2015 (6) TMI 513 - AT - Income Tax

Appeal dismissed: Interest on borrowed capital not part of acquisition cost. Unproved credits treated as income.

The Tribunal dismissed the assessee's appeal, ruling that interest on borrowed capital invested in shares cannot be treated as part of the cost of ... Holding cost versus cost of acquisition - capitalization of interest on borrowed funds - time cost of funds - cost of acquisition and cost of improvement - deeming provision under section 41(1) - cessation or remission of trade liability - onus of proof on Revenue to establish remissionCapitalization of interest on borrowed funds - holding cost versus cost of acquisition - time cost of funds - cost of acquisition and cost of improvement - Allowability of interest on borrowings as part of cost of acquisition or improvement of shares sold in the relevant previous year - HELD THAT: - The Tribunal held that interest on borrowings incurred after the transfer of ownership (post-acquisition) cannot be treated as part of the cost of acquisition or improvement of capital assets. Acquisition is complete on transfer of the asset, and interest incurred thereafter is a time or holding cost, revenue in nature and properly claimable only as a period expense. Authority and accounting standards support that only those borrowing costs which contribute to acquisition or to bringing an asset to working condition (for example, interest during construction) can be capitalised. No physical improvement to the shares was shown; the assessee itself had historically treated the interest as revenue expenditure up to FY 1996-97, and there was no change in facts after FY 1997-98 to justify recasting those expenses as capital. Reliance on precedents permitting capitalization where interest contributed to acquisition or where specific factual permutations existed was distinguishable. The Tribunal therefore found the assessee's attempt to include post-acquisition interest in cost of acquisition to be without merit and akin to circumventing other provisions (such as section 14A) by backdoor means. [Paras 3]Interest on borrowings incurred after acquisition of the shares is not allowable as part of cost of acquisition or improvement and is a revenue (period) expense; the assessee's claim to capitalise such interest is rejected.Deeming provision under section 41(1) - cessation or remission of trade liability - onus of proof on Revenue to establish remission - inference of fact from long outstanding liabilities - Treatability as income under section 41(1)(a) of long outstanding, unproven business liabilities that remain in the assessee's books - HELD THAT: - Section 41(1)(a) is a deeming provision that treats cessation or remission of a trade liability as income in the year of such cessation or remission. While the Revenue bears the initial onus to show that the conditions for deeming are satisfied, long continuance of liabilities in books (spanning years) and absence of explanation or supporting evidence raises legitimate doubt about their existence. The Tribunal observed that accounting entries alone are not conclusive; persistence of longstanding trading liabilities without payment or proof may justify an inference that the liability no longer exists and that the assessee has obtained a benefit by remission or cessation. Where the Revenue discharges its onus by demonstrating such doubt, the onus shifts to the assessee to prove the genuineness and continued existence of the liability as at the relevant year end. On the facts, the assessee failed to provide material to dispel the doubts, and the finding that the liabilities were not established was warranted. [Paras 5]The claim of unproven long outstanding liabilities was rejected and such remission/cessation was held to be taxable as income under section 41(1)(a); the assessee failed to discharge the onus to prove the liabilities.Final Conclusion: Both grounds of appeal were found without merit and the assessee's appeal is dismissed. Issues Involved:1. Maintainability of interest on borrowed capital invested in shares as part of the cost of acquisition and/or improvement.2. Deeming of income qua unproved credits by way of business liabilities under Section 41(1) of the Income Tax Act.Detailed Analysis:Issue 1: Maintainability of Interest on Borrowed Capital Invested in SharesThe first issue revolves around whether the interest on borrowed capital, used to invest in shares, can be considered part of the cost of acquisition and/or improvement under Section 48(ii) of the Income Tax Act, 1961. The shares were acquired by the assessee-company from financial years 1980-81 to 1992-93 and sold during the relevant previous year, yielding capital gains. The assessee claimed the interest cost from financial year 1997-98 onwards up to the year of transfer, indexing it for inflation.The Tribunal examined how interest costs related to borrowings for acquiring a capital asset could be considered part of its acquisition cost. It was noted that the acquisition process is complete upon the transfer of the asset to the owner, and post-acquisition interest costs are more appropriately classified as holding costs or period costs. These costs should be charged against the income of the enterprise for the relevant period rather than being added to the cost of the asset.The Tribunal referenced several landmark judgments, including India Cements Ltd. vs. CIT [1966] 60 ITR 52 (SC) and CIT vs. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285 (SC), which clarified that loan-related expenses are revenue expenditures and do not alter the cost of the asset. The Tribunal also referred to Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), which upheld the inclusion of interest during the construction period as part of the actual cost of a fixed asset. However, it was emphasized that post-acquisition interest does not contribute to the acquisition or improvement of the asset and remains a revenue expense.The Tribunal concluded that the assessee's claim to transform the interest cost from a revenue to a capital expense from financial year 1997-98 onwards was unjustifiable. The interest costs were rightly considered by the Revenue as an attempt to circumvent Section 14A by claiming the expenses indirectly.Issue 2: Deeming of Income Qua Unproved Credits by Way of Business Liabilities Under Section 41(1)The second issue concerns the deeming of income related to unproved credits by way of business liabilities under Section 41(1) of the Income Tax Act. The assessee argued that since these liabilities were not written back in the books, they continued to represent liabilities. The Revenue, however, considered these as invalid due to the lack of proof of their existence.Section 41(1) is a deeming provision that considers the benefit from the cessation or remission of a trade liability as income for the year in which such cessation or remission occurs. The Tribunal noted that the cessation or remission of liability is a factual matter that needs to be proved, with the onus initially on the Revenue. The inordinate delay in discharging these liabilities (ranging from 3 to 25 years) raised valid doubts about their existence.The Tribunal held that the onus shifted to the assessee to demonstrate that the liabilities were genuine. The absence of any material evidence or explanation from the assessee led to the inference that the liabilities no longer existed, implying a benefit by way of remission or cessation of liability. The Tribunal disagreed with the assessee's contention that the liabilities were not existing in the preceding year, emphasizing that the cessation or remission occurred during the relevant previous year.The Tribunal referenced several judgments, including CIT vs. Bhogilal Laherchand [1954] 25 ITR 50 (SC) and Kesoram Industries & Cotton Mills Ltd. vs. CIT [1992] 196 ITR 845 (Cal), to support its conclusions. The Tribunal found little merit in the assessee's case and upheld the Revenue's position.Conclusion:The Tribunal dismissed the assessee's appeal, concluding that the interest on borrowed capital invested in shares cannot be considered part of the cost of acquisition or improvement and that the unproved credits by way of business liabilities were rightly deemed as income under Section 41(1) of the Income Tax Act.