2020 (10) TMI 742 - AT - Income Tax

Tribunal allows appeal, removes interest expense disallowance for Long Term Capital Gains

Shri Ramesh Trikamlal Padhiyar Versus The Dy. Commissioner of Income-tax, Circle – 3 (3), Ahmedabad

The Tribunal allowed the appeal of the assessee, deleting the disallowance of interest expenses while computing Long Term Capital Gains. The Tribunal ... Capital gain computation - Disallowance of interest expenses while computing income from Long Term Capital Gain - HELD THAT:- As decided in own case we are satisfied that the ld. Revenue authorities have failed to appreciate the facts and circumstances in right perspective while holding that nexus has not been proved. The assessee has demonstrated that interest free funds were used for acquiring assets and interest expenditures were capitalized. Unsecured loans were remained outstanding at the end of every accounting year. It cannot be construed that nexus has not been demonstrated. We have noticed the order of the AO, which is absolutely silent on any of the aspects though the ld.CIT(A) has made reference to the details in order to demonstrate that the assessee failed to prove the nexus, but on re-appreciation of these very details we are of the view that the ld.CIT(A) has not appreciated the facts in right perspective, and considered them half-heartedly. We find that there is no disparity on facts between AYs 2010-11 [2019 (4) TMI 1912 - ITAT AHMEDABAD] to this assessment year. The assessee has demonstrated that the borrowed funds have been used by him in making investments. Therefore, he is entitled for the claim of interest expenditure while computing the Long Term Capital Gains/Short Term Capital Gains on sale of investments - Appeal of the assessee is partly allowed. Issues Involved:1. Addition under Section 14A of the Income-tax Act.2. Disallowance of interest expenses while computing income from Long Term Capital Gain.Detailed Analysis:1. Addition under Section 14A of the Income-tax Act:The first ground of appeal involved the addition of Rs. 54,366/- made by the Assessing Officer under Section 14A of the Income-tax Act. The learned Counsel for the assessee did not press this ground of appeal during the hearing. Consequently, this ground was rejected by the Tribunal.2. Disallowance of Interest Expenses while Computing Long Term Capital Gain:The second ground of appeal concerned the disallowance of interest expenses amounting to Rs. 14,09,635/- while computing income from Long Term Capital Gain. The assessee argued that the learned CIT(A) erred in upholding this disallowance without properly appreciating the facts of the case.Brief Facts:- The assessee filed his return of income electronically on 30.09.2013, declaring a total income of Rs. 13,38,20,298/-.- The case was selected for scrutiny assessment, and a notice under Section 143(2) of the Act was issued and served.- The assessee claimed that he made investments in land using borrowed funds, and the interest expenditure incurred on these funds was capitalized in the investments.- Upon the sale of these lands, the assessee claimed the cost of interest expenditure while computing capital gains.- The Assessing Officer disallowed this claim, citing a lack of nexus between the loan taken for the purchase of land and its utilization for the same. This disallowance was mainly based on findings from Assessment Year 2010-11.CIT(A)'s Findings:- The CIT(A) concurred with the findings of the Assessing Officer and followed the order of his predecessor for AY 2010-11.- It was noted that unsecured loans were bifurcated among land investments and partnership firms at the end of the year.- The CIT(A) emphasized that no nexus was proven between the loan arrival and investment in properties.- The CIT(A) also noted that similar additions were made in AY 2010-11 and confirmed by the CIT(A), and the appellant did not distinguish his case from the facts of AY 2010-11.Tribunal's Analysis:- The Tribunal noted that in AY 2010-11, the appeal of the assessee was allowed, and the findings of the Revenue Authorities were set aside.- The Tribunal made reference to the case of Global Assets Holding Corporation, where it was held that interest paid on borrowings used for the acquisition of shares should be taken as part of the actual cost of purchase.- The Tribunal also referred to the Hon'ble Delhi High Court's decision in the case of Mithilesh Kumari, which supported the capitalization of interest on borrowings for the purpose of computing capital gains.- The Tribunal further noted that the CIT(A) did not dispute the legal aspect but confirmed the disallowance on the ground that the assessee failed to establish the nexus between borrowed funds and investments.- Upon reviewing the fund flow statements and balance sheets, the Tribunal found that the assessee had demonstrated the utilization of borrowed funds for investments and that the Revenue Authorities had failed to appreciate the facts correctly.Conclusion:- The Tribunal concluded that there was no disparity in the facts between AYs 2010-11 and 2013-14.- The assessee successfully demonstrated that borrowed funds were used for making investments, thus entitling him to claim interest expenditure while computing Long Term Capital Gains.- Consequently, the Tribunal allowed the appeal of the assessee and deleted the disallowance of interest expenses.Final Order:The appeal of the assessee was partly allowed, and the order was pronounced in the Court on 19th March 2020 at Ahmedabad.