Interest cost for the period capital asset was held prior to sale not deductible u/s 48 – ITAT

Interest cost for the period for which capital asset was held by the assessee prior to sale not deductible u/s 48 in computing capital gain u/s 45

ABCAUS Case Law Citation:
ABCAUS 2852 (2019) (04) ITAT

Important Case Laws Cited/relied upon by the parties

Habib Hussein v. CIT [1963] 48 ITR 859 (Bom), Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC), Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), CIT v. Vardhman Polytex Ltd. [2006] 205 CTR 457 (P&H), CIT v. Punjab Tractors Ltd. [2007] 289 ITR 130 (P&H), CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48 (Cal), (Sree Bhagavathi Textiles Ltd. v. CIT [2000] 244 ITR 496 (Ker), Saharanpur Electric Supply Co. Ltd. v. CIT [1992] 194 ITR 294 (SC), CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC), Collector of Central Excise v. Dai Ichi ,Karkaria Ltd. [1999] 156 CTR 172 (SC), CIT v. Tata Iron and Steel Co. Ltd. [1982] 231 ITR 285 (SC)

The instant appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals).

The issue at large in the instant appeal was the allowability of the interest on borrowed capital employed by the assessee for purchasing a capital asset, i.e., in computing short-term capital gain (STCG) arising on its’ sale.

The Tribunal noted that under section 48 of the Income Tax Act, 1961 (the Act), the cost incurred by the assessee, deduction for which in computing capital gains, short-term or long-term, could be allowed, other than where incurred in connection with the transfer, is that incurred on the acquisition or improvement of the capital asset transferred, i.e., capital costs. Whether a particular cost qualifies to be a cost of acquisition, as the interest cost is claimed to be in the instant case, or cost of improvement, is primarily a matter of fact, being the cost laid down or suffered to obtain anything.

The Tribunal observed that the cost is to correspond with the common notion thereof, i.e., as understood commercially or which an ordinary man of business will resort to when making computation for his purposes, was reiterated, again in the context of computation of capital gain/loss, by the Apex Court.

It was noted that the Hon’ble Supreme Court clarified that whether the cost incurred is necessary to bring the relevant asset into existence and to put it in working condition. The said decision, though rendered in the context of cost for the purpose of claim of depreciation, the principle involved is the same, i.e., what could, or could not, under the given facts and circumstances, be regarded as a qualifying cost to the assessee, either toward acquisition or, after acquisition, its’ improvement. The decision is thus equally applicable in the context of computation of capital gains.

The Tribunal observed that the principle that emerge is that only the cost laid out or incurred toward acquisition of a capital asset, or for effecting any improvement thereto, as understood by a man of commerce, applying principles of commercial accounting, would stand to be included as part of its’ capital cost and, accordingly, deducted in computing the capital gain on its’ transfer.

The Tribunal opined that any cost incurred for holding a capital asset, i.e., after its’ acquisition, or for its’ maintenance, would, accordingly, not stand to be allowed which is also the ratio of the decision of the Hon’ble Supreme Court.

The Tribunal also dwelled on the nature of the interest cost and explained it in detail. The interest cost represents the time cost of funds. That is, relates to the period for which the funds are borrowed or made available by one person, at a cost, to another. The same would stand to be incurred irrespective of the purpose for which the funds borrowed are deployed. Where, therefore, the acquisition of an asset itself involves, and essentially so, time, as where it is under construction, the corresponding interest cost, i.e., relatable to the construction period, would qualify as a cost of acquisition in-as-much as the same is incurred for bringing the asset into existence, as approved by the Hon’ble Supreme Court upholding the principle of commercial accounting, which in fact stands since formalized per accounting standard AS 10 by ICAI.

The Tribunal opined that a cost, which has nothing to do with the acquisition cost of the asset and, besides, relates to the period after its’ acquisition, can not be regarded as a part of the acquisition cost.

The Tribunal opined that if a the capital asset is sold after one month or six months or a year, over which period the borrowing continues and the interest cost would vary accordingly, altering the cost of acquisition of the asset with the period for which it is held. Again, the borrowed capital may not be repaid even after the asset is sold, and interest may continue to be incurred, deploying the sale proceeds for any other purpose.

The Tribunal stated that in a given case, the asset may be sold on credit, so that interest cost continues to be incurred. The Tribunal opined that the same, in short, would be a holding cost, i.e., cost of holding the asset, post acquisition, allowable as a revenue expenditure where the asset is to be used for the purpose of business.

The Tribunal pointed out that as explained by the Hon’ble Supreme Court, there is a fundamental difference between the cost of an asset and the means of its’ financing. The manner or mode of repayment of the loan obtained to acquire an asset has, therefore, nothing to do with the cost of the asset acquired for the purpose of the business.

Accordingly, the Tribunal held that there was no basis to consider the interest cost for the period for which the capital asset was retained or held by the assessee prior to being sold/transferred as a capital cost and, thus, deductible u/s. 48 in computing capital gain u/s. 45.

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