Mukul Shrawat, Judicial Member -
(1.) THIS is an appeal of the assessee arising out of the order of CIT(A)-II, Pune, dated 11.10.2005. 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 A.R. has also specified that one of the reasoning for such disallowance was the applicability of provision of Section 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 Commissioner of Income tax (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 considered while working out short term capital loss/gain;
2) On facts and in the circumstances of the case, the Learned Commissioner of Income tax (A)-II, Pune, was not justified in holding that the dominant intention of acquisition of shares was for earning of income and therefore, interest paid is for earning of tax free dividend. Therefore, as per the provisions of Section 14A, the same is not allowable for deduction;
(2.) Facts in brief as emerged from the corresponding assessment order passed Under Section 143(3) dt. 31.3.2000 were that the appellant as an 'Individual' worked as a promoter and builder and also had income from salary, rent and other sources. The observation of the A.O was that the return of income has shown loss on sale of shares which required requisite investigation. On perusal of details, it was noticed by the A.O that the cost price of the shares included the amount of interest paid on the borrowed funds. The A.O has mentioned that funds were borrowed for investment in shares. The capital gain was worked out accordingly after taking into account the interest to the cost of the shares by the assessee. The component of interest amounted to Rs. 71,30,560/- and the script-wise details were as follows:
Further, the A.O has also mentioned that the assessee has declared the sales of shares under the head "capital gain" instead of "business income". The question was as to why the interest component of Rs. 70,30,560/- should not be disallowed torn the working of the capital gains. According to A.O, since the assessee has disclosed the income under the head "income from capital gain", therefore, the impugned computation was covered under the provisions of Section 48 of IT. Act. Referring this Section, the A.O 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 A.O, 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 v. Mithlesh Kumari (1973) 92 ITR p (Delhi), but the A.O 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 afore-said disallowance resulting into the loss as per A.O at Rs. 4,03,54,861/-. This action of the A.O was challenged.
The first appellate authority has given three reasons for confirming the action of the A.O, the first one was that since the term "cost" has not been defined in the I.T. Act, as far as Section 48 is concerned, therefore, the amount of interest should not be taken into account for determining the cost of a capital asset. The second reason assigned by Ld CIT(A) was that the intention of investment in shares was earning of dividend and since the said dividend income happened to be exempt, therefore, any expenditure in that regard i.e. interest expenditure had not to be taken into account in view of the provisions of Section 14A of I.T. Act. Apart from these two basic reasons, the Ld CIT(A) has also advanced few arguments that whenever the Parliament intend to allow interest as a deduction, then specific provisions are Incorporated such as Section 36(3) and Section 24(b) of IT. Act, however, it is not so in Section 48 of IT. Act. An another argument has also been advanced by Ld CIT(A) that the appellant had dominant intention of earning dividend income, therefore, the provisions of Section 14A was to be applied. He has also mentioned that an expenditure laid out in obtaining anything could reasonably be included in the actual cost but an expenditure incurred thereafter is nothing but for maintaining the said capital asset, therefore, since the interest was not part of the cost on the date of purchase, therefore, out of the ambits of Section 48 of IT. Act. In this manner, the action of the A.O. was confirmed which is now further challenged.
(3.) FROM the side of the appellant, Learned A.R. Mr. M.R. Bhagwat appeared and the first plank of his argument was that interest should have been allowed as part of the cost because the borrowed capital was utilized towards acquisition of shares, hence it was nothing but a part of the cost of the acquisition and in support, reliance placed on the following decisions:
CIT v. Mithilesh Kumari 92 ITR 9 (Del)
K.S. Gupta 119 ITR 372 (AP)
Maithreyi Pai 152 ITR 247(Karn)
Indian Overseas Bank 222 ITR 77 (Mad)
His argument was that Section 48 speaks about cost of acquisition and also cost of any improvement, therefore, Ld CIT(A) went wrong in holding that such expenditure was out of the ambits of Section 48 of IT. Act. His second plank of argument was that the said interest expenditure was never 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 Section 14A of IT. Act, Ld. A.R. 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.;