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2015 (6) TMI 513 - ITAT MUMBAI

2015 (6) TMI 513 - ITAT MUMBAI - [2015] 44 ITR (Trib) 208 (ITAT [Mum]) - Deduction of interest on borrowed capital invested in shares - assessee has claimed the interest cost as a part of the cost of acquisition and/or improvement - Held that:- To bring an expense within the cost of its improvement, the expenditure has to be by way of a (physical) addition or alteration, adding value to the capital asset. Admittedly, no such improvement has taken place to the shares, which continue to be held as .....

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nue expenditure for the period 1980-81 onwards up to f.y. 1996-97. How could it then transform in character from f.y. 1997-98 onwards, to become a capital cost. This is incomprehensible, i.e., without any change in the underlying facts and circumstances of the case, so that shares continued to be a capital asset or an investment of the assessee. Merely for the reason that from a particular year the dividend income on shares, which is the holding income arising thereon, and against which the inte .....

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tries or the treatment that the assessee accords to an asset or liability in its books is not determinative of the matter. Again, the presumption would only be of the same representing the true state of affairs, but the inordinate delay in discharging the same raises considerable and valid doubt as to the existence of those liabilities as at the relevant year-end, i.e., as a fact. The onus on the Revenue, thus, gets discharged and shifts to the assessee, who is in effect only being called upon t .....

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t becomes doubtful if the creditor exists, who may have moved to a different place; discontinued business, et. al. No material or evidence or even explanation is forthcoming from the assessee. The only inference under the circumstances is that the liability no longer exists. Per contra, the assessee has obtained a benefit by way of remission or as the case may be cessation of liability. An inference of fact is again only a finding of fact, drawn in consistence and in harmony with in the conspect .....

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rn back and say that you accepted my lie for the preceding year/s and, therefore, you are bound by it. The only consequence in law is that the cessation or remission has occurred during the relevant previous year. - Decided against assessee. - ITA No. 47/Mum/2011 - Dated:- 22-5-2015 - D. Manmohan, VP And Sanjay Arora, AM,JJ. For the Appellant : Shri S V Joshi For the Respondent : Shri Vijay Kumar Bora ORDER Per Sanjay Arora, AM. This is an Appeal by the Assessee directed against the Order by the .....

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ee-company during the financial years (fy) 1980- 81 (or even prior thereto) up to 1992-93, were sold during the relevant previous year, yielding capital gains. The assessee claimed the interest cost from f.y. 1997-98 onwards up to the current year - the year of transfer, indexing it for the inflation as obtaining from year to year, as part of the cost of acquisition and/or improvement, in the computation of income by way of capital gains, chargeable u/s.45. The interest for the period prior to f .....

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provement (without actually specifying the same), so that we shall, as was the Revenue, obliged to consider it under either category; the said two costs being specified as eligible deductions u/s.48(ii). The first question, therefore, that arises is as to how is the interest cost relating to borrowings made to finance the acquisition of a capital asset, could be considered as toward its acquisition, which is already complete on the passing of the property therein to its owner-holder. The questio .....

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This difference is again of relevance in-as-much as the asset may be sold/ realized without the repayment of the debt, so that the interest cost continues independent of the asset. Again, the debt may be repaid/liquidated, extinguishing the interest cost, while the holding of the asset continues. That is, even the holding cost relationship is not automatic or follows as a natural corollary. The two, i.e., the interest cost and cost of the asset, are in any case independent of each other. So, how .....

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tribute toward the same, which process stands completed on the transfer. The same is, at best, a holding cost of the asset and, therefore, revenue in nature, to be, as such, expensed as a period cost for the relevant period. That in fact is precisely what the assessee had done after acquiring the asset in the instant case as well. In India Cements Ltd. vs. CIT [1966] 60 ITR 52 (SC) , it was clarified by the apex court that a loan cannot itself be treated as an asset or an advantage for the endur .....

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tself. That is, the financial obligation/s attached to an asset would not have a bearing on its cost of acquisition. Applying the said decision, the tribunal in the case of LML Ltd. v. Jt. CIT [2014] 33 ITR (Trib) 269 (Mum), discountenanced the insistence by the Department to increase or decrease, as the case may be, the value of the imported raw material on the basis of the corresponding increase or decrease in the purchase liability on account of fluctuation in the exchange rate. This was as t .....

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o the working condition for intended use, so that the same would cover the cost of improvement as well. The cost of an investment is, again, per the relevant accounting standard (AS-13), to include all the acquisition costs, including brokerage, fees and duties. The same, as would be evident, are in agreement with the cost of acquisition and cost of improvement as defined u/s. 55 of the Act. Continuing further, it is well settled that in working out the capital gains (or loss), the principles th .....

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ary to bring such asset into existence and to put it in working condition, finding the same to be in agreement with the concept of the cost, not statutorily defined, though envisaged under and within the meaning of the expression actual cost in section 10(5) of the Income Tax Act, 1922, so that the former shall prevail. The actual cost, it clarified, should be so construed as no man of commerce would misunderstand. The interest for the construction period on the capital borrowed toward the acqui .....

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not contribute to either its acquisition or improvement. In fact, even for the period prior to acquisition, the borrowing cost would form part of the cost of the capital asset only where it contributes to its acquisition or its improvement, i.e., where it is toward the same, as where the asset is under construction, entailing time and, thus, the time cost of the funds deployed thereon. The interest cost under such circumstances represents an essential ingredient toward acquiring the asset. The .....

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ttled law, for which we may refer to the decision in the case of Industrial Credits & Development Syndicate Ltd. vs. CIT [2001] 251 ITR 720 (Kar). We may not dwell on this aspect of the matter further, being a matter of trite law and, in any case, the interest cost under reference being for post acquisition period, and which has admittedly been considered by the assessee itself as a revenue cost, claimed and allowed as a revenue expenditure for the period 1980-81 onwards up to f.y. 1996-97. .....

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ax-exempt, would not alter its character from revenue to capital. It is in fact preposterous to state so. The same has thus rightly been considered as by the Revenue as an attempt to obviate or circumvent section 14A, by claiming the interest expenses as by the backdoor as it were (refer 3.3.2 of the impugned order). In fact, the very basis that a cost, irrespective of its character or purpose, is to be allowed in computing the taxable income as it had not been claimed earlier, is flawed and ber .....

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t to any judicial precedence, making down the law in the matter. Two, in all cases of the purchase of shares, viz. CIT vs. Maithreya Pai [1985] 152 ITR 247 (Kar.); Shri Mahendra C. Shah vs. Addl. CIT [2011] 140 TTJ 16 (Mum); S. Balan vs. Dy. CIT [2009] 120 ITD 469 (Pune), which are relevant for specific purposes, the interest has been allowed as being toward the acquisition of the shares. We have already clarified that the purchase of shares in the present case was, beginning prior to 01.04.1981 .....

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ITR 578 (Mad), relied upon, would be of assistance to the assessee. In the facts of that case, the assessee became the owner of the shares in the amalgamated company/s on the basis of the shares held in the amalgamating company/s, the cost of which would thus obtain (section 49(2) of the Act). The assessee, however, substituted the cost of acquisition with their fair market value as on 01.01.1964, an option available to it under the Act. The same being available to a shareholder of the amalgamat .....

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the standard and accepted notion and understanding of the cost of acquisition, being defined as including the cost of purchase, further explaining the nature of the interest as a time cost, which cannot thus be confused either with the asset or with the cost of its acquisition. The said decisions are, therefore, completely distinguishable on facts. The case law being relied upon by the assessee would thus be of no assistance to it. On the contrary, we find our self to be in agreement with the as .....

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y way of business liabilities u/s. 41(1) of the Act. While the assessee rests its case on it having not written back the same in books, so that they continue to represent its liabilities therein, the Revenue considers the same as invalid in the absence of liability being not proved to be an existing liability. Again, both the parties have cited abundant case law, as under: Assessee : CIT vs. Bhogilal Ramjibhai Atara [2014] 222 Taxmann 313 (Guj) ; CIT vs. Jain Exports (P) Ltd. [2013] 89 DTR 265 ( .....

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Bhogilal Laherchand [1954] 25 ITR 50 (SC) , deeming involves a number of concepts. By statutory fiction, income which can in no sense be said to have accrued, may be considered as accruing. Similarly, the fiction may relate to the place, the person or the year of taxability. The deeming in the case of section 41(1)(a), applicable in the instant case, is qua the benefit by way of cessation or remission of a trade liability in respect of an expenses of business or profession, as the income of bus .....

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liability/s. True, they stand not written back and continue to outstand in the assessee s books, but that is precisely the reason for the same being questioned by the Revenue, or entertaining doubts about the same. The doubt can by no means be considered as not valid, being in accord with the common practice and, thus, discharging the onus that law places on the Revenue. The accounting entries or the treatment that the assessee accords to an asset or liability in its books is not determinative o .....

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y would normally get settled within a period of one or two months of it s arising, while in the instant case years and years have passed. The same leads to the question: Why were the same not paid in the normal course and, rather, not paid at all? Is the matter disputed - if so, to what extent, and which shall again have to be demonstrated. In fact, after the lapse of considerable time, it becomes doubtful if the creditor exists, who may have moved to a different place; discontinued business, et .....

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and which is the year of remission or cessation of liability. The assessee having claimed it as a liability for the immediately preceding year as well, and which stood accepted by the Revenue, would preclude the assessee from contending that the liability was not existing, or was in fact not a liability even as at the end of the immediately preceding year. That is, it is not open for the assessee to turn back and say that you accepted my lie for the preceding year/s and, therefore, you are boun .....

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