KALYANJI J. TANNA (DECD) (THROUGH HIS LEGAL HEIR DIPAK K. TANNA), MUMBAI V. ITO 9(1)(2), MUMBAI

ITA 3137/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7810 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2004-2005
• Appeal Filed On: 22-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MAYAK
• Assessee Lawyers: AJAY GHOSALIA
• Keywords: Question of law; Cost of acquisition; Capital Gains
• Section: 143(3); 207

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, G, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER I T A NO: 3137/MUM/2010 (ASSESSMENT YEAR: 2004-05) KALYANJI J TANNA (DECD), MUMBAI APPELLANT (THROUGH HIS LEGAL HEIR DIPAK K TANNA) (PAN: AAEPT2345R) VS INCOME TAX OFFICER 9(1)(2), MUMBAI RESPONDENT APPELLANT BY: SHRI AJAY GHOSALIA RESPONDENT BY: SHRI A K MAYAK O R D E R R V EASWAR, PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE AND IT RELATES T O THE ASSESSMENT YEAR 2004-05. THE ASSESSEE IS AN INDIVI DUAL ENGAGED IN THE BUSINESS OF INVESTMENTS IN SHARES AND SECURI TIES. THE APPEAL ARISES OUT OF THE ASSESSMENT ORDER PASSED ON 21.12. 2006 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE FIRST GROUND IS DIRECTED AGAINST THE TREATME NT GIVEN TO THE INTEREST OF ` 2,56,147/- IN THE COMPUTATION OF THE CAPITAL GAINS. THE ASSESSEE BORROWED MONIES FROM M/S SAHARA INDIA FINA NCIAL CORPORATION LIMITED (HEREINAFTER REFERRED TO AS SA HARA) FOR THE PURPOSE OF INVESTING IN THE SHARES OF INDRAPRASTHA GAS LIMITED ISSUE AS IPO (INITIAL PUBLIC OFFER). THE INTEREST PAID ON THE BORROWING ALONG WITH THE PROCESSING CHARGES WERE CL AIMED AS A DEDUCTION AS COST OF ACQUISITION OF THE SHARES IN T HE COMPUTATION OF CAPITAL GAINS ON THE SALE OF THE SHARES IMMEDIATELY ON ALLOTMENT. ITA NO: 3137/MUM/2010 2 THE ASSESSING OFFICER TOOK THE VIEW THAT SINCE THER E WAS NO PROVISION IN THE INCOME TAX ACT TO ALLOW THE INTERE ST AS EXPENDITURE IN COMPUTING THE CAPITAL GAINS, THE CLAIM WAS NOT A DMISSIBLE. THE DECISION OF THE ASSESSING OFFICER HAVING BEEN ENDOR SED BY THE CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE TH E TRIBUNAL. 3. WE HAVE CONSIDERED THE FACTS AND THE RIVAL CONTE NTIONS. ONE OF THE POINTS MADE BY THE CIT(A) IS THAT THERE IS N O DIRECT NEXUS BETWEEN THE INTEREST PAID AND THE SHARES ACQUIRED. THE EVIDENCE ADDUCED BY THE ASSESSEE INDICATES TO THE CONTRARY. AT PAGE 4 OF THE ASSESSEES PAPER BOOK THE COPY OF THE LOAN APPL ICATION FORM HAS BEEN FILED. A PERUSAL THEREOF SHOWS THAT EVEN WHILE APPLYING FOR THE LOAN OF ` 2.84 CRORES, THE ASSESSEE HAS STATED THAT THE LOAN WAS REQUIRED FOR APPLYING IN THE IPO OF INDRAPRASTH A GAS LIMITED WHICH OPENS ON 28.11.2003 AND CLOSES ON 05.12.2003. THE LOAN WAS REQUIRED FOR 15 DAYS. AT PAGE 21 THE ASSESSEE HAS PLACED THE SCHEDULE OF TERMS ATTACHED TO THE LOAN AGREEMENT. THEREIN THE PURPOSE OF THE LOAN HAS BEEN CLEARLY STATED TO BE F OR APPLYING / BIDDING IN THE PUBLIC OFFER OF INDRAPRASTHA GAS LIM ITED. IN CLAUSE 12 OF THE LOAN AGREEMENT WITH SAHARA, A COPY OF WHI CH IS PLACED IN THE PAPER BOOK, IT HAS BEEN STATED THAT UNDER THE F INANCING SCHEME THE LENDER, VIZ. SAHARA SHALL SIGN THE APPLICATION FORM ON BEHALF OF THE ASSESSEE PURSUANT TO THE POWER OF ATTORNEY GIVE N BY THE ASSESSEE AND FURTHER THAT SAHARA EXPRESSLY CLARIFIE D THAT IT IS NOT RESPONSIBLE FOR NON-ALLOTMENT TO THE BORROWER OF TH E SHARES APPLIED FOR BY THE BORROWER. THE FACT THAT THE CLAUSE MENT IONED THAT SAHARA WILL SIGN THE APPLICATION FORM ON BEHALF OF THE ASS ESSEE FOR APPLYING ITA NO: 3137/MUM/2010 3 FOR THE SHARES WAS HIGHLIGHTED TO CONTEND THAT THER E WAS IMMEDIATE NEXUS BETWEEN THE LOAN AND THE ACQUISITION OF THE S HARES. AT PAGE 41 OF THE PAPER BOOK THE ASSESSEE HAS PLACED A COPY OF THE SHARE APPLICATION FORM. WE FIND THEREFROM THAT THE SAME HAS BEEN SIGNED BOTH BY THE ASSESSEE AS WELL AS BY SAHARA. AT THE SAME PAGE THE ASSESSEE HAS ALSO PLACED A PHOTOCOPY OF THE CHEQUE ISSUED IN FAVOUR OF THE ESCROW ACCOUNT FOR PURCHASE OF THE SH ARES, WHICH SHOWS THAT THE CHEQUE FOR ` 3.00 CRORES HAS BEEN ISSUED BY SAHARA, WHICH IS THE LENDING COMPANY. THE APPLICAT ION FORM ALSO SHOWS THE ADDRESS OF THE ASSESSEE AS C/O SAHARA IND IA FINANCIAL CORPORATION LIMITED, 25 28 ATLANTA, NARIMAN POINT , MUMBAI 400 021. AT PAGE 42 IS A LETTER DATED 08.01.2010 WRITT EN BY SAHARA TO THE ASSESSEE. IN ADDITION TO CONFIRMING THAT THE A SSESSEE HAS AVAILED OF THE FINANCE FACILITY FROM SAHARA FOR THE IPO OF INDRAPRASTHA GAS LIMITED, THE LETTER ALSO GIVES THE DETAILS OF THE INTEREST PAYMENT. ALL THESE EVIDENCE SHOWS THE NEX US BETWEEN THE BORROWING FROM SAHARA AND THE INVESTMENT IN THE SHA RES OF INDRAPRASTHA GAS LIMITED. THE FINDING OF THE CIT(A ) THAT THE ASSESSEE WAS NOT ABLE TO ESTABLISH THE NEXUS CANNOT THEREFORE BE ACCEPTED AS CORRECT. 4. NEXT COMES THE LEGAL QUESTION AS TO WHETHER THE INTEREST PAID ON LOANS TAKEN FOR ACQUIRING THE SHARES CAN BE ALLO WED AS A DEDUCTION UNDER SECTION 48 AS COST OF ACQUISITION I N THE COMPUTATION OF THE CAPITAL GAINS ON SALE OF THE SHARES. ON THI S QUESTION OUR ATTENTION WAS DRAWN TO A DIRECT DECISION OF THE MAD RAS HIGH COURT IN CIT VS. TRISHUL INVESTMENTS LIMITED (2008) 305 ITR 434 (MAD). IN ITA NO: 3137/MUM/2010 4 THIS CASE THE ASSESSEE COMPANY WAS CARRYING ON THE BUSINESS OF INVESTMENT IN SHARES AND SECURITIES. IT WANTED TO PURCHASE SHARES OF A COMPANY BY NAME RCL. THE ASSESSEE DID NOT HAV E SUFFICIENT FUNDS AND THEREFORE THEY WERE PROVIDED BY ANOTHER C OMPANY BY NAME ICL EITHER DIRECTLY OR BY ARRANGING BRIDGE LOA NS FROM A BANK. THE INTEREST LIABILITY ON THE BORROWED FUNDS WAS AC COUNTED FOR IN THE BOOKS OF THE ASSESSEE AND IN THE COMPUTATION OF THE CAPITAL GAINS ON THE SALE OF THE SHARES, THE ASSESSEE CLAIMED THA T THE INTEREST LIABILITY SHOULD BE DEDUCTED AS COST ON ACQUISITION OF THE SHARES. THE TRIBUNAL ACCEPTED THE CLAIM AND THE FOLLOWING S UBSTANTIAL QUESTION OF LAW WAS REFERRED TO THE MADRAS HIGH COU RT AS ONE OF THE QUESTIONS FOR DECISION: - WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN ALLOWING THE INTEREST LIABILITY INCURRED ON BORROWINGS TO ACQUIRE THE SHARES? THE TRIBUNAL IN THAT CASE HAD FOUND AS A FACT THAT THE ASSESSEE HAD NO INTENTION TO TRADE IN THE SHARES AND THE PURCHAS E OF THE SHARES COULD NOT BE HELD TO BE A BUSINESS ASSET IN ITS HAN DS. ACCORDING TO THE TRIBUNAL, THE ASSESSEE WAS IN THE BUSINESS OF I NVESTMENT IN SHARES AND SECURITIES AND WAS NEVER IN THE BUSINESS OF TRADING IN SHARES. ON THESE FINDINGS THE MADRAS HIGH COURT HE LD THAT THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE INTEREST PAI D FOR ACQUISITION OF THE SHARES WOULD PARTAKE OF THE CHARACTER OF COST O F THE SHARE AND THEREFORE THE ASSESSEE HAD RIGHTLY CAPITALIZED THE INTEREST ALONG WITH THE COST OF ACQUISITION. IT WAS THUS HELD THAT THE RE WAS NO ERROR OR LEGAL INFIRMITY IN THE ORDER OF THE TRIBUNAL. THIS DECISION, IN OUR OPINION, APPLIES TO THE PRESENT CASE. THE ASSESSIN G OFFICER HIMSELF ITA NO: 3137/MUM/2010 5 HAS RECORDED A FINDING IN THE ASSESSMENT ORDER, IN PARAGRAPH 3 THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF INVESTM ENT IN SHARES AND SECURITIES. THE DEPARTMENTAL AUTHORITIES HAVE NOT DISPUTED THAT THE SALE OF THE INDRAPRASTHA GAS LIMITED SHARES GAV E RISE TO CAPITAL GAINS. ON THESE FACTS THE JUDGMENT OF THE MADRAS H IGH COURT CITED ABOVE IS FULLY APPLICABLE AND THE ASSESSEE MUST BE HELD TO HAVE RIGHTLY CLAIMED THE DEDUCTION IN RESPECT OF THE INT EREST OF ` 2,56,147/-, PAID TO SAHARA FOR AMOUNTS BORROWED FOR INVESTING IN THE SAID SHARES, IN COMPUTING THE CAPITAL GAINS. T HE INTEREST PAID IS ALLOWABLE AS PART OF THE COST OF ACQUISITION OF THE SHARES SINCE THE ASSESSEE IS IN THE BUSINESS OF INVESTMENT IN SHARES AND SECURITIES. 5. THE LEARNED SENIOR DR HAS DRAWN OUR ATTENTION TO AN ORDER OF THE MUMBAI BENCH OF ITAT IN MACINTOSH FINANCE ESTAT ES LIMITED VS. ADDITIONAL COMMISSIONER OF INCOME TAX (2007) 12 SOT 324 (MUM). IN THIS CASE ALSO THE QUESTION AROSE AS TO WHETHER INTEREST EXPENSES INCURRED FOR HOLDING SHARES AS INVESTMENT CAN BE ADDED TO THE COST OF INVESTMENT. IN PARAGRAPH 12 OF ITS ORDER THE TRIBUNAL HELD FIRSTLY THAT THIS POINT WAS NEVER RAISED BY TH E ASSESSEE BEFORE THE CIT(A). HAVING SAID SO, THE TRIBUNAL PROCEEDED TO DECIDE THE MERITS OF THE CLAIM. IT FOUND THAT IN THE CASE BEF ORE IT, THE ASSESSEE WAS EARNING DIVIDEND INCOME FROM THE INVESTMENT IN SHARES AND IT WAS A SETTLED POSITION THAT THE INTEREST WAS ALLOWA BLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVER, ACCORDI NG TO THE TRIBUNAL, THE INTEREST CANNOT BE ALLOWED UNDER THIS HEAD ALSO BECAUSE OF SECTION 14A, UNDER WHICH ANY EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME CANNOT BE CLAIMED AS A DEDUCTION. ITA NO: 3137/MUM/2010 6 THE BASIS OF THE DECISION OF THE TRIBUNAL IS THAT T HE INTEREST EXPENDITURE WAS AN ALLOWABLE EXPENDITURE ONLY UNDER THE HEAD INCOME FROM OTHER SOURCES AND THAT THE SAME CANNO T BE ALLOWED TO BE ADDED TO THE COST OF INVESTMENT ONLY BECAUSE IN THE YEAR BEFORE THE TRIBUNAL NO DEDUCTION WOULD ENURE TO THE ASSESSEE BECAUSE OF THE LEGAL POSITION THAT DIVIDEND INCOME WAS EXEMPT FROM TAX. ACCORDING TO THE TRIBUNAL, IT WOULD RESULT IN TO DOUBLE DEDUCTION. THE TRIBUNAL HAS FURTHER RELIED ON THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. L N DALM IA (1994) 207 ITR 89 (CAL). IN THAT CASE THE ASSESSEE HAD NOT AP PEALED AGAINST THE DECISION OF THE TRIBUNAL THAT THE INTEREST WAS TO BE CAPITALIZED AS PART OF THE COST OF ACQUISITION OF SHARES. THE ASS ESSEE WOULD APPEAR TO HAVE MADE A CLAIM BEFORE THE CALCUTTA HIG H COURT THAT THE INTEREST SHOULD BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE INCOME FROM OTHER SOURCES. THIS CLAIM WAS ACCEPTED BY THE CALCUTTA HIGH COURT AND IT WOULD APPEAR TO US THAT THE QUESTION WHICH HAS ARISEN IN THE CASE BEFORE US DID NOT DIRE CTLY ARISE BEFORE THE HONBLE CALCUTTA HIGH COURT. EVEN IN THE CASE BEFORE THE MUMBAI BENCH OF THE TRIBUNAL, WHICH FOLLOWED THE JU DGMENT OF THE CALCUTTA HIGH COURT, THE ISSUE DOES NOT APPEAR TO H AVE DIRECTLY ARISEN. HOWEVER, THE QUESTION DIRECTLY AROSE FOR C ONSIDERATION BEFORE THE MADRAS HIGH COURT IN THE JUDGMENT CITED SUPRA. IT IS SEEN THAT THE JUDGMENT OF THE MADRAS HIGH COURT WAS RENDERED ON 12.07.2007 AND THE MUMBAI BENCH OF THE TRIBUNAL HAD DECIDED THE ISSUE EARLIER, I.E. ON 27.02.2006 AND THEREFORE THE BENEFIT OF THE JUDGMENT WAS NOT AVAILABLE TO THE TRIBUNAL. SINCE THE JUDGMENT OF ITA NO: 3137/MUM/2010 7 THE MADRAS HIGH COURT IS DIRECTLY ON THE POINT, RES PECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ASSESSEES CLAIM AND DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE CAPITAL GAINS BY ALLOWING DEDUCTION IN RESPECT OF THE INTEREST OF ` 2,56,147/- AS COST OF ACQUISITION. THE GROUND IS ALLOWED. 6. THE OTHER GROUND RELATING TO COMPUTATION OF THE LONG TERM CAPITAL GAINS ON SALE OF SHARES OF TANNA BUILDERS P RIVATE LIMITED IS DISMISSED AS NOT PRESSED. 7. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. NO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH MARCH 2011. SD/- SD/- (RAJENDRA SINGH) (R V EASWAR) ACCOUNTANT MEMBER PRESIDE NT MUMBAI, DATED 29 TH MARCH 2011 SALDANHA COPY TO: 1. KALLYANJI J TANNA (DECD) (THROUGH LEGAL HEIR DIPAK K TANNA) 11-A, TANNA HOUSE, 2 ND FLOOR NATHALAL PAREKH MARG, MUMBAI 400 039 2. ITO 9(1)(2), MUMBAI 3. CIT-9, MUMBAI 4. CIT(A)-19, MUMBAI 5. DR G BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI