Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT
ITA No. 1859 (Pune) of 2005
A.Y. : 2002-03. Dated : 31-1-2008
S. 14A and S. 48 of the Income-tax Act, 1961 :
(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)
(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.
For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.
The Tribunal, relying on the decisions in the following
cases, held in favour of the assessee :
(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)
(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)
(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)
The Tribunal noted as under :
(1) In the past, the assessee had always capitalised the
interest.
(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.
(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.
In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :
(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of 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.
