Income Tax Appellate Tribunal - Mumbai
V. Mahesh, Ito vs Vikram Sadanand Hoskote on 26 July, 2007
ORDER
K.C. Singhal, J.M.
1. The following grounds have been raised by the revenue in this appeal.
(1) On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erredin law in deleting the addition of Rs. 8,57,383 made out of interest claimed and directing to recompute the short-term capital gains.
(2) The appellant prays that the order of the Commissioner (Appeals) on the above ground(s) be set aside and the order of the assessing officer be restored.
2. Briefly stated, the facts are these. The assessee is a Chartered Accountant. Apart from the professional work, he had purchased shares on 22-5-1998, of Orient Information Technology Ltd., out of the borrowed funds of Rs. 59,45,000 received from Ketan Sheth & Co. According to the assessee, all these shares agreed to be sold to certain parties. Since these parties could not make the payments, the assessee did not deliver the shares. It was only in February, 1999, that payments were received from those parties, and from the sale proceeds of shares the amount of loan was repaid to Ketan Sheth & Co., along with interest of Rs. 9,64,556 for the period of 9 months. While computing the capital gain, the assessee deducted the cost of shares and interest on loan from the sale proceeds which resulted in short-term capital gain of Rs. 50,444, which was offered for taxation. In the course of the assessment proceedings the assessee was asked to show why he had taken the decision to sell the shares in June, 1998, while the payment was received in February, 1999. Reply of the assessee was that he does not have this information of hand. However, the assessing officer allowed deduction of Rs. 1,07,173 being interest for one month Le., from 22-5-1998 to 27-6-1998, and the balance amount of Rs. 8,57,382 was disallowed.
3. The matter was carried in appeal before the Commissioner (Appeals), before whom it was contended that action of assessing officer in disallowing the interest was not correct for the following reasons:
(i) The assessing officer did not dispute the fact that, interest of Rs. 9,64,556 was actually paid by the appellant to the loan creditor.
(ii) The assessing officer accepted the fact that, the interest paid on borrowed funds, which were utilised for purchase of capital asset, which was to be considered in ascertaining the cost of capital asset. The amount borrowed by the appellant was repaid to the loan creditor on 25-2-1999, when he received the sale proceeds of the shares sold from the purchasers.
(iii) Lastly it was not the fact or case of the assessing officer as if the appellant received sale proceeds earlier and utilised the said proceeds for some other purpose, till February 1999, and hence, such interest was disallowable.
4. Reliance was also placed on the decision of Kerala High Court in the case of Shri K.N. Narayanan v. ITO (1983) 145 ITR 373 and in the case of Rajgiri Rubber & Produce Co. Ltd. v. CIT (1993) 203 ITR 663 (Ker) as well as on the Board Circular No. 704, dated 28-4-1995 for the proposition that where the transactions took place directly between the parties and not through the Stock Exchange, the date of contract of sale as declared by the parties shall be treated as the date of transfer, provided it is followed up by actual delivery of shares and the transfer deeds. In view of the same it was contended that the interest paid should be treated as part of the cost of acquisition and should be allowed as deduction while computing the capital gains. The Commissioner (Appeals) deleted the addition made by the assessing officer by observing as under:
6. After going through the facts of the case from the assessment orderand after hearing the arguments of the learned authorised representative and after perusing the copy of the letter dated 4-2-2003, which was submitted to the Assessing Officer, I find that, the assessing officer disallowed interest of Rs. 8,57,383 only for the reason that, the appellant could not givesatisfactory answer for the question that, 'why the appellant had taken the decision to sale the shares in June, 1998, when the payments were received in February, 1999'.However, the appellant had given the explanation, vide letter dated 4-2-2003, with facts and figures, giving the cheque numbers, received from purchasers, etc. Thus, I find that, the assessing officer was not justified in disallowing the interest of Rs. 8,57,383 out of the total interest of Rs. 9,64,556, since, the assessing officer had not disputed the fact that, the interest of Rs. 9,64,556 was actually paid by the appellant, to the creditors, for the purpose of funds borrowed for purchasing the said shares. Accordingly, while computing S.T.C.G., the said interest was correctly to be deducted. However, instead of deducting whole of the interest of, Rs. 9,65,556, the assessing officer deducted only interest pertaining to one month, without giving logical and cogent reason for the same. Accordingly, I hereby direct the assessing officer to deduct the entire interest of Rs. 9,64,556 while working the S.T.C.G. on sale of shares, and thereby delete the addition made of Rs. 8,57,383.
Aggrieved by the same, the revenue is in appeal before the Tribunal.
5. The learned Departmental Representative has contended before us that deductions have to be allowed only to the extent it is provided under the statute. According to her, Section 48 provides the procedure for computing the capital gains. As per this Section what is allowed as deduction is either the cost of acquisition or the cost of improvement or the expenditure incurred wholly and exclusively in connection with such transfer. Thus the interest paid by the assessee on borrowed funds cannot be allowed as deduction, since such expenditure does not fall within the ambit of Section 48. In support of her contention, she relied on the decision of Mumbai Bench dated 27-2-2006, in the case of Macintosh Finance Estates Ltd. v. Addl. CIT (2007) 12 SOT 324 (Mum-Trib). On the other hand, the learned Counsel for the assessee has submitted before us that cost of acquisition will include the interest paid on the borrowed funds right from the date of acquisition till the date of sale. Reliance was placed on the decision of Hon'ble Madras High Court in the case of CIT v. K. Raja Gopala Rao .
6. Rival submissions of the parties have been considered carefully in the light of case-law referred to. The question for our consideration is whether interest paid by the assessee on the borrowed funds, for the period commencing from the date of purchase till the date of sale, would form part of the cost of acquisition of the shares for the purpose of computing capital gain under Section 48. In our humble opinion, the answer to this question is in negative for the reasons given hereafter.
7. It is a settled legal position that income of an assessee has to be computed under various heads specified under Section 14 of the Act. Therefore, the deductions are to be allowed in computing the income under various heads only to the extent it is provided by the Legislature under that very heads. The computation of capital gain is provided in Section 48 of the Act. According to this Section, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition, in our opinion, means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot be considered as the cost of acquisition, since such expenditure would not have any nexus with the acquisition of the asset. Wherever the Legislature intended to allow such expenditure as deduction, it had specifically provided so under various heads. For example, in computing the income from house property, the assessee is allowed deduction under Section 24 of the Act on account of interest paid on the borrowed funds utilised for acquiring the immovable property. Similarly, when the income is to be computed under the head "Profits and gains from business or profession", the deduction on account of interest on borrowed fund is provided under Section 36(1)(iii) of the Act, where the business assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allow able as deduction under Section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as per Explanation 8 to Section 43 of the Act. If the interest is to be added to the cost of acquisition, then the assessee would be entitled to double deduction - once under Section 36(l)(iii) and the other under Section 32 of the Act, which is not permissible in view of the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. v. UOI .
8. Similarly, when the shares are purchased by way of investment, and the dividend is received in respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against the dividend income. The Hon'ble Supreme Court has gone a step further in the case of CIT v. Rajendra Prasad Moody , wherein it has been held that deduction on account of interest paid on borrowed funds is allowable as deduction in computing the income under the head 'Income from other sources', even where the dividend is not received in a particular year. If this is the legal position, then we are afraid, how the interest paid by the assessee can be considered as part of the cost of acquisition of the shares. If the contention of the assessee is accepted then it would amount to allowing double deduction le., under Section 57 as well as under Section 48 of the Act, which can never be the intention of the Legislature. As already stated, the double deduction is prohibited as laid down by the Hon'ble Supreme Court in the case of Escorts Ltd. (supra). The entire scheme of the Act, therefore, reveals that interest component after the date of acquisition and till the date of sale cannot be treated as the cost of acquisition. It is only allowable as a revenue deduction on year to year basis against the income generated from such asset or likely to be generated to the extent provided by the Legislature under different heads.
9. The view taken by us is fortified by the decision of the coordinate Bench of the Tribunal in the case of Macintosh Finance Estates Ltd. (supra), wherein it has been held "once we find that interest expenses is an allowable expenditure under the head "Income from other sources", it cannot be allowed to be added to the cost of investment only because in this year no deduction is allowable because the dividend income has been made exempt".
This view is also fortified by the decision of Hon'ble Karnataka High Court in the case of CIT v. Maithrey .
10. However, the Hon'ble Madras High Court in the case of K. Raja Gopala Rao (supra) has taken the view that interest paid on the loan received on the mortgage of the property would also form part of the cost of acquisition in view of the Supreme Court judgment in the case of Challapalli Sugars Ltd. v. CIT . The following observations of the Hon'able Supreme Court were relied on by the Court:
As the expression 'actual cost' has not been defined, it should beconstrued, in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of theexpression, in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring suchassets into existence and to put them in working condition. In case moneyis borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before thecommencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets.
A bare look at the above observations reveals that actual cost would include all expenditure necessary to bring the assets into existence and put them in working condition. Nowhere in the above observations, the Hon'ble Supreme Court held that the expenditure incurred after the acquisition of asset would be included in the cost of assets. The terminal point is the time when the asset is brought into existence or when the asset is put in a working condition. Therefore, on the basis of the Supreme Court judgment, it cannot be said that expenditure incurred after the asset is brought into existence, i.e., after the acquisition of the asset would form part of the actual cost. Accordingly, we are not persuaded by the decision of the Hon'ble Madras High Court. The jurisdictional High Court in the case of CIT v. Thane Electricity Supply Ltd. , has held that judgment of non-jurisdictional High Court is not binding on the subordinate Courts or the tax authorities but has only a persuasive value.
11. In view of the above discussion, it is held that the interest paid by the assessee for the period commencing from the date of acquisition of shares till the date of sale would not form part of the cost of acquisition. However, our decision would not affect the part relief allowed by the assessing officer himself since that matter is not before us.
12. In the result, appeal of the revenue is allowed.