Therefore, it cannot be construed that there is no nexus between the acquisition of the property and the utilization of the capital so borrowed. Authorities below were not justified in disallowing the claim of the assesseee - interest paid on the capital utilized for repayment of loan, we allow as cost of acquisition. AO hereby directed to allow capitalization of interest to the extent that the assessee had utilized borrowed funds for repayment of loan taken from directors and other relatives. - Decided in favour of assessee.

Issues Involved:
1. Recomputing the Long Term Capital Gain by not allowing deduction towards cost on account of interest capitalized to cost of asset.
2. Disallowance of interest without appreciating the nexus between the borrowed funds and acquisition of the asset.
3. Ignoring the submission and evidence provided by the assessee regarding the cost of the asset.

Detailed Analysis:

1. Recomputing the Long Term Capital Gain by not allowing deduction towards cost on account of interest capitalized to cost of asset:
The assessee challenged the action of the Assessing Officer (AO) in recomputing the Long Term Capital Gain by not allowing the indexed cost of interest paid on borrowed funds, amounting to ?77,04,728, as capitalization against the long-term capital gains from the sale of property. The assessee argued that the interest paid on borrowed funds for acquiring the property should be included in the total cost of acquisition and thus deductible under section 48(ii) of the Income Tax Act, 1961. The AO disallowed this interest without providing a plausible reason, despite the cost being accepted in the scrutiny assessment of A.Y. 2012-13.

2. Disallowance of interest without appreciating the nexus between the borrowed funds and acquisition of the asset:
The AO required the assessee to justify the allowability of the interest and establish the nexus between the loan sanctioned and its utilization for the property under consideration. The AO found the explanation unsatisfactory and disallowed the interest, arguing that the assessee failed to establish a clear nexus. The CIT(A) upheld this disallowance, noting that the loan taken was not a housing loan and the payment to one of the directors was not immediate. The CIT(A) also observed that the interest paid up to the registration was not separately recorded in financial documents.

3. Ignoring the submission and evidence provided by the assessee regarding the cost of the asset:
The assessee submitted that the funds borrowed were used for acquiring the property and the interest was capitalized each year as the asset was not put to use. The assessee provided detailed records, including the loan sanction letter from ICICI Bank, balance sheets, and bank statements, to establish the nexus. The CIT(A) and AO, however, dismissed these submissions, arguing that the assessee failed to provide relevant material and that the principle of res judicata did not apply in income tax proceedings.

Tribunal's Findings:
The Tribunal found that the AO did not provide a reason for rejecting the assessee's explanation, especially when similar claims were allowed in earlier years. The Tribunal emphasized the need for consistency and noted that the AO's approach was contrary to settled principles of law. The Tribunal also criticized the CIT(A) for making assumptions without a correct appreciation of facts. It was established that the property was acquired using borrowed capital initially from the directors' relatives, which was later repaid using a loan from ICICI Bank. Therefore, a nexus existed between the borrowed capital and the acquisition of the property.

Conclusion:
The Tribunal concluded that the authorities below were not justified in disallowing the assessee's claim. It directed the AO to allow capitalization of interest to the extent that the borrowed funds were used for repaying the loan taken from directors and other relatives. The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 19.11.2020.

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