PRANAV KIRIT INAMDAR ,MUMBAI vs. DCIT, CIRCLE 32(1), MUMBAI

Grounds of appeal raised by the assessee are as under:

Brief facts of the case are that assessee filed his return of income on 15.12.2020, reporting total income at Rs. 1,81,53,547/-. Case was selected for scrutiny and assessment was completed u/s 143(3) read with section 144B on 13.09.2022, wherein ld. Assessing Officer assessed total income at Rs. 2,54,89,980/- after making disallowance of interest expenditure amounting to Rs. 73,36,433/- claimed u/s 57. During assessment proceedings, ld. Assessing Officer noted that assessee had taken loans from M/s IIFL Wealth and Sankhya Financial Services and utilized said borrowed funds to invest in Non-Convertible Debentures (NCDs). Sale of these NCDs resulted in short-term capital gains of Rs. 88,51,632/-, which assessee offered under the head Capital Gains. However, interest payment of Rs. 73,36,433/- paid towards borrowings was claimed as deduction u/s 57 under Income from Other Sources. Ld. Assessing Officer disallowed deduction holding that there was no direct nexus between interest expenditure and income earned under Other Sources. Aggrieved, assessee went in appeal before ld. CIT(A), who confirmed disallowance holding that interest expenditure could not be allowed u/s 57 nor could it be added to cost of acquisition. Aggrieved, assessee is now in appeal before the Tribunal.

We have heard rival submissions and perused material available on record. Ld. Counsel for assessee submitted that loans were availed specifically for the purpose of making applications for allotment of NCDs and were repaid immediately after sale of NCDs, thereby establishing direct nexus. He contended that without borrowed funds, assessee could not have acquired NCDs and earned capital gains. Statement showing date of allotment of NCDs, date of sale, date of availing loans and date of repayment of loans is placed on record and perused. This statement shows that loans were availed just before the date of making application of NCDs and were repaid immediately after sale of the NCDs, establishing direct nexus. Without prejudice to claim under section 57, ld. Counsel strongly argued that interest paid for acquisition of NCDs partakes character of cost of acquisition and therefore ought to be added to cost of acquisition under section 48 for computing capital gains, relying on jurisdictional decisions and judgments of Hon'ble Madras High Court in CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad). On other hand, ld. Sr. DR supported orders of authorities below.

We have carefully considered rival stands and examined judicial precedents cited. Controversy before us relates to allowability of interest expenditure of Rs. 73,36,433/- incurred on funds borrowed for acquiring NCDs, either as deduction u/s 57 or alternatively as part of cost of acquisition while computing capital gains under section 48. We find that identical issue regarding capitalization of interest paid on borrowed funds utilized for acquiring securities/shares as cost of acquisition came up before Hon'ble Madras High Court in the case of CIT v. Trishul Investments Ltd. (supra) wherein it was held that interest paid for acquisition of shares partakes character of cost of asset and therefore, same is rightly capitalised along with cost of acquisition for purpose of computing capital gains.

In the result, appeal of the assessee is allowed.