Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI
Before: SH. R. K. PANDA
This appeal filed by the assessee is directed against the order dated 18.06.2018 of the CIT(A)-10, New Delhi relating to A. Y. 2015-16.
Facts of the case, in brief, are that assessee is an individual and drives income from business, house property, capital gain and income from other sources. He is also engaged in the business of decoration of tiles through his proprietorship concern M/s. Arcadia Creations. He filed his return of income on 24.09.2015 declaring nil income. The Assessing Officer during the course of assessment proceedings noticed that the assessee has shown short term capital gain of Rs.45,85,992/- on sale of shares after claiming interest expenses of Rs.10,76,258/-. 3. The Assessing Officer asked the assessee to justify the claim of expenses of Rs.10,76,258/-. Rejecting the various explanation given by the assessee, the Assessing Officer disallowed the interest expenses of Rs.10,76,258/- by observing as under :-
Assessee has failed to establish the fact that the interest expenses • incurred are actually with respect to the shares shown as part of short term capital gain alone. Mere written submission without any corroborative evidence does not suffice for allowing any claim in quasi-judicial proceedings. It is pertinent to mention that the assessee has maintained a single portfolio with Motilal Oswal Financial Securities Ltd. through which intraday trading; derivative trading and trading in shares for investment purposes is performed.
• As per the assesee’s submission, interest is charged on day-to-day basis and debited at the end of the month. Assessee has proportionately divided the monthly interest expenses with the cost of each share (sold in short term). But for the computation of capital gain each security/shares is to be treated as separate capital asset and thereby requiring specific computation of cost of borrowed capital for its purchase. The method adopted by assessee has resulted in disproportionate charging of interest as part of cost of acquisition for every share because proportionate interest cost of those shares purchased with borrowed funds thereafter as well as all the interest expenses pertaining to period after the date of acquisition is added to it.
It is observed that assessee purchases shares by overdrawing from • M/S Motilal Oswal Financial Securities Ltd. and that overdrawing continues till either the same shares or some other shares equivalent to amount overdrawn are sold. The overdrawing as well as corresponding interest starts Page | 2 only from the moment shares are purchased. Therefore assessee is actually paying interest expense only for the period after the date of acquisition. Such interest expenses are not allowable as part of cost of acquisition. The said view gets support from the decision rendered in the case of V. Mahesh, ITO v. Vikram Sadanand Hoskote [2007] 18 SOT 130 (Mum), wherein it is held that the interest expenditure incurred on borrowed funds for the period commencing from the date of acquisition of shares till date of sale would not form part of cost of acquisition of share
• Further, assessee cannot claim interest expenses in lump sum. If it was shown as business income such expenses were deductible. It is understandable that looking at the number and turnover of transactions, it is difficult to compute/ segregate interests cost pertaining to each security. But once assessee has consciously treated such transactions in shares as short term capital gain, it cannot take advantage of both the provisions i.e. paying tax at lower rate for STCG as well as claiming expenses of nature of business activity together. 4.7 Therefore based on the discussion supra, the interest expense of Rs. 10,76,258/- cannot be said to beincurred only on the shares kept for investment purposes as the funds available with the Motilal Oswal are mixed funds. These interest expenses actually pertain to the period after date of acquisition of such investments overdrawing as well as corresponding interest starts only from the moment shares are purchased. Further looking at the turnover of the assessee for F&O and share business it cannot be accepted that the loan has been used for investment in shares (short term investment). The assessee must calculate the interest expenses against each security held for investment purpose if cost of acquisition is to be claimed. Therefore, the fact that exact amount of interest expenses pertaining to capital borrowed for the purchase of such shares and for the period prior to purchase of such shares (includible as part of cost of acquisition) is not computed by the assessee. Thus interest expenses are not allowed to be deducted from the sale consideration received on the sale of shares. In view of the above discussions, Page | 3 the interest expenses of Rs. 10,76,258/- is hereby added to the income of the assessee for the year under consideration.”
Before CIT(A) the assessee submitted that the interest of Rs.10,76,258/- was charged by Motilal Oswal Financial Services Ltd. and its statement of account showing interest debited was filed with the AO. The source of funding of share transactions was also with the same company. Month-wise detail of interest charged by Motilal Oswal Financial Services Ltd. was filed during the assessment proceedings. It was submitted that amount of interest of Rs. 10,76,258/- was paid to Motilal Oswal Financial Services Ltd. only in respect of STCG on shares. It was also submitted that there was no interest paid for the period prior to purchase of shares and the assessee has allocated amount of interest against each security and the statement of the same was submitted before the AO. The assessee relied on the decision of the ITAT, Delhi Bench-E in the case of Narendra Gehlaut v JCIT [2012] 21 taxmann.com 82 (Delhi) and the decision of Hon’ble High Court of Delhi in the case of CIT v Mithlesh Kumari [1973] 92 ITR 9 (Delhi).
However, the Ld. CIT(A) was not satisfied with the arguments advanced by the assesee and upheld the action of the Assessing Officer. While doing so he held that no interest was paid by the assessee for the period prior to purchase of shares. He observed that the issue whether interest paid on the borrowed money for acquisition of the shares could be added to its cost of acquisition for computation of capital gains is Page | 4 squarely covered against the assessee by the judgment of Hon'ble Calcutta High Court in the case of CIT v L N Dalmia and the judgment of Karnataka High Court in the case of CIT v Maithreyei Pai (supra). Further ITAT Mumbai in its various decisions has also held that interest on borrowings on the purchase of shares cannot be constituted as part of the cost of the shares for the purpose of working out the capital gains on the sale of shares.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising following grounds of appeal :-
1. That the order of the learned Commissioner of Income – tax (appeals) is against fact and law.
2. That the Learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.10,76,260/- being the amount of interest claimed as deduction in computing the Short Term Capital Gain.
3. That the Learned Commissioner of Income-tax (Appeals) has erred in not allowing the capitalizing of interest paid on investments and adjusting the same against Short Term Capital Gain.
4. That the further grounds shall be submitted at the time of hearing.
7. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A) in confirming the action of the Assessing Officer. He submitted that the assessee has carried on share transactions which resulted in Short Term Capital Gain covering STT. An interest of Rs. 10,76,258/- was incurred on borrowings made for acquisition of investments made in shares and was paid Page | 5 to Motilal Oswal Financial Services Ltd. There are no mixed funds in as much as the account on which interest has been paid relates to short term capital gain only. It is a separate account in which no other transaction has been carried out except of Short Term Capital Gain and the interest paid has been apportioned against each investment. Referring to paper book page No. 6 and 7 which contains the Statement of Capital Gain he submitted that the same shows share wise interest allocated. The statement also shows transactions through ICICI Bank and J M Financial Services on which no interest has been claimed. The interest paid was capitalized as cost of acquisition of investment. The interest was paid on funds raised for purchase of shares. It is but natural that the interest will be paid only from the date from which the investments are purchased and loan is raised. The interest is payable up to the date when the repayment is made. The interest was charged on day to day basis and no interest was paid prior to acquisition of Investment. He also relied on the following decisions :- 1. CIT Vs. Mithlesh Kumari 92 ITR 9 (Delhi) 2. CIT Vs. K. Raja Gopala Rao 125 Taxman 148 3. V. Mahesh, ITO Vs. vikram Sadanand Hoskote 18 SOT 130 8. He submitted that the assessee has been carrying out similar activity in earlier years also. The assessee has also paid interest to Motilal Oswal Financial Services in earlier years also. Referring to the return of income for assessment year 2013-14 he submitted that against short term capital gain (covering STT) interest of Rs.4,90,555/- was claimed and was accepted. He accordingly submitted that the interest expenditure of Rs.10,76,258/- should be allowed as deduction.
The Ld. DR on the other hand heavily relied on the order of the CIT(A).
I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I have also considered the various decisions relied on by both the sides. I find the Assessing Officer in the instant case denied the claim of interest expenditure of Rs.10,76,258/- as deduction from the short term capital gain on the ground that the same cannot be said to be incurred only on the shares kept for investment purposes as the funds available with M/s. Moti Lal Oswal are mixed funds. It is also the allegation of the Assessing Officer that assessee could not substantiate that the loan has been used for investment in shares. It is also his allegation that the exact amount of interest expenses pertaining to capital borrowed for the purchase of such shares and for the period prior to purchase of such shares (which is includible as part of cost of acquisition) has not been computed by the assessee. I find the Ld. CIT(A) upheld the action of the Assessing Officer on the ground that no interest was paid by the assessee for the period prior to purchase of shares. It is the submission of the Ld. Counsel for the assessee that the interest expenditure of Rs.10,76,258/- was incurred on borrowings made for acquisition of investments made in shares and there are no mixed funds and that it is a separate account in which no other transaction has been carried out except of the shares on which short term capital gain has been earned. It is the submission of the Ld. Counsel for the assesesee that in assessment year 2013-14 assessee has also paid interest to Moti Lal Oswal Financial Services amounting to Rs.4,90,555/- which was accepted by the department and allowed as deduction from short term capital gain. From the various details furnished by the assessee in the paper book I am of the considered opinion that it requires a re-visit to the file of the Assessing Officer to adjudicate the issue afresh in the light of the various submissions made by the assessee before me. Needless to say the Assessing Officer shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. I hold and direct accordingly. The grounds raised
by the assessee are accordingly allowed for statistical purpose.
13. In the result, the appeal filed by the assessee is allowed for statistical purpose. Order pronounced in the open court on 24.06.2019.