2019 (3) TMI 1689 - AT - Income Tax

Tribunal allows interest capitalization & set-off of capital losses vs gains.

Shri Somanth Vaijanath Sakre Versus The Asst. Commissioner of Income Tax, Range -3, Aurangabad And Vice-Versa.

Shri Somanth Vaijanath Sakre Versus The Asst. Commissioner of Income Tax, Range -3, Aurangabad And Vice-Versa. - TMI Issues Involved:1. Allowability of interest paid on borrowed funds for the purpose of acquisition of a capital asset as part of the acquisition cost.2. Set off of long-term capital loss on sale of shares of listed companies against long-term capital gains on sale of shares of unlisted companies.Detailed Analysis:Issue 1: Allowability of Interest Paid on Borrowed FundsFacts and Arguments:- The assessee sold a house property and claimed a cost of improvement amounting to Rs. 1,07,42,039/- as interest paid to Punjab National Bank for acquiring the property.- The Assessing Officer (AO) disallowed this claim, arguing that interest on borrowed funds used for acquiring an asset cannot be considered as a cost of improvement due to specific provisions of Section 24(b) of the Income Tax Act, which allows the deduction of interest paid on borrowed funds.- The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's claim by relying on various High Court decisions, stating that the interest paid on borrowed funds can be capitalized and treated as part of the asset's cost.Judgment:- The Tribunal upheld the CIT(A)'s decision, emphasizing that the interest on borrowed funds was debited to the asset account and not claimed as a deduction under any other head of income.- The Tribunal noted that the Revenue did not present any contrary binding decision or point out any fallacy in the CIT(A)'s findings.- The Tribunal cited decisions from various High Courts, including CIT Vs. Mithilesh Kumari (1973) 92 ITR 9 (Del) and ACIT Vs. K.S. Gupta (1979) 119 ITR 372 (AP), which supported the capitalization of interest as part of the asset's cost.- Consequently, the Revenue's appeal was dismissed.Issue 2: Set Off of Long-Term Capital LossFacts and Arguments:- The assessee showed net long-term capital gains after setting off losses from the sale of listed company shares against profits from the sale of unlisted company shares.- The AO denied this set-off, stating that the income from the sale of listed company shares is exempt under Section 10(38) of the Act, and thus, the loss from such sales cannot be set off against taxable income.- The CIT(A) upheld the AO's decision, relying on the Gujarat High Court's ruling in Kishorebhai Virani Vs. ACIT (2014) 367 ITR 261, which held that losses from exempt income sources cannot be set off against taxable income.Judgment:- The Tribunal reviewed the CIT(A)'s decision and the Gujarat High Court's ruling but also considered the Mumbai Tribunal's decision in Raptakos Brett & Co., Ltd., which allowed such set-off.- The Tribunal noted that the Mumbai Tribunal had considered the Gujarat High Court's decision and other relevant judgments, ultimately deciding in favor of the assessee.- The Tribunal also referenced the Supreme Court's decision in CIT Vs. M/s. Vegetable Products Ltd., which states that if a statutory provision is capable of more than one interpretation, the interpretation favoring the assessee should be adopted.- Following this principle, the Tribunal allowed the assessee's appeal, permitting the set-off of long-term capital losses from the sale of listed shares against long-term capital gains from the sale of unlisted shares.Conclusion:- The appeal of the Revenue was dismissed, and the appeal of the assessee was allowed.- The Tribunal upheld the CIT(A)'s decision to allow the capitalization of interest on borrowed funds as part of the asset's cost.- The Tribunal permitted the set-off of long-term capital losses from the sale of listed shares against long-term capital gains from the sale of unlisted shares, following the favorable interpretation principle.