Interest income cannot be assessed separately in the hands of the assessee

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH “F” New Delhi)

BEFORE SHRI RAJPAL YADAV AND SHRI SHAMIM YAHYA

ITA No. 2020/Del/2009

Assessment Year: 2006-07

Assistant CIT,

Circle 37(1),

New Delhi.

 (Appellant)

Vs.

 Shri Raj Kumar Aggarwal,

U-6, Green Park Extension,

New Delhi.

(PAN: AACPA6397C)

 (Respondent)

Appellant by: Shri Pradeep Kumar, CIT (DR)

Respondent by: Shri K. Sampath, Adv.

Date of hearing: 07.03.2012

Date of pronouncement: 15.03.2012

ORDER

PER RAJPAL YADAV: JUDICIAL MEMBER

The revenue is in appeal before us against the order of Learned CIT(Appeals) dated 27.02.2009 passed for assessment year 2006-07. The solitary grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the addition of Rs.41,73,321.

2. The brief facts of the case are that assessee is an individual. He has filed his return of income on 18.12.2006 declaring an income of Rs.155,27,356. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) of the Income-tax Act, 1961 was issued and served upon the assessee. In response to the notice, Shri Myank Goel, FCA appeared before the Assessing Officer and furnished the requisite details from time to time. Assessing Officer has observed that according to AIR Information, assessee has received a sum of Rs.41,73,321 on account of interest other than securities from Swedish Match Singapore Pte Limited. He issued a show-cause notice to the assessee inviting his explanation as to why the alleged interest income be not assessed as income of the assessee. In response to the query of the Assessing Officer, it was contended by the assessee that M/s. Swedish Match Singapore Pte Ltd. was in the process of

acquiring fully paid up equity shares representing up to 26% of the issued and paid up equity shares capital of M/s. WIMCO Ltd. M/s. Swedish Match Singapore Pte Ltd. had come up with an open offer for acquisition of shares of WIMCO from the general public in pursuance of instruction of SEBI, it gave an open offer with a price of Rs.59.54 per shares. The assessee had purchased 1,70,362 shares of WIMCO on 8th and 9th September 2005 @ 58.93 per share. The assessee had sold all these shares to M/s. Swedish Match Singapore Pte Ltd. after 20 days i.e. on 29th September, 2005 @ Rs.59.54 per share. He has earned short term capital gain because shares were sold within 20 days. Assessing Officer has observed that M/s. Swedish Match Singapore Pte had purchased, the shares at Rs.59.54 which include Rs.35 per share as cost and interest of Rs.24.54 per shares for the period 27.1.2001 till September 27, 2005. On the basis of this arrangement, Assessing Officer construed that assessee had received interest of Rs.24.54 per share. He accordingly calculated the short term capital loss accrued to the assessee on sale of shares, adjusted that short term capital loss against the capital gain and thereafter assessed the interest income under the head “income from other sources”. In this way, an addition of Rs.41,73,321 was made.

3. On appeal, Learned First Appellate Authority has deleted the addition by observing as under:

“3. I have considered facts of the case. A perusal of the assessment order shows that the shares of M/s. WIMCO Ltd. purchased by the appellant had interest component built into it and, therefore, the Assessing Officer has excluded the interest component and treated the same as income from other sources. This action of the Assessing Officer has resulted in short term capital loss, which has been set off against the capital gains during the year. Thus, on one hand the total income had been was reduced and, on the other hand, the taxable income under the head ‘income from other sources’ has been increased.

3.1 It is, noted from the letter of offer issued by Swedish Match, Singapore P.T.E. Ltd. (acquirer) that this company was in the process of acquiring fully paid-up equity shares representing up to 26% of the issued and paid-up equity share capital of M/s. Wimco Ltd. (target company) at Rs.59.54 per share, comprising of Rs.35 per share (offer price) and accrued interest thereon of Rs.24.54 per share calculated @ 15% per share from January 27, 2001 till September 29,2005. The appellant had purchased shares of M/s. WIMCO Ltd. Through Navratan Capital & Securities P. Ltd., a member of National Stock Exchanges, at an average rate of Rs.58.93 per share on 8th and 9^th September, 2005. These shares were sold @ 59.54 per share. Thus, the average cost of acquisition of the shares in the hands of the assessee was Rs.59.93 per share. There may be different components of this amount, but the fact remains that the cost of acquisition of these shares qua the appellant would be the amount he has paid to acquire these shares. The cost of acquisition cannot be bifurcated into different components in the hands of the acquirer. The amount has been paid by the assessee for acquiring the asset i.e. shares of M/s. WIMCO Ltd. The whole amount would, therefore, be cost of acquisition in his hands. The ‘full value of consideration’ received by the assessee on sale of the shares cannot be split and taxed under the head ‘Capital Assets’ and partly under “income from other sources”.

The action of the Assessing Officer in taxing the gross amount of interest component amounting to Rs.41,73,321 as income from other sources is not correct even from another angle. If this amount is treated as interest income, the amount paid by the appellant as interest component for acquiring these shares has also to be deducted. This, as explained above, would ultimately result in the same amount of income i.e. Rs.1,03,220 as included in the capital gain shown by the assessee”.

4. The learned counsel for the assessee at the very outset submitted that a similar issue was considered by the Authority for Advance Ruling in the case of Burmah Castrol Plc. reported in 175 Taxman 353 (AAR, New Delhi). He pointed out that this decision has a percussive value upon the ITAT. In this case, the issue considered by the learned authority is whether on the said facts and in law, while calculating the amount of long term capital gain chargeable to tax interest paid by the applicant to the shareholder of FOSECO India Ltd. as per the directive of the SEBI deserves to be treated as a part of the cost of acquisition of shares. Learned Authority had held that it is inseparable part of the cost. The learned counsel for the assessee drew our attention towards the conclusion drawn in paragraph 8 of this order which reads as under:

“8. It does not require much of argument to demonstrate that interest paid to the shareholders pursuant to the order of a statutory body legitimately enters into the cost of acquisition of shares in addition to the payment of price. Interest was paid to the shareholders of FIL in order to compensate for the delay. But for the payment by way of interest, it would not have been possible to acquire the shares. The payment of interest in addition to the price is nothing but an integral process of acquisition of shares. Either in plain sense or commercial sense, it becomes an inseparable part of cost of acquisition. By no process of reasoning, the interest amount paid to the shareholders prior to acquisition can be dissociated from the cost of acquisition of shares”.

5. On the strength of this order, coupled with the findings of the Learned CIT(Appeals), learned counsel for the assessee submitted that for an investment of 20 days by no stretch of imagination, assessee can earn this much interest income. On the other hand, Learned DR relied upon the order of the Assessing Officer.

6. We have duly considered the rival contentions and gone through the record carefully. On an analysis of the facts, we find that the cost which was paid by the assessee for acquiring the share is Rs.58.93 per share. The alleged interest component calculated by the Assessing Officer was embedded in the cost of acquisition of the shares. The Swedish Match Singapore Pte had paid the interest components by considering the period of January 27, 2001 till September 29, 2005 whereas assessee had purchased the shares on 8th and 9th of September and he sold them on 29th September 2005. Learned First Appellate Authority has considered all these aspects elaborately. The interest income cannot be assessed separately in the hands of the assessee. In view of the above discussion, this appeal of the revenue is dismissed.

Decision pronounced in the open court on 15.03.2012

                                                    Sd/-                                   Sd/-

                                    (SHAMIM YAHYA)           (RAJPAL YADAV)

                                ACCOUNTANT MEMBER  JUDICIAL MEMBER

Dated: 15/03/2012

Mohan Lal

Copy forwarded to:

1) Appellant

2) Respondent

3) CIT

4) CIT (Appeals)

5) DR: ITAT

ASSISTANT REGISTRAR