SUNITA A DAMANI, MUMBAI V. ACIT 12(3), MUMBAI

ITA 5770/MUM/2010

• Counselvise Citation: 577019914 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 17-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Keywords: Capital asset; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H,MUMBAI BEFORE SHRI D.K. AGARWAL (JM) & SHRI R.K. PANDA ( AM) I.T.A. NO.5770/MUM/2010 (A.Y. 2006-07) SMT. SUNITA A. DAMANI, 5, SURYA MAHAL, 1 ST FLOOR, BURJORJI BHARUCH MART, FORT, MUMBAI-400 023. PAN: AHHPD0570E. VS. ASST. COMMR. OF INCOME-TAX-12(3), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. APPELLANT RESPONDENT APPELLANT BY SHRI HIRO RAI. RESPONDENT BY SHRI V .V. SHASTRI. DATE OF HEARING 17 - 11 - 2011 DATE OF PRONOUNCEMENT 25 - 11 - 2011 O R D E R PER D.K. AGARWAL, JM : THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 27-04-2010 PASSED BY THE LD. CIT(A) FOR THE ASSESSM ENT YEAR 2006-07. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE, AN INDIVIDUAL, DERIVES INCOME FROM LIC BY WAY OF COMMISSION, CAPITAL GAIN ON SALE OF SHARES AND INCOME FROM OTHER SOURCES. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE HAS RETURNED SHORT-TERM CAP ITAL GAINS. THESE SHORT-TERM CAPITAL GAINS HAVE ACCRUED TO THE ASSESSEE ON ACCOU NT OF PURCHASE AND SALE OF SECURITIES/UNITS OF MUTUAL FUND. THE AO, WHILE GOIN G THROUGH THE PORTFOLIO AND THE ITA 5770/M/2010 SUNITA A. DAMANI 2 INGREDIENTS OF SHORT-TERM CAPITAL GAINS, FURTHER NO TED THAT IN RESPECT OF CERTAIN SHARES, THE ASSESSEE HAS ACQUIRED THESE THROUGH THE IPO MECHANISM I.E. THROUGH THE PRIMARY MARKET. OUT OF THE HUGE NUMBER OF SHARES APPLIED FOR BY THE ASSESSEE, THE IPO MODE, ONLY VERY SMALL AMOUNT OF S HARES WERE FINALLY ALLOTTED. SOME OF THESE SHARES WERE PURCHASED DURING THE LATE R HALF OF THE IMMEDIATELY PRECEDING YEAR, I.E. F.Y. 2005-06, ONLY TO BE SOLD THIS YEAR RESULTING IN SHORT-TERM CAPITAL GAIN/LOSS FROM THE TRANSACTION. IN CERTAIN OTHER SCRIPS, THE IPO WAS APPLIED FOR IN THE CURRENCY OF THIS YEAR ITSELF ONLY TO BE SOLD BEFORE THE EXPIRY OF YEAR UNDER CONSIDERATION AND HENCE THE RESULTANT SHORT-T ERM CAPITAL GAIN. FOR THIS PURPOSE FOR APPLYING OF IPO SCRIPS, THE ASSESSEE HA D UTILIZED LOAN TAKEN FROM THE FINANCIAL INSTITUTIONS, ON WHICH INTEREST WAS REQUI RED TO BE PAID TO THE LENDERS. HOWEVER, IT WAS SEEN THAT THE SSESSEE HAD CAPITALIZ ED THE INTEREST COST RELATABLE TO THE SHARES APPLIED FOR BUT NEVER ALLOTTED AS AN INTEGRAL PART AND PARCEL OF THE SHARES ACTUALLY ALLOTTED. THE AO GAVE EXAMPLE THAT IF 2,86,000 SHARES WERE APPLIED OF THE SCRIP PUNJ LLYOD LIMITED, FINALLY ONLY 4,585 SHARES WERE ALLOTTED TO THE ASSESSEE. IN RESPECT OF THESE SHARES, WHEN THEY FINALLY WERE SOLD, THE ASSESSEE TREATED THE INTEREST COST RELATABLE TO THE ENTIRE LOT OF SHARES (THE NUMBER APPLIED FOR) IN CALCULATING THE COST OF ACQU ISITION OF 4,585 SHARES BY TREATING SUCH INTEREST COST AS AN INTEGRAL PART OF THE PURCHASE VALUE OF SUCH SHARES AND CLAIMING THE SAME AS A COST OF ACQUISITI ON THEREOF. THIS WAS THE BASIC MODUS OPERANDI. IT WAS ALSO OBSERVED THAT SUCH MODU S OPERANDI HAS BEEN FOLLOWED IN OTHER IPO SCRIP VIZ. ANDHRA BANK AND IC ICI BANK. THE ASSESSEE HAS NOT CLAIMED THIS INTEREST COST ATTRIBUTABLE TO THE SHARES APPLIED FOR AS A COST OF ACQUISITION U/S.48(2). HOWEVER, THE ASSESSEE HAS EM BEDDED THIS INTEREST COST RELATABLE TO THE FINANCING OF ENTIRE SHARES APPLIED FOR ALONG WITH THE PURE ALLOTMENT COST OF THE IPO SHARES AS IF THE SAID INT EREST COST IS NOTHING BUT THE ITA 5770/M/2010 SUNITA A. DAMANI 3 PURCHASE PRICE OF THE SHARE. THE AO HELD THAT IT IS THUS CLEAR THAT THE PURCHASE PRICE CLAIMED FOR IPO SHARES WAS IN FACT A COMBINAT ION OF TWO INGREDIENTS, ONE BEING THE ALLOTMENT COST OF SHARES I.E. THE PURE PU RCHASE PRICE AND THE OTHER BEING THE INTEREST COST NOT AT ALL OF THE SHARES AL LOTTED BUT RATHER OF THE ENTIRE LOT APPLIED FOR. ACCORDING TO THE AO, SECTION 48(2) SPE AKS OF COST OF ACQUISITION IN ACQUIRING THE CAPITAL ASSETS TO BE ALLOWED IN COMPU TING THE CAPITAL GAIN FROM THE FULL VALUE OF CONSIDERATION. THE AO STATED THAT THE INTEREST COST MUST BE ATTRIBUTABLE TO THE CAPITAL ASSETS (I.E. WHICH ARE ACTUALLY SUCH CAPITAL ASSETS AS HAVE BEEN AND ARE WITH THE ASSESSEE AND NOT MERELY THE EXPECTATION OF GETTING SOME INDEFINITE AND INDETERMINATE NUMBER OF CAPITAL ASSETS I.E. THE AMOUNT OF SHARES APPLIED FOR). MORE SPECIFICALLY, THE INTERES T COST MUST BE SHOWN TO BE DIRECTLY RELATABLE TO THE FACTUM OF ACQUISITION OF THE CAPITAL ASSETS. IT IS CLEAR IN THIS CASE THAT THE ASSESSEE HAS ALSO CLAIMED INTERE ST COST PERTAINING TO SHARES WHICH NEVER WERE ALLOTTED TO HIM AND THUS NEVER BEC AME ITS CAPITAL ASSETS. THUS, WHAT WERE NEVER THE CAPITAL ASSETS OF THE ASSESSEE, THE INTEREST COST THEREON CANNOT BE SAID TO BE THE COST OF ACQUISITION OF THE SAME. THEREFORE, THE AO HELD THAT THERE IS NO QUESTION OF ALLOWING THE INTEREST COST IN RELATION TO THE SHARES WHICH WERE NEVER ALLOTTED AS A PART OF COST OF THE SHARES THAT WERE ALLOTTED AND WERE THE CAPITAL ASSETS OF THE ASSESSEE BECAUSE TO DO SO WOULD NOT BE IN KEEPING WITH THE PLAIN READING AND INTENTION OF THE ENACTME NT I.E. SECTION 48. ACCORDINGLY, THE AO RE-WORKED SHORT-TERM CAPITAL GAIN/LOSS AS PE R WORKING GIVEN AT PAGES 6 & 7 OF ASSESSMENT ORDER AND THEREBY ADDED RS.16,86,68 5/- AS SHORT-TERM CAPITAL GAIN TO THE INCOME OF THE ASSESSEE. 3. ON APPEAL, THE LD. CIT(A) HELD THAT INTEREST ATT RIBUTABLE FOR SHARES APPLIED FOR AND NOT ALLOTTED IS NOT ALLOWABLE AS THERE IS N O CAPITAL ASSET ACQUIRED WHICH IS SUBJECT TO CAPITAL GAIN AND HENCE DISMISSED THE ASS ESSEES APPEAL. ITA 5770/M/2010 SUNITA A. DAMANI 4 4. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US CHALLENGING IN ALL THE GROUNDS THE SUSTEN ANCE OF ADDITION OF RS.16,84,685/- MADE BY THE AO AS SHORT-TERM CAPITAL GAIN. 5. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASESSEE, AT THE OUTSET, SUBMITS THAT THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN SMT. NEERA JAIN VS. ACIT, CIR.12 (3), MUMBAI, DATED 22-02- 2010 (ITA NO.1861/MUM/2009) AND HARSHAD N. PATEL VS . ITO-18/17 (3)(2), MUMBAI (ITA NOS.1252 & 1958/MUM/2010 DATED 15-07-20 11. HE ALSO PLACED ON RECORD COPIES OF THE SAID ORDERS OF THE TRIBUNAL. 6. ON THE OTHER HAND, THE LD. D.R. SUPPORTS THE ORD ERS OF THE A.O. AND THE LD. CIT(A). 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT THE FACTS ARE NOT IN DISPUTE. WE FURTHER FIND THAT THE CLAIM OF INTEREST ATTRIBUTABLE TO SHARES APPLIED FOR AND NOT ALLOTTED WAS DISALLOWED BY THE AO AND THE LD. CIT(A) ON THE GROUND THAT NO SUCH CAPITAL ASSET WAS ACQUIRED SUBJECT TO CAPITAL GAIN. HOWEVER, WE FIND MERIT IN THE PLEA OF THE LD. COUNSEL FOR THE ASSESS EE THAT THE ABOVE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE TRIBUNAL. 8. IN THE CASE OF SMT. NEERA JAIN (SUPRA), ON IDEN TICAL SET OF FACTS, THE ASSESSEE HAS BORROWED THE MONEY FOR IPO APPLICATION BUT ALL THE SHARES WERE NOT ALLOTTED AS APPLIED FOR AND PART OF THE SHARES WAS ALLOTTED AND BALANCE AMOUNT WAS REFUNDED TO THE ASSESSEE IN RESPECT OF NON-ALLO TMENT OF SHARES. THE ASSESSEE HAS TO PAY THE INTEREST ON THE ENTIRE FINANCE WHICH WAS BORROWED FOR MAKING THE PAYMENT WITH THE APPLICATION MONEY. IT HAS BEEN OBS ERVED BY THE TRIBUNAL THAT THE ENTIRE MONEY HAS BEEN BORROWED BY THE ASSESSEE WITH THE SOLE PURPOSE OF ITA 5770/M/2010 SUNITA A. DAMANI 5 ACQUIRING THE SHARES OF PUNJAB NATIONAL BANK AND NT PC LTD. THOUGH THE APPLIED SHARES WERE NOT ALLOTTED IN FULL, THAT WILL NOT DEP RIVE THE ASSESSEE FROM CLAIMING THE ENTIRE INTEREST PAID AS PART OF THE COST OF THE ACQUISITION OF THE SHARES ALLOTTED AS THE MONEY BORROWED HAS DIRECT NEXUS WITH THE ACQ UISITION OF THE SHARES. IT WAS HELD BY THE TRIBUNAL THAT THE INTEREST PAID BY THE ASSESSEE TO BOTH THE FINANCIERS AS PART OF COST OF ACQUISITION OF THE SH ARES BE ALLOWED AS DEDUCTION. 9. IN THE CASE OF HARSHAD N. PATEL (SUPRA), THE TRI BUNAL, FOLLOWING THE DECISION IN THE CASE OF SMT. NEERA JAIN (SUPRA) AND WOOD STOCK BROKING P. LTD. V. ACIT (ITA NO.6657/MUM/2007 DATED 5-1-2001), HAS HEL D THAT THE INTEREST PAID BY THE ASSESSEE ON THE MONEY BORROWED FOR IPO APPLI CATION IS PART OF COST OF ACQUISITION AND THE SAME IS TO BE ALLOWED. 10. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE OR CONTRARY DECISION BROUGHT ON RECORD BY THE REVENUE AND KEEPING IN VIEW THAT I T IS NOT THE CASE OF THE REVENUE THAT THERE IS NO NEXUS OR THE INTEREST EXP ENDITURE IS PERSONAL EXPENSES OF THE ASSESSEE, WE, RESPECTFULLY FOLLOWING THE CON SISTENT VIEW OF THE TRIBUNAL, HOLD THAT THE INTEREST PAID BY THE ASSESSEE ON THE MONEY BORROWED FOR IPO APPLICATION IS PART OF THE COST OF ACQUISITION AND THE SAME IS TO BE ALLOWED AS THE COST OF ACQUISITION IN COMPUTING THE SHORT-TERM CAP ITAL GAIN. WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS TAKEN BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 11. IN THE RESULT, THE ASSESSEES APPEAL STANDS ALL OWED. ORDER PRONOUNCED IN OPEN COURT ON THE 25TH DAY OF NOVEMBER, 2011. SD/- SD/- (R.K. PANDA) (D.K. AGARWAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 25TH NOVEMBER , 2011. ITA 5770/M/2010 SUNITA A. DAMANI 6 NG: COPY TO : 1. ASSESSEE. 2.DEPARTMENT. 3 CIT(A)-23,MUMBAI. 4 CIT-XII,MUMBAI. 5.DR,H BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST. REGISTRAR, ITAT, MUMBAI. ITA 5770/M/2010 SUNITA A. DAMANI 7 DETAILS DATE INITIALS DESIGNA TION 1. DRAFT DICTATED ON 17-11-2011 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 21-11-2011 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/ AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER