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2015 (6) TMI 348 - ITAT MUMBAI

2015 (6) TMI 348 - ITAT MUMBAI - TMI - Disallowance under section 14A r.w.s.8D - capitalization of interest expenditure as directed by CIT(A) - Held that:- The ld. AR submitted that the assessee has not incurred any expenditure on earning tax free income and there is no question of disallowing notional expenditure but in our opinion there should be certain expenditure on administration of these investments from which the assessee earned exempt income. Hence, in the interest of justice we direct .....

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llows:- Ground No.1 and 2 . i) The Learned CIT(A) has erred on facts and in law, in directing the Assessing Officer to allow the capitalization of interest expenditure of ₹ 42,25,030/- without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer. ii) The Learned CIT(A) has erred on facts and in law in directing the Assessing Officer to allow the capitalization of interest expenditure of ₹ 42,25,030/- ignoring the fact that since there is .....

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nterest of ₹ 42,25,030/-. According to the assessee interest expenditure was capitalized following AS-13 having direct nexus with acquisition of shares. The AO did not accept the contention of assessee. According to him the interest expenses so incurred were not allowed to be reconsidered as part of cost of acquisition of capital asset which do not form part of business assets. According to the AO the cost of acquisition has to be reduced by such interest and accordingly the cost of new sh .....

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cquisition of 45 shares of M/s. Merino Homeland Pvt. Ltd. He observed that the AO had admitted that such shares had been acquired by the assessee by utilizing borrowed fund. He further observed that since there is direct nexus of corporate loans with acquisition of shares, such expenditure would add to the cost of shares. He observed that the AO has wrongly presumed that such expenditure is not to be capitalized and was of the opinion that the arguments of the AO were not tenable, when no such e .....

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re, but it was capitalized as part of the investment in shares. The contention of the AO was that it cannot be added to the cost of the investment so as to increase the value of the capital asset. 3.1 In the present case, there is no dispute that the assessee has borrowed funds for the purpose of investment in shares and thereafter the assessee has incurred interest on it and the assessee added that interest to the cost of investment. In our opinion, the interest is to be considered as part of t .....

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very heads. The computation of capital gain is provided in section 48 of the Act. According to this section, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition, in our opinion, means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot .....

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o be computed under the head "Profits and gains from business or profession", the deduction account of interest on borrowed fund is provided under section 36(1)(iii) the Act, where the business assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allowable as deduction under section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asse .....

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n respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against dividend income. The Hon'ble Supreme Court has gone a step further in the case of CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519, wherein it has been held that deduction on account of interest paid on borrowed funds is allowable as deduction in computing the income under the head Income from other sources , even where the dividend is not received in a particular year. If this is .....

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entire scheme of the Act, therefore, reveals that interest component after the date of acquisition and till the date of sale cannot be treated as the cost of acquisition. It is only allowable as a revenue deduction on year to year basis against the income generated from such asset or likely to be generated to the extent provided by the Legislature under different heads. 4.2 The view taken by us is fortified by the decision of the coordinate Bench of the Tribunal in the case of Macintosh Finance .....

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on the mortgage of the property would also form part of the cost of acquisition in view of the Supreme Court judgment in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. The following observations of the Hon ble Supreme Court were relied on by the Court: As the expression 'actual cost' has not been defined, it should be construed, in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the expression, i .....

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the cost of the fixed assets. 4.4 A bare look at the above observations reveals that actual cost would include all expenditure necessary to bring the assets into existence and put them in working condition. Nowhere in the above observations, the Hon ble Supreme Court held that the expenditure incurred after the acquisition of asset would be included in the cost of assets. The terminal point is the time when the asset is brought into existence or when the asset is put in a working condition. Ther .....

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are not persuaded by the decision of the Hon'ble Madras High Court. The Jurisdictional High Court in the case of CIT v. Thane Electricity Supply Ltd. [1994] 206 1TR 727 (Bom.),has held that judgment of non-jurisdictional High Court is not binding on subordinate Courts or the tax authorities but has only a persuasive value. 4.5 The assessee s counsel placed strong reliance on the following judgments in : 1. Mr. S. Balan alias Shanmugam Balkrishnan Chettiar vs. DCIT (ITAT (Pune) Bench dated 31 .....

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TA No.4294/Mum/2012 order dated 19/10/2012 for assessment year 2009-10 and 7. Daga Global Chemicals Pvt. Ltd. vs. ACIT ITA No.5592/Mum/2012 order dated 01/01/2015 for assessment year 2009-10 4.6 In our opinion in view of the judgment of Hon'ble Supreme Court in the case of Chellapally Sugars Ltd. cited supra, we are inclined to not follow above judgments cited by the ld. AR . Accordingly, this ground is rejected. 5. Next ground that we take is ground No.3 which reads as follows:- The ld. CIT .....

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