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IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, MUMBAI
BEFORE S/SHRI B.R.MITTAL,(JM) AND SANJAY ARORA (AM)
.. , ,
./I.T.A. No.2393/Mum/2012
( / Assessment Year:2005-06)
Alka Rajesh Agrawal / Asstt. Commissioner of Income
C/o M/s Ravi andDev, Vs. Tax, 17(2),
Chartered Accountants, 601, Mumbai.
"A" Wing, Aurus Chambers,
Behind Mahindra Towerw,
S.S.Amrut war Marg, Worli,
Mumbai-400013
. / . /PAN/GIR No. : AAFPA5985K
( /Appellant) .. ( / Respondent)
/ Appellant by : Shri Devendra A Mehta
/Respondent by : Shri Surendra Kumar
/ Date of Hearing
: 26.9.2013
/Dat e of Pronouncement : 9.10.2013
/ O R D E R
Per B.R.Mittal, JM:
The assessee has filed this appeal for assessment year 2005-06 against order
of ld. CIT(A) dated 8.2.2012.
2. Only issue involved in this appeal is as to whether the assessee is entitled to
capitalize the interest of Rs.12,58,348/- on the facts and in the circumstances of the
case for computing the short term capital gain on sale of shares.
3. Relevant facts giving rise to this appeal are that the assessee is an individual
deriving income from house property, shares in profits of partnership firm, capital gains
on sale of shares, dividend and bank interest. For the assessment year under
consideration, the return of income was filed on 25.8.2005 declaring income at
Rs.57,49,475/-. The assessment was completed u/s 143(3) of the Income Tax Act,
1961 (the Act) on 10.7.2007 determining the total income at Rs.70,51,180/-. It is
relevant to state that at the time of making the original assessment, the AO allowed
I.T.A. No.2393/Mum/2012
2
capitalization of the interest paid on purchase of shares towards cost of acquisition while
computing the capital gain. However, ld. Commissioner of Income Tax u/s 263 of the
Act set aside the assessment and directed the AO to reassess the assessee's income
interalia disallowing interest paid on funds borrowed for investment made in shares
while computing the short term capital gain. Pursuant thereto, AO made assessment
u/s 143(3) r.w. section 263 of the Act vide order dated 3.11.2009 and disallowed the
interest aggregating to Rs.12,58,348/- as part of cost of acquisition of shares while
computing the short capital gain in respect of shares, the details of which are given in
para 2 at page 5 of assessment order as under :
Name of company NTPC Ltd. Datamatics Ltd NDTV Ltd. Total
No.of shares
Applied 15,00,000 1,00,000 7,65,000
Allotted 1,25,690 1,950 6,200
Application money
Own funds 1,86,00,000 7,50,000 38,25,000
Borrowed funds 7,44,00,000 1,02,50,000 4,97,25,000
Total 9,30,00,000 1,10,00,000 5,35,50,000
Interest paid 7,03,960 82,000 4,72,388 12,58,348
Interest paid Kotak Birla Global Ltd. Birla Global
partly Mahindra Ltd.
Finance Ltd.
STCG/STCL 21,20,514 (-)2,870 (-)3,87,666
Being aggrieved, the assessee filed appeal before the First Appellate Authority.
4. Ld. CIT(A) relying on the decision of ITAT, Mumbai in the case of Macintosh
Finance Estates Ltd V/s Addl.CIT (2007) 12 SOT 324 (Mum-Trib) confirmed the action
of the AO. Hence, this appeal before the Tribunal.
5. Ld. AR submitted that the assessee applied in the IPOs (Initial Public Offerings)
of NTPC Ltd., NDTV Ltd, and Datamatics Ltd. and used partially her own funds and
partially out of funding from the financial institutions. We may state that the details of
the said shares, the details of funds owned, funds borrowed and the payment of interest
are mentioned hereinabove in para 3. Ld. AR submitted that interest paid to financial
institutions on the amount borrowed by the assessee till the date of allotment of the
said shares has direct relation to the shares allotted under IPOs. Thus, the said
interest has been paid as cost of acquisition for the purpose of computing the capital
gains. Ld. AR submitted that there is a clear nexus between interest paid and the
shares of NTPC Ltd., Datamatics Ltd. and NDTV Ltd. allotted to the assessee, on which
the short term capital gain has been claimed by the assessee. Ld. AR submitted
I.T.A. No.2393/Mum/2012
3
that assessee has neither claimed nor was allowed deduction of interest u/s 57 or
Section 37(1) or Sec.36 (1)(iii) of the Act. Ld. AR submitted that assessee did not
derive any dividend from the said shares. The only income derived by the assessee
from those shares is short term capital gain, which is taxable under the Act. Since,
assessee capitalized the interest, it constitutes cost of acquisition. Ld. AR submitted
that the income from the said shares is not exempt under the Act, the provisions of
section 14A of the Act does not apply. Ld. AR referred the decision of Hon'ble
Bombay High Court in the case of CIT V/s Reliance Industries Ltd. (2010) 8
Taxmann.com 218 (Bom) and submitted that no disallowance under section 14A is
called for when there is no fact of having incurred any expenditure for the purpose of
earning the dividend income. Ld. AR also referred the decision of Hon'ble Bombay
High Court in the case of CIT V/s Glenmark Pharmaceutical Ltd. (2013) 30
Taxmann.com 167 (Bom), the decision of Hon'ble Punjab and Haryana High Court in the
case of CIT V/s Hero Cycles Ltd (2010) 189 Taxman 50 (Punj & Har) and the decision
of Hon'ble Mumbai High Court in the case of Justice Sam P. Bharucha V/s Addl CIT
(2012) 25 Taxmann.Com 381(Mum). He further submitted that the ITAT, Delhi Bench
of the Tribunal in the case of Modern Info Technology P.Ltd. V/s ITO in ITA
No.4294/Del/2012 (AY-2009-10) observed and held that no disallowance u/s 14A is
called for when the assessee has not incurred and claimed any expenditure for earning
the exempt income. Ld. AR also referred the following decisions :
(a) CIT V/s Trishul Investment Ltd (215 CTR 96) (Mad);
(b) Smt. Neera Jain V/s ACIT in ITA No.1861/Mum/2009;
(c ) Rajesh Ramswarop Agarwal V/s ITO in ITA No.5157/Mum/2008;
He further submitted that the decision of Macintosh Finance Estates Ltd (supra) relied
upon by the ld. CIT(A) is distinguishable as in that case the assessee was not an
investor but was a Non-Banking Finance Company which paid interest on borrowed
funds and claimed it as deduction u/s 37(1) read with section 36(1)(iii) of the Act and
also derived the dividend income. The Tribunal held that interest on borrowings used
for acquiring stock-in-trade which was allowable as business expenditure after reducing
the amount of dividend received on shares held as "stock-in-trade". However, the
assessee is an investor and not a trader, engaged in the purchase and sale of shares.
That the profit on sale of shares has been assessed as capital gains. That the assessee
has capitalized the interest paid on purchase of shares as a part of cost of acquisition
and never claimed deduction or allowed deduction thereof u/s 57/37(1)/36(1)(iii) of the
I.T.A. No.2393/Mum/2012
4
Act. Further, the only income which was derived from those shares on which the
interest has been paid is short capital gain which is taxable under the provisions of Act.
Ld.AR submitted that the provisions of section 14A is not applicable and the interest
should be considered as cost of acquisition and the short term capital gains be
computed accordingly.
6. On the other hand, ld. DR relied on the order of ld. CIT(A).
7. We have carefully considered the submissions of ld. Representatives of the
parties and the orders of authorities below. We have also considered the cases cited
before us (supra). On perusal of the details of the loan borrowed by the assessee
from the concerned Financial Companies and the investment made in respect of shares
which are under consideration, the details given hereinabove in para 3, we agree that
there is a clear nexus between the interest paid and the allotment of shares of NTPC
Ltd., NDTV Ltd, and Datamatics Ltd. to the assessee and also income on sale of those
shares has been considered under the head "Short term capital gain/short term capital
loss". We observe that the assessee has considered the payment of interest in respect
of shares for which the loan was taken as cost of acquisition of those shares. Therefore,
the assessee has reduced full value of cost of acquisition from the sale consideration
while computing the capital gain. It is not in dispute that the assessee has capitalized
the interest and considered it as part of cost of cost of acquisition as per section 48 of
the Act. The department has not disputed the contention of ld.AR that the assessee has
not claimed the said interests as deduction u/s 57/37(1)/36(1)(iii) of the Act. Similar
issue came before the Hon'ble Madras High Court in the case of Trishul Investment
Ltd (supra), wherein the order of the Tribunal was confirmed by Their Lordships as
under :
"The Tribunal correctly held that the interest paid for acquisition of shares would
partake character of cost of share and therefore the same was rightly capitalised
along with the cost of acquisition of shares. There is no denial regarding the
borrowed money for the acquisition of shares by the assessee. The Tribunal
correctly held that the interest payable thereon should be added to the cost of
acquisition of shares. The reasons given by the Tribunal are based on valid
materials and evidence. Under these circumstances, we do not find any error or
legal infirmity in the order of the Tribunal so as to warrant interference."
We also observe that the ITAT Mumbai Bench in the case of Smt.Neera Jain (supra) has
also considered the similar issue and directed AO to treat interest paid by the assessee
for acquiring shares as part of cost of acquisitions by observing as under :
I.T.A. No.2393/Mum/2012
5
"There was no dispute that the entire loan was borrowed for the purpose of
acquiring the shares of Punjab National Bank and NTPC. Also that immediately
after allotment of shares, money refunded by both the companies was refunded
to the financiers. The Tribunal held that the fact that applied shares were not
allotted in full will not deprive the assessee from claiming the entire interest paid
as part of the cost of acquisition of the shares allowed, as money borrowed has
direct nexus with acquisition of shares. The Tribunal directed the assessing
officer to treat the interest paid by the assessee to both the financiers as part of
cost of acquisitions of shares allow the same as a deduction."
Similar view has also been taken by the Tribunal Mumbai Bench in Rajesh Ramswarop
Agarwal (supra) has held as under :
"It is not disputed that the assessee had borrowed funds for investing in IPO and
the shares acquired through IPO were sold. Therefore, whatever the interest
was paid for the period till the date of allotment of shares had to be treated as
part of cost of acquisition of shares. It is not disputed that final allotment of
shares was fully covered from own funds and, therefore, no borrowed funds
were allocated towards allotment of shares. We, accordingly, confirm the order
of Ld. CIT(A)."
Considering the above cases and also the cases cited before us (supra) we hold that the
entire interest has been paid by the assessee as a part of cost of acquisition of shares
allotted, is to be treated as cost of acquisition because on perusal of all the details
from the table as mentioned hereinabove in para 3 there is a direct nexus between the
borrowed money and the cost of acquisition of shares by assessee. The assessee is
entitled to capitalize the said interest as part of cost of acquisition as per section 48 of
the Act. Hence, short term capital gain as accrued to the assessee on the sale of shares
of NTPC Ltd., NDTV Ltd, and Datamatics Ltd has to be considered after considering the
payment of the said interest as part of cost of acquisition. Since, the short term capital
gain is taxable under the Act, we agree with the ld.AR that the provisions of section 14A
is not applicable on the facts and circumstances of the case. Hence, we allow grounds of
appeal taken by assessee by reversing the orders of authorities below.
8. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on the 9th October, 2013
9th October, 2013
Sd sd
( /SANJAY ARORA) (.. /B.R.MITTAL)
/ ACCOUNTANT MEMBER / JUDICIAL MEMBER
Mumbai; on this 9th day of October, 2013
I.T.A. No.2393/Mum/2012
6
. ../ SRL, Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)-
4. / CIT
5. , , / DR, ITAT,
Mumbai
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, / ITAT, Mumbai
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