2022 (1) TMI 240 - AT - Income Tax

Capital gain computation - disallowance of indexed interest cost while computing capital gains - assessee while computing capital gains had reduced the indexed interest cost, being interest cost incurred for acquiring the relevant shares, but the same was denied by the lower authorities - HELD THAT - We find that identical issue arose in the case of Fritz Desilva 2015 (5) TMI 1125 - ITAT MUMBAI after relying on the decision of Hon ble Madras High Court in the case of Trishul Investments Ltd. 2007 (7) TMI 252 - MADRAS HIGH COURT held that interest paid for acquisition of shares would partake the character of cost of shares and therefore the interest would be considered as cost of acquisition for the purpose of computing of capital gains. We further find that in the case of CIT vs. Maithreyi Pai 1983 (11) TMI 43 - KARNATAKA HIGH COURT has held that the interest paid on borrowings for the acquisition of a capital asset must fall for deduction u/s 48, if the same sum has not been claimed as deduction under any other heads. Submissions of the assessee about the interest paid for acquisition of the shares having not been claimed as deduction in any of the earlier years has been found false or has been controverted by Revenue by bringing any contrary material on record. In such a situation, we relying on the aforesaid decisions, are of the view that the interest payable by the assessee for acquisition of shares should be added to the cost of acquisition and therefore be considered while computing capital gains. We therefore direct the AO to allow the indexed cost on account of interest on shares to compute the deduction under capital gains. Thus the grounds of assessee are allowed. Disallowance u/s 14A - AO noticed that assessee had received dividend which was claimed as exempt u/s 10(34) - HELD THAT - We find that AO had given detailed reason to discard the assessee s working of disallowance u/s 14A. In such a situation, we are of the view that the requirement of the statue has been satisfied. No infirmity in the action of AO in invoking the provisions of Rule 8D r.w. Section 14A for working the disallowance is concerned. Alternate submissions of the AR in working the disallowance u/s 14A only after considering the investment which have yielded tax free income is concerned, we find force in the submission of Learned AR. We find that in the case of CIT vs. Holcim India Pvt. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT , CIT vs. Corrtech Engineering Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT and Shivam Motors (P.) Ltd. 2014 (5) TMI 592 - ALLAHABAD HIGH COURT has held that Section 14A of the Act cannot be involved when no exempt income was earned. Before us, AR has submitted that out of the total investments which the AO has considered for working of disallowance u/s 14A r.w.r 8D, the investments which had yielded dividend were to the extent of ₹ 20,55,16,081/- (as on 31.03.2013) and ₹ 20,98,25,264/- (as on 31.03.2012). The contention of the assessee that it has received dividend only from the aforesaid investments has not been controverted by Revenue. In such a situation, relying on the aforesaid decisions, we are of the view that disallowance u/s 14A needs to be re-worked on the basis of the investments which have yielded tax free income. We therefore direct the AO to work out the disallowance u/s 14A r.w.r 8D on the basis of investments which had yielded dividend. Thus Ground of assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of indexed cost of interest related to the purchase of shares.
2. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Indexed Cost of Interest Related to the Purchase of Shares:

The first issue pertains to the disallowance of ?18,01,158/- as indexed cost of interest in computing capital gains from the sale of shares of ANS Construction Ltd. The assessee argued that the interest cost had a direct nexus to the investment in ANS shares and should be allowed with indexation. The Assessing Officer (AO) denied the claim, stating that the assessee did not provide sufficient documentation to verify the use of Inter Corporate Deposits (ICDs) for purchasing the shares. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision.

Upon appeal, the tribunal examined the contention that the interest paid on borrowings for acquiring the shares should be part of the cost of acquisition. The assessee provided evidence, including bank statements and application forms, showing that the borrowed funds were used for purchasing the shares. The tribunal noted that the interest was never claimed as a deduction in previous years. Citing precedents from the Bombay Tribunal and High Courts, the tribunal concluded that the interest cost should be considered part of the acquisition cost and directed the AO to allow the indexed cost of interest in computing capital gains.

2. Disallowance under Section 14A of the Income Tax Act:

The second issue revolves around the disallowance of ?37,46,362/- under Section 14A, which pertains to expenses incurred in earning exempt income. The AO applied Rule 8D to determine the disallowance, which the CIT(A) upheld. The assessee argued that the AO mechanically applied Rule 8D without recording satisfaction regarding the correctness of the assessee's claim. The assessee further contended that the disallowance should only be calculated based on investments that yielded exempt income.

The tribunal found that the AO had indeed recorded reasons for not accepting the assessee's calculation and had followed the statutory requirements. However, the tribunal agreed with the assessee's alternative argument that the disallowance should be based on investments that generated exempt income. Citing various High Court decisions, the tribunal directed the AO to rework the disallowance under Section 14A by considering only those investments that yielded dividend income.

Conclusion:

The appeal resulted in partial relief for the assessee. The tribunal allowed the indexed cost of interest for computing capital gains and directed the AO to rework the disallowance under Section 14A based on investments yielding exempt income. The order was pronounced on 05.01.2022.