2021 (3) TMI 1060 - AT - Income Tax

Scope of Limited Scrutiny - Disallowance of interest as sought to be claimed as deduction from Short Term Capital Gains - HELD THAT - It is not in dispute that the assessee had claimed deduction towards interest under the head short term capital gains. Admittedly the short term capital gains falls under the ambit of Securities Transactions and hence would fall within the scope of Limited Scrutiny . Accordingly, the Ground No. 1 raised by the assessee is hereby dismissed. Deduction of interest under the head short term capital gains - HELD THAT - As borrowed funds were indeed utilized for purchasing the shares of Indiabulls Hsg Fin Ltd. It is not in dispute that the said borrowings had suffered interest and that the said interest was debited by the share broker himself in the ledger account of the assessee. Hence one to one nexus of borrowed funds being utilized for making investment in shares which had yielded short term capital gains to the assessee, has been proved beyond doubt. Admittedly, the assessee had not claimed the interest cost as revenue expenditure under the head Income from Business as he had rightly bifurcated the brokerage income which is offered under the head Income from Business and share transactions under the head Capital Gains being an investor in shares and securities. Since the interest cost of ₹ 12,15,500/- has been capitalized by the assessee , it partakes the character of cost of acquisition and gets added to the same thereon and hence would be eligible for deduction u/s 48 of the Act while computing the capital gains. The genuineness of the borrowings utilized for purchase of shares and payment of interest thereon to the broker is not disputed by the revenue. As relying on S. BALAN ALIAS SHANMUGAM BALKRISHNAN CHETTIAR. 2008 (1) TMI 489 - ITAT PUNE-B we hold that the assessee is entitled for deduction of interest under the head short term capital gains .

Summary

Issues:
Disallowance of interest as deduction from Short Term Capital Gains.

Analysis:
The appeal in ITA No.756/Mum/2019 for A.Y.2015-16 questions the disallowance of interest amounting to ?12,15,500 claimed as deduction from Short Term Capital Gains. The assessee contended that the assessment was under 'Limited Scrutiny' and the verification of interest was beyond the scope. However, the ld CITA upheld the disallowance, citing that securities transactions were part of the 'Limited Scrutiny' and hence, the interest could be examined. The assessee argued that the interest was incurred for acquiring shares of a specific company, supported by documents. The Tribunal noted the one-to-one nexus between borrowed funds and share investment, establishing the interest cost as part of the acquisition cost. The genuineness of borrowings and interest payment was undisputed by the revenue.

The Tribunal referred to a co-ordinate bench decision where it was held that interest capitalized for acquiring capital assets cannot be separated from the investment amount. The Tribunal emphasized that if interest is part of the cost of the asset, it falls under section 48 of the Income Tax Act. The Tribunal highlighted that the interest was not claimed as a revenue expenditure but was capitalized, enhancing the cost of the capital asset. The Tribunal relied on legal precedents to support the inclusion of interest in the actual cost of the asset for computing capital gains. Consequently, the Tribunal allowed the deduction of interest from Short Term Capital Gains, considering it as part of the cost of acquisition.

In conclusion, the Tribunal partially allowed the appeal, permitting the deduction of interest in the sum of ?12,15,500 under the head 'short term capital gains'. The decision was pronounced on 24/03/2021, acknowledging the legal precedent and the genuine nature of the borrowings and interest payment for share acquisition.