2010 (2) TMI 739 - AT - Income Tax

Tribunal allows appeal for capital loss claim & interest disallowance overturned

Asian PPG Industries Ltd. Versus DCIT

The Tribunal partly allowed the appeal, permitting the claim for long-term capital loss on the surrender of leasehold rights and overturning the ... Rejection of Long Term Capital Loss on the basis of Ownership of Capital Asset - disallowance u/s 36(1)(iii) interest on fund borrowed - disallowance of 10 % of exempt income u/s 14A - In the issue of Rejection of LTCL. Held that :- 'capital asset' means, 'property of any kind held by an assessee'. Therefore, it does not necessarily mean that the property, which the assessee holds, must be his own.And Surrender of rights of the assessee referred to above would amount to extinguishment of his rights in the land/capital asset and, therefore, it attracts capital gains/loss. decided in favour of Assessee. In the issue of disallowance u/s 36(1)(iii) Held that :- No separate disallowance under section 36(1)(iii) is required considering the same reason that the assessee has utilized the borrowed funds in investment of Rs. 150.83 million, otherwise that will be a double addition. Since the learned AR has not pressed ground relating to 14A, the addition to that extent becomes confirmed. No separate disallowance is required under section 36(1)(iii) on the same reason that the assessee has invested borrowed funds in investment of Rs. 150.83 million. We, therefore, delete the addition of Rs. 20,60,000. Issues Involved:1. Rejection of the claim of long-term capital loss on part surrender of leasehold land.2. Allowability of long-term capital loss on transfer of leasehold rights.3. Disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Rejection of the Claim of Long-term Capital Loss on Part Surrender of Leasehold Land:The assessee claimed a long-term capital loss amounting to Rs. 3,69,08,837 due to the part surrender of leasehold land to MIDC and part transfer to Lucas TVS Ltd. The Assessing Officer (AO) rejected the claim, stating that the assessee never owned the capital asset as the land was allotted conditionally by MIDC. The AO noted that the assessee failed to fulfill the conditions required for the lease, resulting in the land being returned to MIDC. Consequently, the AO held that no capital gain or loss could arise as the assessee never owned the asset.The CIT(A) upheld the AO's decision, emphasizing that the agreement between the assessee and MIDC did not confer ownership of the land to the assessee due to the non-fulfillment of conditions. The CIT(A) referred to specific clauses in the agreement that indicated the land was not demised in law to the assessee until the lease was executed and registered.2. Allowability of Long-term Capital Loss on Transfer of Leasehold Rights:The assessee argued that the leasehold rights constituted a capital asset and that the surrender of these rights amounted to a transfer, thereby incurring a capital loss. The assessee relied on various judgments to support the contention that the leasehold rights were a valuable asset and their surrender should be considered a transfer liable to capital gains or loss.The Tribunal examined the relevant provisions of the Income-tax Act, particularly sections 2(14) and 2(47), which define 'capital asset' and 'transfer' respectively. The Tribunal concluded that the leasehold rights held by the assessee constituted a capital asset. The possession of the land, payment of consideration, and subsequent transfer to Lucas TVS Ltd. indicated that the assessee had rights in the property. Therefore, the surrender of these rights amounted to an extinguishment of rights in the capital asset, attracting capital gains or loss. The Tribunal set aside the orders of the revenue authorities and allowed the assessee's claim for long-term capital loss.3. Disallowance of Interest Under Section 36(1)(iii) of the Income-tax Act, 1961:The AO disallowed interest expenses amounting to Rs. 20,60,000 under section 36(1)(iii) on the grounds that the borrowed funds were used for making investments, which did not constitute carrying on of business. The AO relied on judgments from the Apex Court and the Punjab and Haryana High Court to support this disallowance.The Tribunal noted that the AO had already disallowed 10% of the exempt income under section 14A as expenses incurred for earning the dividend, which included interest expenses. The Tribunal agreed with the assessee's contention that no separate disallowance under section 36(1)(iii) was required, as it would result in double addition. Consequently, the Tribunal deleted the addition of Rs. 20,60,000.Conclusion:The appeal was partly allowed. The Tribunal allowed the claim for long-term capital loss on the surrender of leasehold rights and deleted the disallowance of interest under section 36(1)(iii).