2023 (7) TMI 493 - AT - Income Tax

Cost of Acquistion of investment in Shares - Capitalization of interest expenses - Borrowing cost - Accounting Standard 16 - AO and CIT(A) disallowed the capitalization - interest on money borrowed for investment in share capital - HELD THAT - The assessee has neither claimed the impugned amount as expenditure in the statement of income nor there has been any sale of shares where the said cost of acquisition has been claimed as a deduction. Therefore we see merit in the argument of the ld AR that the lower authorities holding against the capitalization of interest for the years under consideration is not warranted. As per the Accounting Standard 16, the borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. It is accordingly submitted by assessee has followed the Accounting Standard while preparing the financial statements and the same cannot questioned without rejecting the books of accounts. Lower authorities have no reason to hold against the assessee following certain accounting standard, unless there is an impact to the amount offered to tax by the assessee during the years under consideration. When in the years under consideration there is no taxable event that is adversely affected by the capitalization of interest by the assessee in the books of accounts, the CIT(A) / AO cannot hold that the interest capitalized cannot be part of the cost of acquisition. The impugned capitalization is merely an accounting treatment and does not have any impact on the income offered to tax during the years under consideration. We will limit our adjudication only to the extent of holding that it is not warranted on the part of the lower authorities to decide against the capitalization of interest to be part of cost of acquisition since there is no taxable event happened during the years under consideration that is adversely impacted by such treatment. We, accordingly, allow the appeal leaving open the right of the Revenue to examine the issue of whether the interest paid to be part of cost of acquisition or not, in the year in which a taxable event occurs involving the cost of acquisition, i.e. the year in which the assessee sells the investment and the capital gain is computed.

Summary

Issues:
The judgment involves the issue of whether the interest cost should be capitalized for the purpose of cost of acquisition of investments made in the subsidiary in the form of Share Capital.

Summary:
The appeals arose from the order of the Commissioner of Income-tax for assessment years 2012-13 & 2014-15, where the only issue contended was the capitalization of interest cost for the purpose of cost of acquisition of investments in the subsidiary. The Assessing Officer disallowed certain amounts under section 14A for both years, based on the capitalized interest on borrowings. The CIT(A) deleted the disallowance under section 14A but held that interest cannot be treated as part of the cost of acquisition. The Tribunal considered whether the lower authorities were correct in holding against the capitalization of interest.

The Appellant argued that the interest was capitalized as per normal accounting practice and was not claimed as an expenditure for income tax purposes. The Respondent contended that interest on borrowed funds for investment in share capital should not be capitalized. The Tribunal noted that the Appellant had followed Accounting Standard 16, which allows capitalization of borrowing costs directly attributable to the acquisition of assets. The Tribunal found that since there was no taxable event adversely affected by the capitalization of interest during the years under consideration, the lower authorities were not justified in holding against the capitalization. The Tribunal allowed the appeal, leaving the Revenue the right to examine the issue in the year of a taxable event involving the cost of acquisition.

The Tribunal also dismissed an additional ground raised by the assessee regarding the allowance of the entire interest as an expenditure, as no arguments were presented during the hearing. Ultimately, the appeals of the assessee were partly allowed, with the decision pronounced in open court.