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

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.

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.

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 | (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/-

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 | (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.

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.).

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 | (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.”

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 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 | (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.

In the result, grounds nos. 1,2 and 3 raised by the assessee are allowed.

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 | (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.

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.

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 | (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