S. Balan alias Shanmugam v. DCIT
A.Y. : 2002-03. Dated : 31-1-2008
If the capital asset is acquired out of borrowed funds and
the interest paid on such amount borrowed has not been claimed as deduction,
then the same may be added to the cost of asset while computing cost of
acquisition on sale of asset.
The issue relates to disallowance of interest for computing
the cost of shares while working out the short-term capital gains.
Facts :
The assessee was an individual working as a promoter and
builder and also had income from salary, rent and other sources. In the A.Y.
2002-03, the assessee sold certain shares and computed short-term capital
loss. On perusal of details, it was noticed by the AO that cost price of the
shares included the amount of interest paid on the borrowed funds. The AO
mentioned that the funds were borrowed for investment in shares. The AO
disallowed the interest component from the working of capital gains on the
ground that it was neither covered under the term ‘expenditure incurred wholly
and exclusively in connection with the transfer’, nor under the term ‘cost of
improvement’. In the opinion of the AO, interest was not covered u/s.48 of the
Act.
The CIT(A) has given the following reasons for confirming
the action of the AO :
à The
amount of interest should not be taken into account for determining cost of
capital asset u/s.48 of the Act
à The
intention of investment in shares was earning of dividend and since the said
dividend is exempt, interest expenditure in that regard should also not be
allowed in view of provision of S. 14A of the Act
à Whenever
the Parliament intends to allow interest as a deduction, then specific
provisions are incorporated such as S. 36(3) and S. 24(b) of the Act,
however it is not so in S. 48 of the Act.
à The
appellant had dominant intention of earning dividend income, therefore, the
provision of S. 14A was to be applied.
Before the ITAT, the appellant argued that borrowed funds
were utilised for acquisition of shares, interest on these funds was never
claimed as revenue expenditure and the main intention was to invest in shares
and not to trade in shares.
Held :
The Tribunal observed that even if it is a situation where
a capital asset is acquired out of borrowed funds having liability of
interest, and since it has been capitalised as cost of asset in the books of
account and never claimed as a revenue expenditure, then that too is towards
enhancing cost of such capital asset and cannot be segregated from cost of
acquisition. The appellant is entitled to deduct interest for the purposes of
S. 48 of the Act.
Further, analysing S. 14A of the Act, the ITAT held that
the issue is related to the transfer of the capital asset and not the revenue
generated. A situation may arise that on transfer of a capital asset, the gain
is taxable but not the incidental income, and if so, the expenditure having
nexus with the cost of acquisition has to be taken into account for the
computation of gain as prescribed u/s.48 of the act.
(6) On the face of the evidence in the shape of
confirmation letters, bank accounts, passports, etc., in the hands of the
assessee, it might be valid gift that would have convinced a reasonably
minded person, specially a person exercising a judicial function. The
accepted position of law is that merely because an assessee had agreed to
the assessment, it cannot bring in automatic levy of penalty.
(7) Therefore, the CIT(A) was right in deleting the
penalty and his order was to be affirmed.
