Capitalised interest and limited scrutiny shaped the capital gains and revision controversy, with the assessment ultimately restored.

Capitalised interest that formed part of the investment's opening value and was not claimed as a revenue deduction could be included in the cost of acquisition of debentures for computing long-term capital gains. On revision, the order under section 263 could not be sustained on the partners' remuneration issue because the original limited scrutiny was confined to the genuineness of capital gains, the remuneration point lay outside that scope, and the underlying tax treatment was debatable with more than one legally sustainable view. The revisional order was therefore set aside and the assessment restored.

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Issues: (i) Whether interest capitalised in an earlier year could be included in the cost of acquisition of debentures for computing long-term capital gain; (ii) Whether revision under section 263 could be sustained on the ground that remuneration to partners was wrongly allowed where the assessment arose from limited scrutiny and the point was debatable.

Issue (i): Whether interest capitalised in an earlier year could be included in the cost of acquisition of debentures for computing long-term capital gain.

Analysis: The debentures were originally acquired for a fixed amount, and the interest on borrowed funds used for retaining or repaying the investment was capitalised in the books in an earlier year. That capitalised amount formed part of the opening value of the investment in the year of sale and had not been claimed as a revenue deduction. When the debentures were ultimately sold, the capitalised interest represented part of the investment cost actually embedded in the asset. The Assessing Officer's acceptance of the enhanced cost of acquisition was therefore consistent with the computation of capital gains.

Conclusion: The inclusion of the capitalised interest in the cost of acquisition was upheld and the revision on this point was not sustainable.

Issue (ii): Whether revision under section 263 could be sustained on the ground that remuneration to partners was wrongly allowed where the assessment arose from limited scrutiny and the point was debatable.

Analysis: The scrutiny was confined to the genuineness of capital gains and whether such capital gains were correctly shown in the return. The question of partners' remuneration was outside that limited scope. On the merits, remuneration under section 40(b)(v) is linked to book profit computed under Chapter IV-D, and the controversy whether other heads of income could enter that computation had attracted divergent High Court views. In such circumstances, the assessment order could not be branded erroneous and prejudicial merely because one possible view was adopted, particularly when the revisional authority itself had not expanded the scrutiny into a complete scrutiny.

Conclusion: Revision under section 263 on the remuneration issue was invalid and the assessee succeeded on this issue.

Final Conclusion: The revisional order was set aside in full and the assessment order was restored.

Ratio Decidendi: Capitalised expenditure forming part of the actual investment cost is deductible in computing capital gains on transfer, and revision under section 263 cannot be sustained on a debatable issue or on a point outside the limited scrutiny scope when the Assessing Officer has adopted one of the legally sustainable views.

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