IN THE INCOME TAX APPELLATE TRIBUNAL DELHI
BENCH `SMC', NEW DELHI
BEFORE SH. R. K. PANDA, ACCOUNTANT MEMBER
ITA No.5210/Del/2018
Assessment Year: 2015-16
Ranji Dhawan ACIT
C-728, New Friends Colony, Vs Circle 28 (1)
New Delhi New Delhi
PAN No. AADPD4279M
(APPELLANT) (RESPONDENT)
Appellant by Shri S.C. Malhotra, CA
Respondent by Shri S. L. Anuragi, Sr. DR
Date of hearing: 09/05/2019
Date of Pronouncement: 24/06/2019
ORDER
PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the
order dated 18.06.2018 of the CIT(A)-10, New Delhi relating to A.
Y. 2015-16.
2. Facts of the case, in brief, are that assessee is an individual
and drives income from business, house property, capital gain
and income from other sources. He is also engaged in the
business of decoration of tiles through his proprietorship concern
M/s. Arcadia Creations. He filed his return of income on
24.09.2015 declaring nil income. The Assessing Officer during
the course of assessment proceedings noticed that the assessee
has shown short term capital gain of Rs.45,85,992/- on sale of
shares after claiming interest expenses of Rs.10,76,258/-.
3. The Assessing Officer asked the assessee to justify the claim
of expenses of Rs.10,76,258/-. Rejecting the various explanation
given by the assessee, the Assessing Officer disallowed the
interest expenses of Rs.10,76,258/- by observing as under :-
· Assessee has failed to establish the fact that the interest expenses
incurred are actually with respect to the shares shown as part of short term
capital gain alone. Mere written submission without any corroborative
evidence does not suffice for allowing any claim in quasi-judicial proceedings.
It is pertinent to mention that the assessee has maintained a single portfolio
with Motilal Oswal Financial Securities Ltd. through which intraday
trading; derivative trading and trading in shares for investment purposes is
performed.
· As per the assesee's submission, interest is charged on day-to-day
basis and debited at the end of the month. Assessee has proportionately
divided the monthly interest expenses with the cost of each share (sold in short
term). But for the computation of capital gain each security/shares is to be
treated as separate capital asset and thereby requiring specific computation of
cost of borrowed capital for its purchase. The method adopted by assessee has
resulted in disproportionate charging of interest as part of cost of acquisition
for every share because proportionate interest cost of those shares
purchased with borrowed funds thereafter as well as all the interest expenses
pertaining to period after the date of acquisition is added to it.
· It is observed that assessee purchases shares by overdrawing from
M/S Motilal Oswal Financial Securities Ltd. and that overdrawing continues
till either the same shares or some other shares equivalent to amount
overdrawn are sold. The overdrawing as well as corresponding interest starts
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only from the moment shares are purchased. Therefore assessee is actually
paying interest expense only for the period after the date of acquisition. Such
interest expenses are not allowable as part of cost of acquisition. The said
view gets support from the decision rendered in the case of V. Mahesh, ITO v.
Vikram Sadanand Hoskote [2007] 18 SOT 130 (Mum), wherein it is held
that the interest expenditure incurred on borrowed funds for the period
commencing from the date of acquisition of shares till date of sale would not
form part of cost of acquisition of share
· Further, assessee cannot claim interest expenses in lump sum. If it
was shown as business income such expenses were deductible. It is
understandable that looking at the number and turnover of transactions, it is
difficult to compute/ segregate interests cost pertaining to each security. But
once assessee has consciously treated such transactions in shares as short
term capital gain, it cannot take advantage of both the provisions i.e. paying
tax at lower rate for STCG as well as claiming expenses of nature of business
activity together.
4.7 Therefore based on the discussion supra, the interest expense of Rs.
10,76,258/- cannot be said to beincurred only on the shares kept for
investment purposes as the funds available with the Motilal Oswal are mixed
funds. These interest expenses actually pertain to the period after date of
acquisition of such investments overdrawing as well as corresponding interest
starts only from the moment shares are purchased. Further looking at the
turnover of the assessee for F&O and share business it cannot be accepted
that the loan has been used for investment in shares (short term investment).
The assessee must calculate the interest expenses against each security held
for investment purpose if cost of acquisition is to be claimed. Therefore, the
fact that exact amount of interest expenses pertaining to capital borrowed for
the purchase of such shares and for the period prior to purchase of such
shares (includible as part of cost of acquisition) is not computed by the
assessee. Thus interest expenses are not allowed to be deducted from the sale
consideration received on the sale of shares. In view of the above discussions,
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the interest expenses of Rs. 10,76,258/- is hereby added to the income of the
assessee for the year under consideration."
4. Before CIT(A) the assessee submitted that the interest of
Rs.10,76,258/- was charged by Motilal Oswal Financial Services
Ltd. and its statement of account showing interest debited was
filed with the AO. The source of funding of share transactions
was also with the same company. Month-wise detail of interest
charged by Motilal Oswal Financial Services Ltd. was filed during
the assessment proceedings. It was submitted that amount of
interest of Rs. 10,76,258/- was paid to Motilal Oswal Financial
Services Ltd. only in respect of STCG on shares. It was also
submitted that there was no interest paid for the period prior to
purchase of shares and the assessee has allocated amount of
interest against each security and the statement of the same was
submitted before the AO. The assessee relied on the decision of
the ITAT, Delhi Bench-E in the case of Narendra Gehlaut v JCIT
[2012] 21 taxmann.com 82 (Delhi) and the decision of Hon'ble
High Court of Delhi in the case of CIT v Mithlesh Kumari [1973]
92 ITR 9 (Delhi).
5. However, the Ld. CIT(A) was not satisfied with the
arguments advanced by the assesee and upheld the action of
the Assessing Officer. While doing so he held that no interest
was paid by the assessee for the period prior to purchase of
shares. He observed that the issue whether interest paid on
the borrowed money for acquisition of the shares could be added
to its cost of acquisition for computation of capital gains is
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squarely covered against the assessee by the judgment of Hon'ble
Calcutta High Court in the case of CIT v L N Dalmia and the
judgment of Karnataka High Court in the case of CIT v
Maithreyei Pai (supra). Further ITAT Mumbai in its various
decisions has also held that interest on borrowings on the
purchase of shares cannot be constituted as part of the cost
of the shares for the purpose of working out the capital gains
on the sale of shares.
6. Aggrieved with such order of the CIT(A), the assessee is in
appeal before the Tribunal by raising following grounds of appeal
:-
1. That the order of the learned Commissioner of Income tax
(appeals) is against fact and law.
2. That the Learned Commissioner of Income-tax (Appeals) has
erred in confirming the disallowance of Rs.10,76,260/- being the
amount of interest claimed as deduction in computing the Short Term
Capital Gain.
3. That the Learned Commissioner of Income-tax (Appeals) has
erred in not allowing the capitalizing of interest paid on investments
and adjusting the same against Short Term Capital Gain.
4. That the further grounds shall be submitted at the time of
hearing.
7. The Ld. Counsel for the assessee strongly challenged the
order of the CIT(A) in confirming the action of the Assessing
Officer. He submitted that the assessee has carried on share
transactions which resulted in Short Term Capital Gain covering
STT. An interest of Rs. 10,76,258/- was incurred on borrowings
made for acquisition of investments made in shares and was paid
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to Motilal Oswal Financial Services Ltd. There are no mixed funds
in as much as the account on which interest has been paid
relates to short term capital gain only. It is a separate account in
which no other transaction has been carried out except of Short
Term Capital Gain and the interest paid has been apportioned
against each investment. Referring to paper book page No. 6 and
7 which contains the Statement of Capital Gain he submitted
that the same shows share wise interest allocated. The statement
also shows transactions through ICICI Bank and J M Financial
Services on which no interest has been claimed. The interest paid
was capitalized as cost of acquisition of investment. The interest
was paid on funds raised for purchase of shares. It is but natural
that the interest will be paid only from the date from which the
investments are purchased and loan is raised. The interest is
payable up to the date when the repayment is made. The interest
was charged on day to day basis and no interest was paid prior to
acquisition of Investment. He also relied on the following
decisions :-
1. CIT Vs. Mithlesh Kumari 92 ITR 9 (Delhi)
2. CIT Vs. K. Raja Gopala Rao 125 Taxman 148
3. V. Mahesh, ITO Vs. vikram Sadanand Hoskote 18 SOT
130
8. He submitted that the assessee has been carrying out
similar activity in earlier years also. The assessee has also paid
interest to Motilal Oswal Financial Services in earlier years also.
Referring to the return of income for assessment year 2013-14 he
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submitted that against short term capital gain (covering STT)
interest of Rs.4,90,555/- was claimed and was accepted. He
accordingly submitted that the interest expenditure of
Rs.10,76,258/- should be allowed as deduction.
9. The Ld. DR on the other hand heavily relied on the order of
the CIT(A).
10. I have considered the rival arguments made by both the
sides and perused the orders of the authorities below. I have also
considered the various decisions relied on by both the sides. I
find the Assessing Officer in the instant case denied the claim of
interest expenditure of Rs.10,76,258/- as deduction from the
short term capital gain on the ground that the same cannot be
said to be incurred only on the shares kept for investment
purposes as the funds available with M/s. Moti Lal Oswal are
mixed funds. It is also the allegation of the Assessing Officer that
assessee could not substantiate that the loan has been used for
investment in shares. It is also his allegation that the exact
amount of interest expenses pertaining to capital borrowed for
the purchase of such shares and for the period prior to purchase
of such shares (which is includible as part of cost of acquisition)
has not been computed by the assessee. I find the Ld. CIT(A)
upheld the action of the Assessing Officer on the ground that no
interest was paid by the assessee for the period prior to purchase
of shares. It is the submission of the Ld. Counsel for the assessee
that the interest expenditure of Rs.10,76,258/- was incurred on
borrowings made for acquisition of investments made in shares
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and there are no mixed funds and that it is a separate account in
which no other transaction has been carried out except of the
shares on which short term capital gain has been earned. It is
the submission of the Ld. Counsel for the assesesee that in
assessment year 2013-14 assessee has also paid interest to Moti
Lal Oswal Financial Services amounting to Rs.4,90,555/- which
was accepted by the department and allowed as deduction from
short term capital gain. From the various details furnished by
the assessee in the paper book I am of the considered opinion
that it requires a re-visit to the file of the Assessing Officer to
adjudicate the issue afresh in the light of the various submissions
made by the assessee before me. Needless to say the Assessing
Officer shall give due opportunity of being heard to the assessee
and decide the issue as per fact and law. I hold and direct
accordingly. The grounds raised by the assessee are accordingly
allowed for statistical purpose.
13. In the result, the appeal filed by the assessee is allowed for
statistical purpose.
Order pronounced in the open court on 24.06.2019.
Sd/-
(R.K PANDA)
ACCOUNTANT MEMBER
*Neha*
Date:- 24.06.2019
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
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5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date of dictation
Date on which the typed draft is placed before the dictating
Member
Date on which the approved draft comes to the Sr.PS/PS
Date on which the fair order is placed before the Dictating
Member for Pronouncement
Date on which the fair order comes back to the Sr. PS/ PS
Date on which the final order is uploaded on the website of
ITAT
Date on which the file goes to the Bench Clerk
Date on which file goes to the Head Clerk.
The date on which file goes to the Assistant Registrar for
signature on the order
Date of dispatch of the Order
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