Asst. Commissioner of Income Tax, Circle-5(1), Hyderabad V. Sri Vishnu Kant Inani, Hyderabad

ITA 1787/HYD/2013

• Counselvise Citation: 178722514 RSA 2013
• Duration Of Justice: 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 23-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KATTA KIRAN
• Assessee Lawyers: LAXMINIVAS SHARMA
• Keywords: Capital asset; Earning of tax free income; Cost of acquisition; Revenue expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.1787/HYD/2013 ASSESSMENT YEAR 2008-2009 ACIT, CIRCLE 5(1) HYDERABAD. VS. MR. VISHNU KANT INANI HYDERABAD PAN AAEP-1813-N (APPELLANT) (RESPONDENT) FOR REVENUE MR. KATTA KIRAN FOR ASSESSEE MR. LAXMI NIVAS SHARMA DATE OF HEARING 22.07.2014 DATE OF PRONOUNCEMENT 13.08.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS REVENUE APPEAL IS AGAINST THE ORDER OF THE L D. CIT(A)-V, HYDERABAD DATED 16.09.2013 FOR THE ASSESS MENT YEAR 2008-2009 ON THE ISSUE OF DISALLOWANCE OF INTEREST PAID BY ASSESSEE AT RS.65,29,462. 2. BRIEFLY STATED, ASSESSEE HAS BORROWED FUNDS AND INVESTED IN INITIAL PUBLIC OFFER OF VARIOUS COMPANI ES. AFTER THE ALLOTMENT, THE SHARES WERE IMMEDIATELY SOLD AND INT EREST WAS PAID FOR A SHORTER PERIOD OF 15 TO 20 DAYS FOR THE MONIES BORROWED. ASSESSEE HAS PAID TOTAL OF RS.65,29,462. THE DETAILS OF THE INTEREST PAID ON VARIOUS SHARES AS WELL AS T O VARIOUS FINANCE COMPANIES ARE EXTRACTED BY THE A.O. AND LD. CIT(A) IN THE ORDERS, HENCE, DOES NOT REQUIRE ANY REPETITION. 2 ITA.NO.1787/HYD/2013 SRI VISHNU KANT INANI, HYDERABAD. 2.1. THE FACTS ARE THAT ASSESSEE HAS INVESTED IN S HARES BY BORROWING THE AMOUNT FROM THREE FINANCIERS AND P AID THE INTEREST FOR THE SHORT PERIOD DURING THE YEAR. ASSE SSEE CONSEQUENT TO THE SALE OF SHARES OFFERED CAPITAL GA INS TO AN EXTENT OF RS.3,71,95,856, AFTER ADJUSTING THE ABOVE INTEREST CLAIMED. A.O. NOTICED THAT THIS AMOUNT CANNOT BE AL LOWED AND RELYING ON ITAT DECISION IN THE CASE OF HARISH KRIS HNA KANTHA BHAT VS. ITO (2004) 91 ITD 311 (AHD.) DISALLOWED TH E INTEREST ON THE CAPITAL BORROWED TO FINANCE INVESTMENT IN SH ARES AND ADDED TO THE INCOME RETURNED. 3. ON SUBMISSION FROM ASSESSEE AND ON EXAMINATION OF THE FACTS, LD. CIT(A) DID NOT ACCEPT THE ACTION OF THE A.O. BOTH UNDER SECTION 14A AND ALSO UNDER SECTION 48. H IS OBSERVATIONS IN PARAS 7.3 TO 7.5 ARE AS UNDER : 7.3 I FIND FORCE IN THE CONTENTION OF THE APPELLA NT THAT IN ORDER TO DISALLOW THE EXPENDITURE U/S. 14A, THERE M UST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME AND IF THE EXPENDI TURE WAS INCURRED WITH AN AIM TO EARN TAXABLE INCOME, THEN N O DISALLOWANCE COULD BE MADE U/S. 14A MERELY BECAUSE SOME TAX EXEMPT INCOME WAS RECEIVED BY ASSESSEE. IN THIS CASE, NO EXEMPT INCOME WAS RECEIVED BY THE APPELLANT FROM THE SHARES AS THE INVESTMENT IN THE SHARES AND THE PERI OD OF SALE OF SHARES WAS FOR A SHORTER PERIOD. THE APPELL ANT RELIED ON THE FOLLOWING CASE LAWS IN SUPPORT OF HIS CONTEN TION THAT NO DISALLOWANCE U/S. 14A WAS WARRANTED WHEN THE APPELLANT HAS NOT INCURRED AND CLAIMED ANY EXPENDIT URE FOR EARNING THE EXEMPT INCOME AND THE PROVISIONS OF SEC TION 14A WOULD NOT ATTRACT FOR DISALLOWANCE OF EXPENDITURE I NCURRED BY ASSESSEE TO MAKE ANY INVESTMENT WHICH WAS CAPABL E OF EARNING TAXABLE INCOME. (I) (I) JUSTICE SAM P BHARUCHA VS. THE ADDL.CIT - 11(3), (ITAT, MUMBAI) ITA NO.3889 (MUM) OF 2011 (II) AVSHESH MERCANTILE LIMITED & OTHERS (ITA NO.5779/ MUM/2006 (ITAT MUMBAI). 3 ITA.NO.1787/HYD/2013 SRI VISHNU KANT INANI, HYDERABAD. 7.4 AS PER SECTION 48, THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS', SHALL BE COMPUTED, BY DEDUCTI NG FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOL LOWING AMOUNTS: (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY I N CONNECTION WITH SUCH TRANSFER; (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT. THE APPELLANT ALSO SUBMITTED COPIES OF ACCOUNT STAT EMENTS FROM MULTIFACED FINSTOCK (P) LIMITED REFLECTING AMO UNT BORROWED AND INTEREST AMOUNT PAID, AMOUNTING TO RS.58,01,043. IN THIS CONNECTION, THE APPELLANT REL IED ON THE FOLLOWING CASE-LAWS IN SUPPORT OF HIS CONTENTION TH AT THE EXPENSES INCURRED IN ACQUIRING THE CAPITAL ASSET HA D TO BE INCLUDED IN THE ACTUAL COST OF ACQUISITION OF THE C APITAL ASSET AS DISTINCT FROM THE ITEMS OF EXPENDITURE WHICH WER E INCURRED BY HIM FOR RETAINING OR MAINTAINING THE CA PITAL ASSET. AND THE INTEREST EXPENDITURE ON ACQUISITION OF SHARES FORMS PART OF COST OF ACQUISITION OF SHARES AS IT H AD DIRECT NEXUS WITH THE PURCHASE OF SHARES AND HENCE SHOULD BE ALLOWED AS DEDUCTION IN COMPUTING THE SHORT-TERM CA PITAL GAIN: (I) CIT VS MIT HLESH KUMARI (92 ITR 9) (DEL) (II) CIT VS. TRISHUL INVESTMENTS LTD (305 ITR 434) (III) RAJRANI SOHANLAL GUPTA VS ASSESSEE I TA.NO. 1890 /M/2012 (ITAT, MUMBAI). (IV) SONAL DHIREN VORA, AHEMDABAD VS. INCOME TAX, VIDE ITA.NO.24/AHD/2012 (ITAT AHMEDABAD). (V) SUNITA ADAMANI, MUMBAI VS. ASSESSEE, ITA.NO. 570 /MUM/2010 (ITAT, MUMBAI). (VI) RAJENDRA SUBHKARAN KHEMKA VS. INCOME TAX, ITA.NO.6641/MUM/2010 (ITAT, MUMBAI). (VII) UDAY HASMUKHLAL VORA, AHMEDABAD VS. INCOME TAX, ITA.NO.23/AHD/2012 (ITAT AHMEDABAD). IN THE CASE OF CIT VS RAJENDRA PRASAD MOODY (115 IT R 522), THE SUPREME COURT HELD THAT INTEREST ON MONIE S BORROWED FOR PURCHASE OF SHARES WAS ALLOWABLE AS A DEDUCTION U/S 57 (III) IRRESPECTIVE OF WHETHER OR N OT THERE IS ANY YIELD OF DIVIDEND TO ASSESSEE. 4 ITA.NO.1787/HYD/2013 SRI VISHNU KANT INANI, HYDERABAD. 7.5 RESPECTFULLY FOLLOWING THE CASE-LAWS CITED ABO VE, I HOLD THAT THE A.O. WAS NOT JUSTIFIED IN DISALLOWING INTEREST EXPENDITURE OF RS.65,29,462 INCURRED FOR ACQUISITIO N OF SHARES, PARTICULARLY WHEN THE SHORT TERM CAPITAL GA INS ON SALE OF SHARES WAS OFFERED FOR TAXATION AND THE PRO VISIONS OF SECTION 14A WILL NOT APPLY TO DISALLOWANCE OF SU CH INTEREST EXPENDITURE WHEN THE INCOME EARNED FROM SA LE OF SHARES FORMED PART OF THE TOTAL INCOME OF THE APPEL LANT. HENCE, I DELETE THE DISALLOWANCE OF INTEREST EXPEND ITURE OF RS.65,29,462. 4. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE L D. CIT(A). AS ALREADY HELD BY THE HONBLE HIGH COURT IN THE CASE OF CIT VS. MITHLESH KUMARI 92 ITR 9 (DEL.) THE ACTUAL COST OF CAPITAL ASSET SHOULD INCLUDE INTEREST PAID ON BORROWED AMOUNTS AT THE TIME OF PURCHASE. THE HONBLE HIGH COURT OF MADRAS IN TH E CASE OF CIT VS. TRISHUL INVESTMENT LTD., 305 ITR 434 HELD T HAT INTEREST PAID ON MONEY BORROWED FOR ACQUIRING THE SHARES, WO ULD PARTAKE THE CHARACTER OF COST OF SHARES. THERE ARE HOST OF OTHER JUDGMENTS ALSO AND THERE IS NO DISPUTE PRINCIPALLY, TO INCLUDE INTEREST ON BORROWALS AS COST OF SHARES , WHEN THE SAID SHARES ARE SOLD. SINCE ASSESSEE IS NOT IN THE BUSINESS OF PURCHASE AND SALE OF SHARES, INVESTMENT IN SHARES AND SUBSEQUENT SALE THEREOF, WAS SHOWN UNDER THE HEAD CAPITAL GAINS A ND SINCE THERE WAS SHORT TERM CAPITAL GAINS, THE SAME WAS DI SCLOSED AS SUCH, AFTER CLAIMING INTEREST PAID AS COST OF SHARE S. WE DO NOT FIND ANY REASON TO DIFFER FROM THE FINDINGS OF THE LD. CIT(A). IN FACT, THE A.O. HAS WRONGLY APPLIED THE PRINCIPLES L AID DOWN BY THE COORDINATE BENCH IN THE CASE OF HARISH KRISHNA KANTHA BHATT VS. ITO (2004) 91 ITD 311 (AHD.). IN THAT CAS E, THE ISSUE WAS NOT OF TREATING THE INTEREST PAID AS COST OF SH ARE BUT REVENUE EXPENDITURE CLAIMED AGAINST THE DIVIDEND IN COME WHICH WAS NOT TAXABLE IN THAT RELEVANT ASSESSMENT Y EAR. IT WAS HELD THAT SINCE THE DIVIDEND WAS NOT TAXABLE, THE I NTEREST 5 ITA.NO.1787/HYD/2013 SRI VISHNU KANT INANI, HYDERABAD. CLAIMED AS REVENUE EXPENDITURE CANNOT BE ALLOWED. W E ARE UNABLE TO UNDERSTAND HOW THIS JUDGMENT WOULD HELP T HE A.O. IN COMING TO CONCLUSION THAT THE INTEREST IS NOT AL LOWABLE AS PART OF THE COST OF SHARES. BE THAT AS IT MAY, ON F ACTS OF THE CASE AND ON PRINCIPLES OF LAW, A.OS ACTION CANNOT BE UPHELD. ACCORDINGLY, ORDER OF THE LD. CIT(A) IS UPHELD. REV ENUE GROUND IS DISMISSED. 5. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.08.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 13 TH AUGUST, 2014 VBP/- COPY TO 1. THE ACIT, CIRCLE 5(1), 6 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2. SRI VISHNU KANT INANI, 5-8-352/15, G-15, R.R. TO WERS, CHIRAG ALI LANE, ABIDS, HYDERABAD. 3. CIT(A)-V, HYDERABAD 4. CIT-IV, HYDERABAD 7. D.R. A BENCH, ITAT, HYDERABAD.