SRI NAND KISHORE KHEMANI,KOLKATA vs. THE C.I.T KOLKATA - III, KOLKATA

The assessee in the present case is an individual, who derives income from salary and capital gains. The return of income for the year under consideration was filed by him on 13.04.2009 declaring total income of Rs.25,09,117/-. In the assessment completed under section 143(3) vide an order dated 24.09.2010, the total income of the assessee was determined by the Assessing Officer at Rs.39,02,100/- after making a disallowance of Rs.15,12,983/- under section 14A of the Act. The record of the said assessment came to be examined by the ld. CIT and on such ./2013 Assessment year: 2008-2009 Page 2 of 5 examination, he found that as the deduction claimed by the assessee on account of interest expenses of Rs.8,65,827/-, software expenses of Rs.10,790/- and demat charges of Rs.24,166/- while computing the short- term capital gain chargeable to tax at the special rate of 10% was allowed by the Assessing Officer. According to him, these expenses were not allowable as deduction while computing income from capital gains and the order of the Assessing Officer passed under section 143(3) was erroneous as well as prejudicial to the interest of the revenue. He, therefore, issued a show-cause notice under section 263, in response to which, a written submission was filed by the assessee stating therein that since the interest on borrowed funds utilized for acquisition of shares was capitalised, the same was a part of cost of acquisition, eligible for deduction under section 48(ii) of the Act. Reliance in support of this stand was placed by the assessee on the decision of the Pune Bench of ITAT in the case of S. Balan Alias Shanmugam Balkrishnan Chettiar –vs.- DCIT reported in 120 ITD 469, wherein it was held that if the capital asset is acquired out of borrowed funds and interest paid on such borrowed funds is capitalized in the books of account treating the same as cost of such capital asset, then it would be part of cost of acquisition eligible for deduction under section 48(ii). It was also submitted by the assessee that Demat charges and software rent charges were also deductible under section 48(ii) while computing capital gains as the same amounted to expenditure incurred wholly and exclusively in connection with transfer of capital asset. This submission of the assessee was not found acceptable by the ld. CIT. According to him, deduction allowable under section 48(ii) was only limited to the cost of the asset and interest paid on borrowed funds used to acquire the capital asset could not be allowed as deduction under the said provision. He also held that even the software expenses and demat charges were not in the nature of expenditure incurred wholly and exclusively in connection with the transfer of the capital asset and the same, therefore, were not deductible under section 48(i) while computing the capital gain. Accordingly, the order passed by the Assessing Officer under section 143(3) allowing ./2013 Assessment year: 2008-2009 Page 3 of 5 deduction to the assessee on account of interest, software expenses and demat charges, while computing the capital gain, was held to be erroneous as well as prejudicial to the interest of the revenue by the ld. CIT and the same was set aside by him with a direction to the Assessing Officer to pass a fresh assessment order without allowing deduction on account of interest, software charges and demat charges while computing the capital gain. Aggrieved by the order of the ld. CIT passed under section 263, the assessee has preferred this appeal before the Tribunal.

We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee has invited our attention to the decision of Pune Bench of ITAT in the case of S. Balan Alias Shanmugam Balkrishnan Chettiar -vs.- DCIT (supra), wherein it was held that interest on funds borrowed for acquisition of shares is to be taken into account towards the cost of acquisition for the purpose of computation of capital gain as prescribed under section 48(ii) of the Act. He has also cited the decision of the Hon’ble Delhi High Court in the case of CIT –vs.- Mithlesh Kumari reported in 92 ITR 9, wherein it was held that interest paid by the assessee on money borrowed for the purpose of an open plot of land constituted part of actual cost of the assessee within the meaning of section 12B(2)(ii) of Indian Income Tax Act, 1922 for the purpose of determining the capital gain derived from the sale of land. To the similar effect is the decision of the Hon’ble Andhra Pradesh High Court in the case of Additional CIT –vs.- K.S. Gupta reported in 119 ITR 372 cited by the ld. counsel for the assessee, wherein it was held that interest expenditure incurred by the assessee on the amount borrowed for acquisition of the capital asset and capitalized in the books of account must be included in the actual cost of the site. Although the ld. D.R. has cited the decision of the Hon’ble Karnataka High Court in the case of CIT –vs.-Maithreyi Pai reported in 152 ITR 247 in support of the revenue’s case, it is observed that it was held by the Hon’ble Karnataka High Court in the said case that interest paid on the borrowings for the acquisition of an capital asset could not be deducted ./2013 Assessment year: 2008-2009 Page 4 of 5 for the purpose of computation under section 48, if the same was already the subject matter of deduction under other heads like those under section 57. It was held that the assessee, under the scheme of the Income Tax Act, could not be allowed deduction of the said amount twice from it. The said decision of the Hon’ble Karnataka High Court in the case of Maitrei Pai (supra) thus cannot be of any help to the revenue’s stand in the present case. In any case, all these case laws cited both the sides clearly show that the issue relating to the allowability of interest as the part of cost of acquisition of the capital asset under section 48(ii) is highly debatable and since the view taken by the Assessing Officer while allowing the claim of the assessee for deduction on account of such interest under section 48(ii) was a possible view, it is not permissible to the ld. CIT under section 263 to substitute his own view in place of such possible view taken by the Assessing Officer. As regards the deduction on account of software expenses and demat charges under section 48(i), the ld. counsel for the assessee has not been able to satisfactorily explain as to how the said expenditure is in the nature of expenditure incurred wholly and exclusively in connection with the transfer of asset. We, therefore, set aside the impugned order passed by the ld. CIT under section 263 directing the Assessing Officer to disallow the claim of the assessee for deduction on account of interest under section 48(ii) but uphold the same directing the Assessing Officer to disallow the claim of the assessee for deduction on account of software expenses, demat charges under section 48(i) of the Act.

In the result, the appeal of the assessee is partly allowed.