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TMI Blog2008 (1) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition of the asset and the cost of any improvement thereto. The issue in hand falls under the second category. Once it is an established fact that the appellant had borrowed the funds for acquisition of those share scrips and the burden of interest had been capitalized, therefore, that interest burden cannot be segregated from the amount of investment. At this juncture, we may also like to mention an observation of learned CIT(A) that, quote thus, the expenditure by way of interest is part of cost only on the date purchase of share is made and after that whatever is interest cost, is incurred by the appellant for retaining or maintaining the capital asset and therefore cannot be allowed as deduction unquote. This observation makes it clear that he was agreeable that in case interest is part of the cost, then it falls within cl. (ii) of s. 48 of IT Act. However, he was apprehensive, that if the burden of interest is for retaining or maintaining a capital asset then not to be allowed. On this proposition of learned CIT(A). We are of the view that even if it is a situation that a capital asset is acquired out of the borrowed funds having liability of interest. and since it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. In this manner, both the grounds of the appellant are hereby allowed. In the result, the appeal is allowed. - Member(s) : PRAMOD KUMAR., MUKUL SHRAWAT. ORDER-MUKUL SHRAWAT, J.M.: This is an appeal of the assessee arising out of the order of CIT(A)-II, Pune, dt. 11th Oct., 2005. Grounds are narrative, running in several numbers albeit the only issue is disallowance of component of interest for computing the cost of shares while working out the short-term capital gain. The learned Authorised Representative has also specified that one of the reason for such disallowance was the applicability of provision of s . 14A being exempted dividend income alleged to have arisen, against which, the expenditure of interest was held as not admissible. For the sake of clarity, the first two grounds are reproduced below around which the arguments were revolved: "(A) Interest paid on borrowing-Part of cost of shares: (1) On facts and in the circumstances of the case, the learned CIT(A)-II, Pune, erred in holding that Rs. 71,30,560 being interest on the amount borrowed for investment in shares cannot be treated as part of cost of shares and therefore, cannot be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question was as to why the interest component of Rs. 70,30,560 should not be disallowed from the working of the capital gains. According to AO, since the assessee has disclosed the income under the head "Income from capital gain", therefore, the impugned computation was covered under the provisions of s. 48 of IT Act. Referring this section, the AO has mentioned that only two types of expenses i.e., the expenditure incurred wholly and exclusively in connection with the transfer and second, the cost of improvement had to be allowed. In the opinion of AO, the component of interest happened to be not covered under the said section. The assessee has relied upon the decision in the case of CIT vs. Mithlesh Kumari (1973) 92 ITR 9 (Del), but the AO has held that the cost so enhanced has to be reduced, resulting into increase in the capital gain offered. He has clarified that the assessee declared short-term capital loss on sale of shares at Rs. 4,74,85,421, however, the same was reduced by the aforesaid disallowance resulting into the loss as per AO at Rs. 4,03,54,861. This action of the AO was challenged. 3. The first appellate authority has given three reasons for confirming the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r claimed as a deduction or allowance in any of the past years by the appellant, rather the interest factor was always capitalized towards the cost in the books of accounts. His next plank of argument was that the intention of the assessee was to invest in shares and not to trade in the shares, therefore, offered as a capital gain since the holding was more than the prescribed limit. Replying to the issue of applicability of s. 14A of IT Act, learned Authorised Representative has vehemently argued that this section is applicable only in a situation of exempted income, however, the capital gain was offered for taxation purpose, therefore, without prejudice to the above arguments, had to be treated as part of the cost and not as a revenue expenditure against an exempted income. 5. From the side of the Revenue, learned Departmental Representative, Mr. Ajitkumar Shrivastav appeared and primarily objected about the case laws cited on the ground that those were applicable to the years prior to the introduction of s. 14A into the statute. He has strongly argued that the interest having nexus with the exempted income, therefore, the provisions of s. 14A ought to have been applied. He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of those share scrips and the burden of interest had been capitalized, therefore, that interest burden cannot be segregated from the amount of investment. At this juncture, we may also like to mention an observation of learned CIT(A) that, quote "thus, the expenditure by way of interest is part of cost only on the date purchase of share is made and after that whatever is interest cost, is incurred by the appellant for retaining or maintaining the capital asset and therefore cannot be allowed as deduction" unquote. This observation makes it clear that he was agreeable that in case interest is part of the cost, then it falls within cl. (ii) of s. 48 of IT Act. However, he was apprehensive, that if the burden of interest is for retaining or maintaining a capital asset then not to be allowed. On this proposition of learned CIT(A). we are of the view that even if it is a situation that a capital asset is acquired out of the borrowed funds having liability of interest. and since it had been capitalized in the books of accounts treated as a part of cost of asset and never claimed as a revenue expenditure, then that too is towards enhancing the cost of such capital asset and cannot be seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such interest constituted part of cost of acquisition of shares for the purpose of computation of capital gain. The ITO has disallowed the claim on the ground that the interest had already been allowed as a deduction under s. 57 while computing income from dividend, so the Revenue has contended that such a deduction, if allowed, would amount to double deduction. Since there was no finding by the Tribunal whether the deduction would amount to double deduction, hence the matter was remanded back as the question referred could not be answered by the Hon'ble Court. However, this decision gives us certain guidelines on account of the fact that if the Revenue has not contended that the interest had ever been claimed as a deduction and also the Revenue has not contended that the interest was wrongly capitalized, then in the light of the said accepted position, the interest ought to be held as part of the cost of the asset in question. Thus, our view gets fortified by the legal proposition laid down by the Hon'ble Court. In the light of this discussion, we arrive at the conclusion that the appellant is entitled to take into account the interest liability towards cost of the capital asset f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the total income of the assessee. Otherwise also, capital gain is not exempt income and without any ifs and buts, always being taxed in the hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a wrong premise that the interest expenditure was in respect of an income which was exempt, or did not form part of the total income. 8.1 The confusion occurred in the minds of the Revenue authorities was due to the incidence of dividend income arising from the asset, i.e., share scrips. Now the situation is like this that the capital gain as such is not exempt arising from the capital assets for the purpose of computation of gain under s. 48, however, the revenue generated therefrom is a non-taxable income. We have posed a question during the course of hearing that whether the Revenue Department is assessing that revenue generation in the year under consideration i.e., the dividend income stated to be earned from those share scrips in question or the Revenue is taxing the gain arising on transfer of the impugned capital asset. Undisputedly, the issue is related to the transfer of the capital asset and not the revenue generated thereout. To sum up, we hereby clarify t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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