DOSCH PHARMACEUTICALS PVT LTD., MUMBAI V. DCIT-9(3)(1), MUMBAI

ITA 4593/MUM/2019

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The case involves Dosch Pharmaceuticals Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax Appeals-16, Mumbai, challenging the disallowance of interest expenses claimed as part of the cost of acquisition under section 48 of the Income Tax Act, 1961. The company had taken loans from IIFL and Kotak Bank to invest in mutual funds and claimed the interest paid on these loans as part of the cost of acquisition. The Assessing Officer and the CIT(A) had disallowed these claims, viewing the expenses as holding costs rather than acquisition costs. The Tribunal, referencing decisions from various High Courts, ruled in favor of the assessee, allowing the deduction of the claimed interest expenses.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131964 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 05-12-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 04-07-2019
• Other Referred Cases: CIT Vs. Trishul Investments Limited, V. Mahesh, ITO- 14 (2)(3) Vs. Shri Vikram Sadanand Hoskote, Ms. Deepti Singh Arora Vs. ACIT, CIT vs. Maithreyi Pai, Shri Fritz D. Silva vs. DCIT, Natural Gas Co.Pvt. Ltd. vs. DCIT, Shri Sudhir S. Mehta vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Question of law; Cost of acquisition; Revenue expenditure; TDS; Capital Gains
• Section: 143(3); 14A; 37(1); 143(1); 250; 48

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH MUMBAI SHRI AMARJIT SINGH, ACCOUNTANT MEMBER & MS. KAVITHA RAJAGOPAL, JUDICIAL MEMBER ITA NO.4593/MUM/2019 (A.Y.2014-15) Dosch Pharmaceuticals Pvt. Ltd. 15-C, Laxmi Industries Ltd. New Link Road, Andheri West Mumbai-400 053 PAN No.AAACDE2320F V/s Deputy Commissioner of Income Tax-9(3)(1) Room No.215, AayakarBhavan, M.K. Road, Mumbai-400 020 Appellant Respondent Assessee by Shri M. Subramanian Department by Smt. KanupriyaDamor Date of Hearing 06.12.2022 Date of Pronouncement 01.03.2023 ORDER PER KAVITHA RAJAGOPAL: This appeal has been filed by the assessee challenging the order of learned Commissioner of Income Tax Appeals-16, Mumbai[hereinafter referred to as “the CIT(A)”] dated 30.04.2019 passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relevant to assessment year 2014-15. 2. The assessee has challenged the appeal on the addition of Rs.12,77,77,488/- towards the cost of acquisition u/s 48 of the Act, claimed as deduction on account of interest expenses while computing capital gains along with other grounds. P a g e | 2 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. 3. The brief facts are that the assessee is engaged in the business of trading and exporting pharmaceutical products, hard gelatine capsule and printed foil. The assessee e-filed its return of income dated 27.11.2014 declaring total income at Rs. (-) 44,22,98,740/- and the return was processed u/s 143(1) of the Act. The assessee case was selected for scrutiny and assessment order dated 13.12.2016 was passed u/s 143(3) of the Act where the total income was determined at Rs. (-) 30,93,67,771/- by making various additions/disallowances. In an appeal before the learned CIT(A) preferred by the assessee the impugned additions/ disallowances were confirmed by the First Appellate Authority. The assessee is in appeal before us challenging the said order. 4. Ground no. 1, 2, and 3 of this appeal pertains to the disallowance made out of cost of acquisition u/s 48 of the Act, amounting to Rs.12,77,77,488/-. It is observed that the assessee has invested in units of mutual funds by availing loan from IIFL and Kotak Bank and has paid interest on the said borrowed funds. The assessee has claimed this interest against capital gain/loss on sale of the units of mutual funds by treating it as cost of acquisition. The assessee claims this interest as an expenditure which was incurred exclusively for purchasing the mutual funds and the same amounts to the expenditure incurred for acquisition of the mutual funds which has to be added to the cost of acquisition and thereby to reduce the sale price. The assessee further contended that it had disallowed interest paid from its business expenditure and had added in the cost of P a g e | 3 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. acquisition. The details of the interest paid to IIFL and KotaK Bank during the impugned year are tabulated as hereunder: Particulars Amount Interest on Loan from IIFL Rs.29,62,229/- Interest on mutual fund loan from Kotak bank Rs.10,28,41,902/- Interest on loan from IIFL bank Rs.2,19,73,357/- Total Rs.12,77,77,488/- 5. This contention of the assessee was not considered by the Assessing Officer (AO) for the reason that section 48 of the Act enumerates the deduction that are allowable while computing the income chargeable under the head capital gains and it pertains to either transfer of such asset or the cost of acquisition of the asset and the cost of improvement thereto. The AO contends that the interest expenses claim by the assessee does not pertain to any of the deduction mentioned in the provision of section 48 of the Act and that the said expenditure pertains to the holding costs of the asset and not for the cost of acquisition u/s. 48 of the Act. The AO further stated that the said interest was not expended for acquisition of capital asset or for transfer of the same. The AO disallowed the impugned amount and calculated the capital gain in accordance with the said disallowance. The learned CIT(A) upheld the disallowance made by AO on ground that the impugned interest expenses was incurred after the purchase of the units of the mutual funds and was not for the purpose of acquisition of the asset. The learned CIT(A) further stated that it is only for holding of the asset and not allowable deduction u/s P a g e | 4 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. 48 of the Act as the twin conditions of the said provision are not fulfilled in the assessee’s case. 6. The learned Authorised Representative (AR) for the assessee contended that the lower authorities have erroneously disallowed the interest expenses claimed by the assessee as disallowance. The learned AR further stated that said interest was paid for acquiring the asset by way of mutual funds and later it was sold and the gain/loss due to transfer is computed as capital gain/loss for which the interest claimed is allowed as per section 48 of the Act. The learned AR further stated that the expenditure incurred was wholly for the purpose of acquisition of the asset and without the said borrowed funds from IIFL and Kotak Bank, the acquisition of mutual funds was not possible. The learned AR relied on the decision of the Hon’ble Madras High Court in the case of CIT Vs. Trishul Investments Limited 305 ITR 334 (Mad.) for the said proposition. 7. The learned Departmental Representative (DR) on the other hand, controverted the same and stated that the impugned expenditure was incurred for holding of the asset and not for the acquisition of the asset for the reason that the interest was paid by the assessee to the bank subsequent to the purchase of the units of mutual funds. The learned DR relied on the decision of the Co-ordinate Bench in the case of V. Mahesh, ITO- 14 (2)(3) Vs. Shri Vikram Sadanand Hoskote, (2007) 18 SOT 130 (Mum) and also relied on the decision of Ms. Deepti Singh Arora Vs. ACIT, 19 (1), Mumbai (2014) 49 taxmann.com 567 (Mum-Trib.). P a g e | 5 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. 8. We have heard the submissions made by rival sides and perused the material available on record. It is evident that the assessee has obtained loan from IIFL and Kotak bank for the purpose of purchasing units of mutual funds. The assessee is said to have claimed the interest paid on these loans for the purpose of computation of capital gain/loss. It is to be noted that the lower authorities have not disputed the fact that the assessee had availed loan for acquiring the asset by way of mutual funds. The only dispute is with regard to the subsequent interest paid by the assessee for the loans and whether the same amounts to an allowable deduction u/s 48 of the Act. It is relevant to extract the provisions of section 48 hereunder for ease of reference: “48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:- (i) Expenditure incurred wholly and exclusively in connection with such transfer, (ii) The cost of acquisition of the asset and the cost of any improvement thereto.” From the above provision it can be inferred that any expenditure incurred exclusively for the purpose of the transfer of the asset or the cost incurred for acquisition of the asset and for any improvements pertaining to the said asset are allowable deduction u/s. 48 of the Act. The moot question here is whether the interest paid for the loan availed for the accuring the asset is said to be wholly and exclusively expended for the asset or not. For this it would be conducive to look into the propositions laid down in the decisions cited by the assessee in the case of Trishul P a g e | 6 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. Investments Limited (supra), wherein it was held that the interest paid on borrowed funds availed for the acquisition of shares amounted to the cost of share and was held to be cost of acquisition of shares. It was stated that the said interest should be included in the cost of the acquisition for which the assessee was entitled to deduction u/s 48 of the Act. The relevant extract of the said decision is cited hereunder for ease of reference: “In respect of question no. 2, the interest liability on the borrowed funds was debited in the books of the assessee-company. The Tribunal correctly held that the interest paid for acquisition of shares would partake of the character of cost of share and, therefore, the same was rightly capitalised along with the cost of acquisition of shares. There is no denial regarding the money borrowed for the acquisition of shares by the assessee. The Tribunal correctly held that the interest payable thereon should be added to the cost of acquisition of shares. The reasons given by the Tribunal are based on valid materials and evidence. Under this circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference. Hence, no substantial question of law arises for consideration of this court, in respect of question no.2.” 9. We would also consider the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Maithreyi Pai, 152 ITR 247 (Kar), wherein it was held that the interest paid on borrowing for acquisition of capital asset is entitled for deduction u/s 48 of the Act, though in this case the primary issue was about double deduction u/s 48 and section 57 of the Act. We also placed our reliance on the decision of the Co-ordinate Bench in the case of Shri Fritz D. Silva vs. DCIT, in ITA No.236/MUM/2010 decided on 08.05.2015 which has also considered the decision of Trishul Investments Ltd. (supra). On considering the decision cited by the learned DR in the case of Natural Gas Co.Pvt. Ltd. vs. P a g e | 7 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. DCIT, (2015) 61 taxmann.com 297 (Mum-Trib.), we find that the said decision is distinguishable on facts wherein the assessee has claimed the interest prior to the sale as ‘revenue expenditure’ and post-sale as ‘capital cost’. The facts of this case are distinguishable to the facts of the present case and does not have reliance for the issue in hand. From the above observation, we are of the considered view that various High Courts have held that the interest incurred on borrowed funds are to be treated as ‘cost of acquisition’ and deduction u/s 48 of the Act was allowed for the said expenditure. By respectfully following the said decisions, we hereby allow the claim of the assessee. 10. In the result, grounds nos. 1,2 and 3 raised by the assessee are allowed. 11. Ground nos. 4, 5 and 6 pertains to the addition of Rs.14,26,898/- towards interest paid from escrow account by not considering the fact that the said interest does not pertain to the assessee and was towards reimbursement. It is observed that an amount of Rs.6,32,57,656/- was retained in the escrow account by the buyer M/s Sanofi Sythelabo (India) Pvt. Ltd. at the time of slump sale proceeds received by the assessee. The same was reduced from the sale consideration received by the assessee from the buyer. During the assessment proceedings, the assessee vide letter dated 22.12.2016 furnished a letter dated 31.05.2016 from the buyer addressed to the assessee company stating that an amount of Rs.6,18,30,758/- was retained by the buyer and the AO found a difference of Rs.14,26,898/- as the difference was P a g e | 8 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. not substantiated by the assessee. The assessee contended that the difference was towards interest paid to buyer i.e. M/s Sanofi Sythelabo (India) Pvt. Ltd. wherein the AO has failed to consider the assessee’s contention and added the impugned amount to the total income of the assesse for the reason that the assessee failed to provide a proper explanation as to how the impugned amount was towards reimbursement. The lower authorities have held that the assessee has not discharged the onus required u/s 37(1) of the Act, in submitting that the impugned amount was not the income of the assessee and was only towards reimbursement. 12. The learned AR for the assessee contended that the said amount was retained by the buyer during the slump sale and that the assessee has submitted the details of the TDS which is filed at page no. 50 of the Paper Book wherein, the A.O. contended that TDS was not deducted towards the said reimbursement. The learned AR controverted the submission of the AO that details pertaining to impugned amount were not furnished before the AO. The learned DR controverted the same and stated that the assessee has not submitted required documentary evidence to substantiate its claim. 13. We have heard the submissions made by rival sides and perused the material available on record. We are of the considered opinion that this issue raised by the assessee requires verification of the documentary evidence relied on by the assessee. For this purpose, we remand this issue back to the P a g e | 9 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. learned AO for verifying the relevant documents relied on by the assessee. 14. In the result, ground nos. 4, 5 and 6 are allowed for statistical purpose. 15. The assessee has raised an additional ground of appeal on the disallowance of Rs.37,26,583/- u/s 14A r.w.r 8D of the Act. It is observed that the assessee has made investments amounting to Rs.10,67,27,483/- during the impugned year in mutual funds for which the assessee has treated that it has invested through its own funds and has not incurred any expenses for the purpose of earning exempt income as per section 14A of the Act. The assessee has furnished working of disallowance u/s 14A of the Act at Rs.37,26,583/- and made disallowance as per section 14A of the Act. The assessee submitted that the said disallowance may be allowed to be set off against other interest income and without prejudice, the same is to be taken as part of cost of acquisition for determining the profit/loss on sale of mutual fund. The assessee relied on the decision of the co-ordinate bench in the case of Shri Sudhir S. Mehta vs. DCIT (2021) 85 ITR (Trib.) ITAT, Mumbai. The learned DR controverted the said fact and stated that the assessee has not challenged the said ground of appeal before the learned CIT(A) and contended that the said ground shall be dismissed. 16. Having heard the rival submissions and perused the material on record. It is observed that the assessee’s additional ground of appeal raised before us has not been challenged before P a g e | 10 ITA NO. 4593/MUM/2019(A.Y.2014-15) DOSCH PHARMACEUTICALS PVT. LTD. the learned CIT(A) and since the First Appellate Tribunal has not dealt with this issue, we deem it fit to refrain from deciding this issue as being academic in nature. 17. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 01.03.2023. Sd/- Sd/- (AMARJIT SINGH) (KAVITHA RAJAGOPAL) ACCOUNTNANT MEMBER JUDICIAL MEMBER Mumbai: Dated: 01/03/2023 MAHESH SONAVANE Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. DR, ITAT, Mumbai 5. Guard File. BY ORDER, //True COPY// (Assistant Registrar) ITAT, Mumbai