2022 (1) TMI 240 - AT - Income Tax

Tribunal allows indexed interest cost, directs AO to rework disallowance under Section 14A

The tribunal allowed the indexed cost of interest for computing capital gains and directed the AO to rework the disallowance under Section 14A based on ... Cost of acquisition including interest - Indexed cost of acquisition - Section 14A disallowance - Rule 8D methodology - Application limited to investments yielding exempt incomeCost of acquisition including interest - Indexed cost of acquisition - Indexed interest paid on borrowings used to acquire shares is includible in the cost of acquisition and may be indexed for computation of long term capital gains where such interest has not been claimed as deduction under any other head. - HELD THAT: - The Tribunal found that the assessee borrowed by way of inter corporate deposits to acquire shares and did not claim the interest as a deduction in earlier years. Revenue did not place any contrary material to controvert the assessee's claim that the interest related to acquisition of the shares and was not claimed elsewhere. Relying on the coordinate bench decision in DCIT v. Fritz Desilva , and the decisions in CIT v. Maithreyi Pai and CIT v. Trishul Investments Ltd. , the Tribunal held that interest paid for acquisition of a capital asset partakes the character of the cost of the asset and, if not otherwise claimed as deduction, can be added to the cost of acquisition and indexed under the capital gains provisions. The Tribunal therefore directed the Assessing Officer to allow the indexed cost on account of interest while computing capital gains. [Paras 8]Grounds 1 and 2 allowed; AO directed to allow indexed interest as part of cost of acquisition for computing capital gains.Section 14A disallowance - Rule 8D methodology - Application limited to investments yielding exempt income - Disallowance under Section 14A read with Rule 8D can be invoked after the AO records reasons to discard the assessee's working; however, Rule 8D computation must be confined to investments that yielded exempt (dividend) income. - HELD THAT: - The Tribunal found that the Assessing Officer had called for the assessee's workings and, after considering the replies, recorded reasons for rejecting the assessee's claimed computation; accordingly the invocation of Rule 8D was not mechanical or without satisfaction. Nevertheless, the Tribunal accepted the assessee's alternate contention, supported by the factual (uncontroverted) claim that dividend was received only from specified investments, and relied on High Court authorities cited in the order - including Maxopp Investments Ltd. , CIT v. Holcim India Pvt. Ltd. , CIT v. Corrtech Engineering Pvt. Ltd. and CIT v. Shivam Motors (P.) Ltd. - for the proposition that Section 14A (and Rule 8D) should be applied only in relation to investments which actually yielded exempt income. In view of the unchallenged assertion about which investments yielded dividend, the Tribunal directed the AO to recompute the Section 14A disallowance under Rule 8D by considering only those investments that produced exempt dividend income. [Paras 13]Grounds 3 to 5 partly allowed; AO directed to recompute disallowance under Section 14A r.w. Rule 8D limited to investments that yielded dividend (exempt) income.Final Conclusion: Appeal partly allowed: (a) indexed interest incurred for acquisition of shares to be added to cost of acquisition and allowed for indexing in computation of capital gains; (b) Section 14A disallowance sustained in principle but remitted for recomputation under Rule 8D limited to investments which actually yielded exempt dividend income. Issues Involved:1. Disallowance of indexed cost of interest related to the purchase of shares.2. Disallowance under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Indexed Cost of Interest Related to the Purchase of Shares:The first issue pertains to the disallowance of Rs. 18,01,158/- as indexed cost of interest in computing capital gains from the sale of shares of ANS Construction Ltd. The assessee argued that the interest cost had a direct nexus to the investment in ANS shares and should be allowed with indexation. The Assessing Officer (AO) denied the claim, stating that the assessee did not provide sufficient documentation to verify the use of Inter Corporate Deposits (ICDs) for purchasing the shares. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision.Upon appeal, the tribunal examined the contention that the interest paid on borrowings for acquiring the shares should be part of the cost of acquisition. The assessee provided evidence, including bank statements and application forms, showing that the borrowed funds were used for purchasing the shares. The tribunal noted that the interest was never claimed as a deduction in previous years. Citing precedents from the Bombay Tribunal and High Courts, the tribunal concluded that the interest cost should be considered part of the acquisition cost and directed the AO to allow the indexed cost of interest in computing capital gains.2. Disallowance under Section 14A of the Income Tax Act:The second issue revolves around the disallowance of Rs. 37,46,362/- under Section 14A, which pertains to expenses incurred in earning exempt income. The AO applied Rule 8D to determine the disallowance, which the CIT(A) upheld. The assessee argued that the AO mechanically applied Rule 8D without recording satisfaction regarding the correctness of the assessee's claim. The assessee further contended that the disallowance should only be calculated based on investments that yielded exempt income.The tribunal found that the AO had indeed recorded reasons for not accepting the assessee's calculation and had followed the statutory requirements. However, the tribunal agreed with the assessee's alternative argument that the disallowance should be based on investments that generated exempt income. Citing various High Court decisions, the tribunal directed the AO to rework the disallowance under Section 14A by considering only those investments that yielded dividend income.Conclusion:The appeal resulted in partial relief for the assessee. The tribunal allowed the indexed cost of interest for computing capital gains and directed the AO to rework the disallowance under Section 14A based on investments yielding exempt income. The order was pronounced on 05.01.2022.