Issue: Whether CIT(A)’s Order confirming the AO’s addition of INR 23,55,074 to the total income of the assessee hold good?

Case name:  HAC India Ltd. v. DCIT Circle

Background

  • The assessee claimed the interest paid on loan taken from Kotak Bank as an expense while computing short term capital gain under Section 111A.
  • The assessee offered the interest amount of INR 23,55,074 for disallowance under Section 14A and again reclaimed it as an expense while computing short term capital gains.
  • The AO contended that the amount of INR 23,55,074/- offered by the assessee for disallowance u/s 14A cannot be claimed again as an expense while computing short term capital gain.

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Forum: Kolkata ITAT

Members:

Lawyers (Assessee): Anil Kochar

Lawyer (Revenue): Ranu Biswas

Applicable Sections:

Case relied on Commissioner of Income Tax Vs Maithreyi Pai

  • Further, the AO observed that the provision relating to short term capital gain provides for deduction in sale consideration of expenses purely in relation to the transfer of capital asset. In the current fact situation, the interest amount being claimed is not in relation to the transfer of capital asset. 
  • Hence, the AO disallowed the said amount as an admissible expense under the head capital gains.
  • The Assessee appealed before the CIT(A) who rejected the appeal and confirmed the disallowance made by the AO.
  • Hence, the assessee appealed before the tribunal.

Revenue’s Arguments

  1. The amount of Rs. 23,55,074/- offered by the assessee for disallowance u/s 14A cannot be claimed again as an expense while computing short term capital gain.
  2. The provision relating to short term capital gain provides for deduction in sale consideration of expenses purely in relation to transfer of capital asset and the said interest amount as claimed by the assessee emanates from the funding pattern of the assessee and has nothing to do with the transfer of capital asset.

Assessee’s Arguments

  • The assessee took a loan for purchasing shares and INR 23,55,074/- was paid as interest for the year. The assessee claimed such interest against short term capital gain on sale of shares under section 111A of the Income Tax Act.
  • The AO disallowed the amount of INR 23,55,074 while computing the short term capital gain which is bad in law.
  • For the purpose of disallowance under Section 14A read with Rule 8D only the net interest amount should be disallowed.

Tribunal’s Judgement

  • The Tribunal examined the CIT(A)’s order which had rejected the assessee’s claim on the ground that double deduction is not permissible. The CIT(A) had held that the interest on the loan was used for the acquisition of shares on which dividend income was earned which is exempt. Therefore, by claiming the same as a deduction while computing short term capital gain u/s 111A amounts to claim of double deduction which is not allowed.
  • The tribunal observed that the CIT(A) had erred in its appreciation of the facts of the case and made disallowance of interest amount under the head ‘short term capital gains’.
  • The tribunal noted that the assessee took a loan for purchasing shares and a sum of INR 23,55,074 was paid as interest. Assessee, while selling these shares, is hence entitled to deduct the interest incurred in buying them.
  • The tribunal further noted that the disallowance under Section 14A read with Rule 8D(2)(ii) of the Rules only takes into account the net interest.
  • Interest expenses of Rs. 23,55,074/- is incurred exclusively in connection with shares which the assessee has sold and claimed the short term capital gain therefore these interest expenses are allowable as a deduction under the head capital gain. If the assessee has received the interest as well as paid the interest then after netting the interest received/paid the disallowance u/s 14A read with Rule 8D(2)(ii) is to be computed. As per the assessee, there is no payment of interest, after netting with interest received, so no disallowance u/s 14A read with Rule 8D(2)(ii) is required to be made.
  • The Tribunal allowed the appeal and remanded the matter back to the AO to reconsider the facts and determine the computation of taxable income.

Soumya Shekhar, legal writer @ Riverus.

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