2013 (10) TMI 1136 - AT - Income Tax

Interest on Share Acquisition Capitalized for Short Term Gain; Section 14A Inapplicable

Alka Rajesh Agrawal C/o M/s Ravi and Dev Chartered Accountants Versus Asstt. Commissioner of Income Tax

The Tribunal allowed the appeal of the assessee, holding that the interest paid on borrowed funds for share acquisition could be capitalized as part of ... Interest on borrowed funds to be part of cost of acquisition for the purpose of section 48 of the Income tax act on purchase and sale of shares – Applicability of section 14A of the Income tax act – Held that:- 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 - 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, the provisions of section 14A is not applicable on the facts and circumstances of the case – Appeal allowed – Decided in favor of Assessee. Issues:Whether the assessee is entitled to capitalize the interest for computing short term capital gain on sale of shares.Analysis:The appeal was filed by the assessee against the order of the ld. CIT(A) for the assessment year 2005-06. The only issue in this appeal was whether the assessee could capitalize the interest of Rs.12,58,348 for computing short term capital gain on the sale of shares. The original assessment allowed capitalization of interest paid on the purchase of shares towards the cost of acquisition. However, the assessment was set aside under section 263 of the Income Tax Act, directing the disallowance of interest paid on funds borrowed for share investment. The AO disallowed the interest as part of the cost of acquisition of shares. The assessee then appealed to the First Appellate Authority.The ld. CIT(A) confirmed the AO's action, relying on a decision of ITAT Mumbai. The assessee argued that the interest paid to financial institutions for borrowed funds had a direct relation to the shares allotted under IPOs, constituting part of the cost of acquisition for computing capital gains. The assessee did not claim any deduction for the interest under various sections of the Act. The assessee's only income from the shares was short term capital gain, not exempt under the Act, making section 14A inapplicable. Various court decisions were cited to support the assessee's position.The Tribunal considered the details of the loan borrowed by the assessee and the investment in shares. It found a clear nexus between the interest paid and the shares allotted, which were considered under short term capital gain/loss. The Tribunal agreed that the interest paid was part of the cost of acquisition of shares, as per section 48 of the Act. Court decisions were cited to support this position, confirming that interest paid for share acquisition should be added to the cost of acquisition. The Tribunal held that the entire interest paid by the assessee was to be treated as part of the cost of acquisition of shares, allowing the appeal and reversing the orders of the authorities below.In conclusion, the Tribunal allowed the appeal of the assessee, holding that the interest paid on borrowed funds for share acquisition could be capitalized as part of the cost of acquisition for computing short term capital gain on the sale of shares. The provisions of section 14A were deemed inapplicable in this case.The order was pronounced in open court on 9th October 2013.