Cost of acquisition treatment for borrowing costs: interest used to buy virtual assets permitted as part of cost, reducing short term capital gains.

Whether interest on funds borrowed to purchase virtual digital assets can be treated as part of cost of acquisition for computing short-term capital gains: the analysis found a factual nexus between the loan and the capital asset acquisition and applied the principle that borrowing costs exclusively used to acquire a capital asset must be capitalised as part of its cost; statutory restriction on deductions permits only cost of acquisition for the purpose, and accordingly the interest disallowed by the Assessing Officer under general deduction provisions was held allowable as part of cost for computing short-term capital gains in favour of the assessee.

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Issues: Whether the assessee is entitled to deduction of Rs. 5,74,560 being interest paid on loan, by treating the interest as part of cost of acquisition for computing short-term capital gains on virtual digital assets.

Analysis: The assessee borrowed funds which were invested in virtual digital assets that are capital assets. The factual nexus between the loan and the investment is established. The interest claimed relates exclusively to borrowed funds used to acquire the capital asset and thus constitutes part of the cost of acquisition. Section 115BBH(2) restricts deductions except cost of acquisition, and cost of acquisition is permissible for computing short-term capital gains. The Assessing Officer disallowed the interest under Section 57; the Tribunal examined the nature of the expenditure and applied the principle that borrowing costs directly used to acquire a capital asset form part of its cost.

Conclusion: The deduction of Rs. 5,74,560 as part of cost of acquisition while computing short-term capital gains is allowed in favour of the assessee.

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