2015 (6) TMI 513 - AT - Income Tax

Deduction of interest on borrowed capital invested in shares - assessee has claimed the interest cost as a part of the cost of acquisition and/or improvement - Held that - To bring an expense within the cost of its improvement, the expenditure has to be by way of a (physical) addition or alteration, adding value to the capital asset. Admittedly, no such improvement has taken place to the shares, which continue to be held as such, i.e., as acquired. This is again part of the settled law, for which we may refer to the decision in the case of Industrial Credits & Development Syndicate Ltd. vs. CIT 2000 (11) TMI 39 - KARNATAKA High Court . We may not dwell on this aspect of the matter further, being a matter of trite law and, in any case, the interest cost under reference being for post acquisition period, and which has admittedly been considered by the assessee itself as a revenue cost, claimed and allowed as a revenue expenditure for the period 1980-81 onwards up to f.y. 1996-97. How could it then transform in character from f.y. 1997-98 onwards, to become a capital cost. This is incomprehensible, i.e., without any change in the underlying facts and circumstances of the case, so that shares continued to be a capital asset or an investment of the assessee. Merely for the reason that from a particular year the dividend income on shares, which is the holding income arising thereon, and against which the interest, as a period expense, would stand to be allowed, is rendered tax-exempt, would not alter its character from revenue to capital. It is in fact preposterous to state so. The same has thus rightly been considered as by the Revenue as an attempt to obviate or circumvent section 14A, by claiming the interest expenses as by the backdoor as it were - Decided against assessee. Deeming of income qua unproved credits by way of business liabilities u/s. 41(1) - Held that - The accounting entries or the treatment that the assessee accords to an asset or liability in its books is not determinative of the matter. Again, the presumption would only be of the same representing the true state of affairs, but the inordinate delay in discharging the same raises considerable and valid doubt as to the existence of those liabilities as at the relevant year-end, i.e., as a fact. The onus on the Revenue, thus, gets discharged and shifts to the assessee, who is in effect only being called upon to show that the position as stated in its accounts reflects the true and correct position. A trading liability would normally get settled within a period of one or two months of it s arising, while in the instant case years and years have passed. The same leads to the question Why were the same not paid in the normal course and, rather, not paid at all? Is the matter disputed if so, to what extent, and which shall again have to be demonstrated. In fact, after the lapse of considerable time, it becomes doubtful if the creditor exists, who may have moved to a different place; discontinued business, et. al. No material or evidence or even explanation is forthcoming from the assessee. The only inference under the circumstances is that the liability no longer exists. Per contra, the assessee has obtained a benefit by way of remission or as the case may be cessation of liability. An inference of fact is again only a finding of fact, drawn in consistence and in harmony with in the conspectus of the facts and circumstances of the case. - Decided against assessee. Which is the year of remission or cessation of liability - Held that - The assessee having claimed it as a liability for the immediately preceding year as well, and which stood accepted by the Revenue, would preclude the assessee from contending that the liability was not existing, or was in fact not a liability even as at the end of the immediately preceding year. That is, it is not open for the assessee to turn back and say that you accepted my lie for the preceding year/s and, therefore, you are bound by it. The only consequence in law is that the cessation or remission has occurred during the relevant previous year. - Decided against assessee.

Issues Involved:
1. Maintainability of interest on borrowed capital invested in shares as part of the cost of acquisition and/or improvement.
2. Deeming of income qua unproved credits by way of business liabilities under Section 41(1) of the Income Tax Act.

Detailed Analysis:

Issue 1: Maintainability of Interest on Borrowed Capital Invested in Shares
The first issue revolves around whether the interest on borrowed capital, used to invest in shares, can be considered part of the cost of acquisition and/or improvement under Section 48(ii) of the Income Tax Act, 1961. The shares were acquired by the assessee-company from financial years 1980-81 to 1992-93 and sold during the relevant previous year, yielding capital gains. The assessee claimed the interest cost from financial year 1997-98 onwards up to the year of transfer, indexing it for inflation.

The Tribunal examined how interest costs related to borrowings for acquiring a capital asset could be considered part of its acquisition cost. It was noted that the acquisition process is complete upon the transfer of the asset to the owner, and post-acquisition interest costs are more appropriately classified as holding costs or period costs. These costs should be charged against the income of the enterprise for the relevant period rather than being added to the cost of the asset.

The Tribunal referenced several landmark judgments, including India Cements Ltd. vs. CIT [1966] 60 ITR 52 (SC) and CIT vs. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285 (SC), which clarified that loan-related expenses are revenue expenditures and do not alter the cost of the asset. The Tribunal also referred to Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), which upheld the inclusion of interest during the construction period as part of the actual cost of a fixed asset. However, it was emphasized that post-acquisition interest does not contribute to the acquisition or improvement of the asset and remains a revenue expense.

The Tribunal concluded that the assessee's claim to transform the interest cost from a revenue to a capital expense from financial year 1997-98 onwards was unjustifiable. The interest costs were rightly considered by the Revenue as an attempt to circumvent Section 14A by claiming the expenses indirectly.

Issue 2: Deeming of Income Qua Unproved Credits by Way of Business Liabilities Under Section 41(1)
The second issue concerns the deeming of income related to unproved credits by way of business liabilities under Section 41(1) of the Income Tax Act. The assessee argued that since these liabilities were not written back in the books, they continued to represent liabilities. The Revenue, however, considered these as invalid due to the lack of proof of their existence.

Section 41(1) is a deeming provision that considers the benefit from the cessation or remission of a trade liability as income for the year in which such cessation or remission occurs. The Tribunal noted that the cessation or remission of liability is a factual matter that needs to be proved, with the onus initially on the Revenue. The inordinate delay in discharging these liabilities (ranging from 3 to 25 years) raised valid doubts about their existence.

The Tribunal held that the onus shifted to the assessee to demonstrate that the liabilities were genuine. The absence of any material evidence or explanation from the assessee led to the inference that the liabilities no longer existed, implying a benefit by way of remission or cessation of liability. The Tribunal disagreed with the assessee's contention that the liabilities were not existing in the preceding year, emphasizing that the cessation or remission occurred during the relevant previous year.

The Tribunal referenced several judgments, including CIT vs. Bhogilal Laherchand [1954] 25 ITR 50 (SC) and Kesoram Industries & Cotton Mills Ltd. vs. CIT [1992] 196 ITR 845 (Cal), to support its conclusions. The Tribunal found little merit in the assessee's case and upheld the Revenue's position.

Conclusion:
The Tribunal dismissed the assessee's appeal, concluding that the interest on borrowed capital invested in shares cannot be considered part of the cost of acquisition or improvement and that the unproved credits by way of business liabilities were rightly deemed as income under Section 41(1) of the Income Tax Act.

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