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2008 (1) TMI 489 - AT - Income TaxComputation of capital gain - Disallowed interest component is part of the cost to be taken into account for the purpose of cost of acquisition - Transfer of the capital asset - Applicability of s. 14A - Capital gain shown as income formed Part of the total income. When the income is shown under the head "Capital gains", then the component of interest is an admissible factor to be allowed to the assessee or it is to be considered as not admissible in the light of the provisions of s. 14A being connected with the exempted incidental dividend income - HELD THAT:- Within this narrow compass of admitted facts, we have examined the relevant section i.e. s. 48 of IT Act as discussed by the Revenue authorities. This section says that the capital gain is to be computed by deducting from the consideration the prescribed two amounts, first expenditure incurred wholly and exclusively in connection with such transfer and second, the cost of acquisition of the asset and the cost of any improvement thereto. The issue in hand falls under the second category. Once it is an established fact that the appellant had borrowed the funds for acquisition of those share scrips and the burden of interest had been capitalized, therefore, that interest burden cannot be segregated from the amount of investment. At this juncture, we may also like to mention an observation of learned CIT(A) that, quote "thus, the expenditure by way of interest is part of cost only on the date purchase of share is made and after that whatever is interest cost, is incurred by the appellant for retaining or maintaining the capital asset and therefore cannot be allowed as deduction" unquote. This observation makes it clear that he was agreeable that in case interest is part of the cost, then it falls within cl. (ii) of s. 48 of IT Act. However, he was apprehensive, that if the burden of interest is for retaining or maintaining a capital asset then not to be allowed. On this proposition of learned CIT(A). We are of the view that even if it is a situation that a capital asset is acquired out of the borrowed funds having liability of interest. and since it had been capitalized in the books of accounts treated as a part of cost of asset and never claimed as a revenue expenditure, then that too is towards enhancing the cost of such capital asset and cannot be segregated from the cost of acquisition. Thus, our view gets fortified by the legal proposition laid down by the Hon'ble Court in the case of K.S. Gupta [1976 (8) TMI 9 - ANDHRA PRADESH HIGH COURT]. Thus, we arrive at the conclusion that the appellant is entitled to take into account the interest liability towards cost of the capital asset for the purpose of computation of the capital gain as prescribed under s. 48(ii) of IT Act. Applicability of s. 14A - non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income - As capital gain shown by the assessee had formed part of the total income of the assessee. Otherwise also, capital gain is not exempt income and without any ifs and buts, always being taxed in the hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a wrong premise that the interest expenditure was in respect of an income which was exempt, or did not form part of the total income. Confusion occurred in the minds of the Revenue authorities was due to the incidence of dividend income arising from the asset, i.e., share scrips - Undisputedly, the issue is related to the transfer of the capital asset and not the revenue generated thereout. To sum up, we hereby clarify that a situation may arise that on transfer of a capital asset, the gain is taxable but not the incidental income, and if so, the expenditure having nexus with the cost of acquisition has to be taken into account for the purpose of computation of the gain as prescribed under s. 48(ii) of IT Act. Though, it is not necessary for us to further make our observation clear but for the sake of completeness, we may like to add that there may be a situation where gain arising out of a capital asset is exempt from income-tax being not forming part of the total income, for example, agricultural land, then, naturally the expenditure incurred on such transfer or on acquisition of such an asset cannot be set off against the total income taxed under any other heads of income prescribed under Chapter IV of IT Act. With these reasonings, we hereby reverse the findings of the authorities below and allow the claim of the assessee. In this manner, both the grounds of the appellant are hereby allowed. In the result, the appeal is allowed.
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