BABULAL MASRAJI,CHENNAI vs. DCIT, CHENNAI

This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-5, Chennai dated 29.07.2016 in u/s. 256 r.w.s. 143(3) of the Act for the assessment year 2007-08

The assessee has raised four grounds in his appeal, however the crux of the issue is that the Ld. CIT(A) had upheld the order of the Ld. AO, who had disallowed the interest expenditure incurred by the assessee amounting to Rs.2,49,076/- for earning short term capital gain.

The brief facts of the case are that the assessee is an individual engaged in trading and finance business filed his return of income for the assessment year 2007-08 on 31.07.2007, admitting his total income as Rs.23,16,341/-. Subsequently, the case was taken up for scrutiny and the assessment was completed u/s. 143(3) of the Act on 29.12.2009, wherein the Ld. AO disallowed Rs.2,49,076/- being the expenditure incurred towards payment of interest. The assessee had claimed the expenditure towards earning short term capital gain of Rs.66,500/- with regard to sale of his immovable property. The reason for the disallowance made by the Ld. AO is that the assessee had not capitalized the interest expenditure by assigning it to the cost of the immovable asset. On appeal, the Ld. CIT upheld the order of the Ld. AO because as pointed out by the Ld. AO there were no creditors in the business and the business carried out by the assessee was small scale i.e., only to the extent of Rs.2,93,000/-, therefore there is no possibility that the assessee would have incurred any expenditure towards interest payment.

Before us, the Ld. AR submitted that the assessee had borrowed funds for purchase of the immovable asset and therefore the interest expense incurred by him has to be allowed as deduction while computing the short term capital gain. He further submitted that only for the reason interest expenditure was not added to the cost of the asset, the disallowance made by the Ld. AO is against justice. It was therefore prayed that the Ld. AO may be directed to grant deduction with respect to the interest expenditure suffered by the assessee for purchase of the immovable asset. The Ld. DR on the other hand argued in support of the orders of the Revenue authorities and pleaded for upholding the same.

I have heard the rival submission and carefully perused the materials available on record. I find merit in the submission of the Ld. AR. If the assessee has borrowings which was for the purchase of the immovable asset, then the same should be either added to the cost of the asset or allowed as deduction while computing short term capital gain. It would not be appropriate to reject the deduction only because of the simple reason that the assessee has not capitalized the interest expenditure towards the cost of the immovable asset. These are only technical mistakes committed by the assessee which needs to be overlooked while arriving at the actual and correct gain enjoyed by the assessee while computing the short term capital gain. Therefore in the interest of justice, I hereby direct the Ld. AO to verify whether the interest expense suffered by the assessee is attributable for the purchase of the immovable asset by way of the borrowings being utilized for acquisition of the immovable assets and if found so, allow deduction by either adding it to the cost of the asset or considering it as the expenditure incurred for the acquisition of the asset. It is ordered accordingly.

In the result the appeal of the assessee is allowed for statistical purposes as indicated herein above.