ACIT 9(3)(2), MUMBAI vs. FLAMBOYAWER FINANCE P.LTD, MUMBAI

This appeal by the revenue and Cross Objection by the assessee are arising out of the order of Commissioner of Income Tax (Appeals)-16, Mumbai [in short CIT(A)], in appeal No. CIT(A)-16/IT-288/DCIT 9(3)(2)/2014-15 dated 26.02.2015. The Assessment was framed by the Dy. Commissioner of Income Tax, Circle-9(3)(2), Mumbai (in short ‘DCIT’) for the A.Y. 2012-13 vide order dated 24.02.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

(ii) Whether on the facts and circumstances of the case, Ld. CIT (A) erred in law as well as in facts in ignoring the provisions of section 55 of the Income-tax Act. 1961. wherein the cost of improvement is defined as expenditure incurred in making any addition(s) or alteration(s) to the capital assets oil after the said date by the previous owner, and thus ignoring the clear meaning of this definition that to bring an expense (in this case. interest expensed within the cost of improvement of a capital asset, the expenditure has to be by way of a (physical) addition or alteration, adding value to that asset and that no such improvement has taken place in instant case, whereby the assets continue to be held as such. i.e., as acquired."

(iii) Whether oil facts and circumstances of the case. Ld. CIT (A) erred in law as well as in facts in ignoring the Ld. AO's observation that in A.Y.2011- 12 the assessee treated interest as business expenses' whereas in AY 2012-13, the assessee had treated it as cost of improvement' and that merely for the reason that in a particular year in which the interest, as a period expense, would stand to be allowed against an income and the same is rendered tax-exempt, would not alter the character from revenue to capital, and that considering these facts available on record, an amount of interest so paid by the assessee does not have any correlation as to be termed as cost of improvement for purchase of the said FMP.

(iv) Whether on the facts and circumstances of the case. Ld. CIT (A) erred in law as well as in facts in ignoring that interest cost, which is a time cost, and thus has only nexus with the time for which the relevant asset is held or, rather, for which the corresponding loan outstands (and to the extent it does), has no bearing on the process of acquisition, which stands completed much earlier."

(v) Whether on the facts and circumstances of the case. Ld. CIT (A) erred in law as well as in facts in ignoring the latest judgement of Hon’ble ITAT, Mumbai, in the case of M/s Natural Gas Company Pvt. Ltd. Vs. DCIT [ITA 47/Mum/2011] dated 22.05.2015 wherein it was held that interest cost could not be treated as cost of acquisition / improvement in computation of capital gains."

Assessee has raised following ground in the Cross Objection: -

1. On the facts and circumstances of the case, and the ld. CIT(A) has erred in law and facts on records is not adding / capitalizing the interest cost amounting to ₹ 54,65,753/- relating to the preceding year i.e. AY 2011-12 merely because the same was debited to the profit and loss account and disallowed u/s 14A.”

8.2 To support its contention, the appellant relied on the following cases: i. DCIT v. Shri Fritz D. Silva decided on 08.05.2015 ii. CIT vs. Trishul investments Ltd. (2008) 305 ITR 434 (Mad) iii. CIT v. Mithlesh Kumari (1973)92 ITR 9 (DELHI)

8.3 AO had stated that interest paid cannot be part of cost of acquisition nor it was cost of improvement as per the definition of "cost of acquisition" for the purpose of s. 48 & 49. AO also stated that in AY 2011-12 the appellant has claimed the interest expenditure of Rs. 54,65,753/- as business expenses and disallowed the same u/s. 14A whereas in A.Y. 2012-13 it is claimed as 'Cost of Improvements'.

8.4 In response to the same the appellant stated that the interest expenditure could not be allowed as deduction in the A.Y. 2011-12 since upto 21.02.2011 the borrowed funds were invested in mutual fund i.e. JP Morgan Liquid Fund from which dividend income was earned which was exempted from tax. However, after 21 .02.2011, the same funds i.e. Rs. 25 crores was transferred from JP Morgan Liquid Fund to JP Morgan India EMP 400D from which no exempt income was earned. In fact on sale of mutual fund, taxable capital gain was earned. Thus, disallowance u/s. 14A w.r.t investment made in JP Morgan India FMP 400D would not be attracted for A.Y. 2012-13.

8.5 Further AO observed that in A.Y. 2011-12 interest was paid to M/s. Torrent Financials Pvt. Ltd at the. rate of 6% p.a. whereas in A.Y. 2012-13 interest was paid at the rate of 8% and considering these facts, amount of interest paid had no correlation to be categorized as cost of improvement.

8.6 In support of its claim, the appellant submitted that the rate of interest charged by M/s. To4ent Financials Pvt. Ltd was as per that company's policy and increase in rate interest as not in the hands of the appellant company. The appellant further stated that interest rate of 8% was comparatively less than market rate of interest and further increase in rate of interest cannot be considered for denying the direct nexus of funds borrowed and invested in the funds since it is the factual aspect and same is proved by the explanation. It was further argued that the increase in rate of interest did not deny the fact that the interest paid on borrowed funds was to be allowed as cost of acquisition/ improvement and allowed as a deduction from the capital gains.

8.7 I have gone through the explanation and judicial pronouncement as relied on by the appellant and the observations of the AO in assessment order. As concluded above in para 7.4, there was a direct nexus between loan taken from M/s. Torrent Financials Pvt. Ltd and amount invested in JP Morgan India FMP 400D. Since there was a direct nexus between loan taken and amount invested, the interest on said loan will form part of cost of acquisition and should be added to the cost of investment.

8.8 As regards the observation of the AO that in last year i.e. A.Y. 2011-12 the interest on loan was claimed as business expenditure and disallowed u/s. 14A. Even if the interest oil was debited to Profit & Loss A/c in A.Y. 2011-12, the appellant had disallowed the said expenditure while computing the total income. Further the treatment of interest expenditure in last year cannot change the fact that loan was utilised to invest in the mutual fund and therefore interest expenditure on such loan should form cost of mutual fund while calculating capital gains. Also charging of interest at 6% or 8% is the policy of the company and also it is rightly said by the appellant that the interest rate of 8% is comparatively less than market rate. Thus, it cannot be the reason for concluding that interest oil cannot be part of cost of acquisition.

8.9 Further, it has been held by Hon'ble Mumbai ITAT in case of Shri Fritz D. Silva (supra) that the interest paid for acquisition of the shares would partake the character of cost of shares and, therefore, assessee had rightly capitalized the interest along with the cost of acquisition for the purpose of computing capital gains.

8.10 Thus, applying the above rationale, it is held that the interest paid of Rs. 2,03,93,534/- for acquisition of mutual fund would partake the character of cost of mutual funds and therefore same needs to be capitalized for the purpose of Computing capital gains.

8.11 In view of above, the ground raised by the appellant is allowed."

Aggrieved, against the order of CIT(A) directing the capitalized interest on loan of amount of ₹ 2,03,93,534/- Revenue came in appeal and against non-capitalization of interest of ₹ 16,02,739/-, the assessee came in cross objection.

We really see no justification for putting the construction on the words "the actual cost to the assessee of the capital asset" which the learned counsel for the revenue seeks to put on them, namely, that the actual cost of the asset is its cost on the date of its acquisition. By putting such a construction we would be qualifying the words used in clause (ii) in a manner which could not have been intended by the legislature. We cannot also accept the construction sought to be put by the learned counsel for the revenue on the words "including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto" as meaning that it is only the expenditure incurred in making additions or alterations to the capital asset that can be included in the actual cost of the capital asset and that other similar items of expenditure cannot be so included. It would be reasonable, in our view, to include in the actual cost of the capital asset all expenses which were incurred by the assessee in acquiring the capital asset as distinct from the items of expenditure which were incurred by him for retaining or maintaining the capital asset. In Commissioner of Income-tax v. Fort Gloster Industries Ltd. [1971] 79 ITR48 (Cal.) the assessee had placed an order with a British concern for the purchase of machinery worth Rs. 48 lakhs. The British supplier required a guarantee to be given. The Allahabad Bank Ltd. agreed to be the guarantor for the sum of Rs. 48 lakhs for a consideration of Rs. 36,000 to be paid to the bank as guarantee commission. The Calcutta High Court held that this sum of Rs. 36,000 should be treated as part of the actual cost to the assessee of the new machinery acquired by it for the purpose of allowance of development rebate in terms of section 10(2)(vi)( b) of the Act. The reasoning of the High Court was that costs which were essentially necessary for a particular assessee to incur for acquiring a capital asset should be included in this actual cost. In so holding, the Calcutta High Court followed a decision of the Bombay High Court in Habib Hussein v. Commissioner of Income- tax [1963] 48 ITR 859 , 875 (Bom.) in which it was held as follows:

"The dictionary meaning of the word 'cost' is 'what is laid out or suffered to obtain anything'.... In our opinion, therefore, the meaning of the expression 'actual cost to the assessee' as used in sub-section (5) of section 10 of the Act would be what the assessee has, in fact, expended or laid out for the purpose of acquiring the depreciable assets."

We are in respectful agreement with the observations of the Calcutta and the Bombay High Courts in the decisions referred to above. In the present case, we find that the assessee in order to purchase the land had not only to borrow the amount of Rs. 95,000 which was the consideration for the purchase of the land, but also had to pay interest of Rs. 16,878 on the amount borrowed by her. The amount of Rs. 95,000 plus the interest paid by the assessee constitutes the actual cost to the assessee of the land. The fact that the amount of Rs. 95,000 was paid by the assessee to the vendor and the amount of interest of Rs. 16,878 was paid to a different person, namely, her mother-in-law, does not make any difference so far as the assessee is concerned in respect of the actual cost of the land to her. It will not also make any difference whether the interest was paid on the date of the purchase or Whether it is paid subsequently. To exclude the interest amount from the actual cost of the asset would lead to anomalous results. Supposing she had purchased the land for Rs. 1,00,000, by raising a loan of that amount and had paid interest of Rs. 20,000 on the said loan and had sold land for Rs. 1,20,000. It would be unreasonable to hold under such circumstances by excluding the interest amount from the actual cost of the land that she had made a capital gain of Rs. 20,000 when, as a matter of fact, she had not made any profit at all by the transaction. Applying the said observations of the Calcutta and the Bombay High Courts to the present case, we hold that the Tribunal was right in adding the interest amount of Rs. 16,878 towards the actual cost of the land."

Order pronounced in the open court on 08-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 08.06.2018 kao kI ga[- .