ITO Vs Gaurav Karnawat HUF (ITAT Jaipur)
₹60-Crore IPO Bid, ₹2.58-Crore Allotment &; ₹16.44-Lakh Interest: Direct Financing Cost Joins Cost of Shares u/s 48
Summary:
Capital Loss Draws Reassessment
The assessee-HUF filed its original return declaring total income of ₹2,77,650. It also disclosed aggregate long-term & short-term capital losses from equity transactions amounting to ₹86,04,002.
The Revenue subsequently formed the view that the assessee had inflated its capital loss by ₹16,44,724, representing interest paid on borrowings utilised for applying for shares in an IPO. Proceedings were accordingly reopened u/s 147.
In the return filed in response to notice u/s 148, the assessee excluded the disputed interest component from its capital-loss computation. The AO did not draw any further adverse inference on the quantum but computed the total loss at ₹69,59,277 & proposed initiation of penalty proceedings u/s 270A for under-reporting of income.
The assessee challenged the reassessment & the exclusion of interest from the cost of shares before the CIT(A)/NFAC.
₹60-Crore IPO Application Financed Through Loan
The assessee had applied for shares in the IPO of SBI Cards for approximately ₹60 crore. The application was financed primarily through a loan obtained from Motilal Oswal Finvest Ltd.
Against the substantial application amount, shares worth only ₹2,58,50,445 were allotted. The balance application money was refunded, following which the loan was repaid together with interest of ₹16,44,724.
The assessee contended that the borrowing was undertaken specifically & exclusively to acquire the IPO shares. But for the proposed acquisition, neither the loan nor the interest liability would have arisen.
Therefore, the interest bore a direct & proximate nexus with the acquisition of the shares & had to be capitalised as part of their cost of acquisition u/s 48.
CIT(A) Accepts Direct Nexus
The CIT(A) examined the loan arrangement, IPO application, proportionate allotment, refund of the unallotted amount & repayment of borrowing together with interest.
It found that the funds were borrowed exclusively for subscribing to the IPO. The interest liability arose solely because the borrowed funds were deployed for obtaining the share allotment.
The fact that only a fraction of the shares applied for was ultimately allotted did not break the connection between the borrowing cost & acquisition. The allotment was proportionate, while the refunded application money was used to discharge the loan.
Relying upon the Mumbai ITAT decisions in Krishnamurthy Thagarajan v. ACIT & Neville Tuli v. DCIT, the CIT(A) held that expenditure directly connected with acquiring a capital asset forms part of its actual cost unless expressly prohibited.
Accordingly, interest of ₹16,44,724 was held allowable as part of the shares’ cost of acquisition. The short-term capital loss originally declared by the assessee was accepted.
The CIT(A) also decided the jurisdictional challenge to the reassessment in favour of the assessee by relying upon the applicable judicial precedent.
Revenue’s Challenge Before the ITAT
The Revenue challenged the CIT(A)’s order on two broad grounds.
First, it contended that the jurisdictional AO possessed statutory authority to issue notice u/s 148 & that the Faceless Reassessment Scheme did not curtail such power. It also objected to reliance upon Sharda Devi Chhajer, pointing out that the decision had been challenged before the Supreme Court.
Secondly, the Revenue argued that interest on the IPO financing arose from an independent contractual arrangement with the lender. According to it, “cost of acquisition” u/s 48 meant only the actual allotment price of ₹2,58,50,445.
The financing cost neither enhanced nor altered the purchase price fixed upon allotment. Therefore, the Revenue contended that Section 48 did not permit capitalisation of the interest.
Assessee Raises Low-Tax-Effect Objection
The assessee supported the CIT(A)’s order & filed a cross-objection challenging the maintainability of the Departmental appeal.
It contended that the tax effect involved was below the monetary threshold prescribed by the CBDT. Therefore, the Revenue’s appeal was barred by CBDT Circular No.09/2024 dated 17.09.2024.
The Departmental Representative fairly conceded that the tax effect was below the prescribed limit & that the case did not fall within any exception to the Circular.
ITAT Upholds Interest as Acquisition Cost
On merits, the Tribunal found no illegality or perversity in the CIT(A)’s conclusion.
The borrowed funds were used specifically for the IPO application. The interest liability was incurred because the assessee sought to acquire the shares. There was thus a clear, direct & proximate connection between the financing cost & acquisition of the capital asset.
In these circumstances, the interest could legitimately form part of the cost of acquisition for computing capital gains or losses u/s 48.
The Tribunal therefore upheld the CIT(A)’s decision allowing ₹16,44,724 as part of the acquisition cost & found the Revenue’s appeal liable to be dismissed on merits.
Appeal Also Hit by Monetary Limit
Independently, the ITAT held that the Departmental appeal was not maintainable because it fell within the low-tax-effect category governed by CBDT Circular No.09/2024.
Since the Revenue conceded that none of the specified exceptions applied, the appeal was liable to dismissal on this ground as well.
Accordingly, the Revenue’s appeal was dismissed & the assessee’s cross-objection was allowed.
Author’s Comments
The ruling recognises that the economic cost of acquiring shares may extend beyond the allotment price where borrowing is specifically undertaken for the acquisition.
The decisive factor was not merely that interest had been paid, but that the loan was exclusively linked to the IPO subscription, followed by allotment, refund & immediate repayment.
The decision should therefore not be read as permitting capitalisation of every general borrowing cost against share gains. The assessee must establish a clear fund-flow nexus between the borrowing & the asset acquired.
Here, both the merits & the monetary limit defeated the Revenue’s challenge—because when ₹60 crore was borrowed only to enter the IPO queue, its ₹16.44-lakh financing cost could not be made to stand outside the acquisition gate.
Cases Discussed
- Krishnamurthy Thagarajan v. ACIT
- Neville Tuli v. DCIT
- Sharda Devi Chhajer Vs ITO
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, JAIPUR BENCH
The Appellant- Revenue by filing aforesaid appeal, sought to set aside the impugned order dated 05.12.2025 passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘CIT(A)’] qua assessment year 2020-21 on the grounds inter-alia that:-
ITA No. 408/JPR/2026 (Revenue’s grounds)
“1. Whether on the facts & the circumstances of the case and in law the Ld. CIT(A) has erred in quashing the reassessment proceedings u/s 148A/148, ignoring the fact that the Jurisdictional Assessing Officer (JAO) possesses valid statutory jurisdiction to issue notice u/s 148, and the Faceless Reassessment Scheme does not curtall such jurisdiction and that the AO followed the statutory procedure before issuing Notice u/s 148 of the Act?
2. Whether on the facts & circumstances of the case and in law, the Ld CIT(A) has erred in relying on the decision of Hon’ble High Court in the case of Sharda Devi Chhajer without appreciating that the said decision has not been accepted; and, challenged further before the Hon’ble Supreme court and has not attended finality yet?
3. Whether on the facts & circumstances of the case and in law, the Ld CIT(A) has erred in holding that interest expenditure of Rs. 16,44,724/- incurred on borrowed funds availed for IPO application constituted part of the ‘cost of acquisition’ under section 48 of the Income tax Act, 1961. without appreciating that the statutory expression cost of acquisition’ refer strictly to the actual consideration paid for acquiring the capital asset, i.e. the price at which the shares were allotted (Rs. 2,58,50,445/-), and does not extend to financing or borrowing costs arising from a separate and independent loan transaction?
4. Whether on the facts & circumstances of the case and in law, the Ld CIT(A) has erred in not appreciating that the interest liability emanated from a contractual arrangement with the lender and not from the acquisition of the shares; such interest neither enhanced nor altered the intrinsic purchase price of the shares as determined by the allotment; and, that the section 48 of the Act does not contemplate capitalization of financing costs?
5. That the appellant craves to add, amend, alter, delete or modify any or all the above grounds of appeal before or at the time of hearing.”
ITA No. 3/JPR/2026 (Assessee’s ground)
“1. The Ld. Assessing Officer erred in law as well as on facts of the case by filing appeal before Honorable Income Tax Appellate Tribunal, Jaipur in the case WHARE tax effect is below monetary limit as prescribed by Central Board of Direct Taxes.
2. At the same time, appellant, Gaurav Karnawat HUF by filing Cross Objection supported the impugned order dated 05.12.2025 by Ld. CIT(A) and also raised ground that present appeal is not maintainable having low tax effect as per notification passed by Central Board of Direct Taxes ( for short CBDT).
3. Briefly stated, facts necessary for consideration and adjudication of the issued at hand are : Assessee filed his original return of income declaring total income at Rs. 2,77,650/- and also declared a total capital loss (i.e. long term capital loss & short term capital loss from equity) amounting to Rs. 86,04,002/-. Subsequently, Revenue department noticed that the assessee has shown inflated capital loss to the tune of Rs. 16,44, 724/- by filing ITR in A.Y. 2020-21, and as such case was reopened under the provisions of section 147 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). In the return of income filed by the assessee in response to notice u/s 148 of the Act, assessee has reduced excess short term capital gain amounting to Rs. 16,44,724/- and as such Assessing Officer has not drawn any adverse inference and proposed to initiate penalty proceedings u/s 270A of the Act for under reporting of income and computed total loss at Rs. 69,59,277/-.
4. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal, who has allowed the appeal filed by the assessee. Feeling aggrieved with the impugned order passed by the Ld. CIT(A), Revenue department has come up before the Tribunal by way of filing the present appeal. At the same time the assessee also come up before the Tribunal by way of cross objection that appeal filed by the Revenue is not maintainable.
5. We have heard Ld. ARs for the assessee and Ld. DR for the Revenue and perused the record available on file.
6. Bare perusal of the impugned order passed by Ld. CIT(A) goes to prove that Ld. CIT(A) has decided the issue in favour of the assessee in accordance with law by holding that interest paid by the assessee qua the loan availed by the assessee for the purpose of allotment of shares is to be added to the cost as claimed by the assessee and as such interest of Rs. 16,44,724/- is allowable as part of the acquisition. Operative part of the findings of Ld. CIT(A) are extracted as under:-
“4.3 Regarding Ground No. 2 Disallowance of Interest of Rs.16,44,724/- from Cost of Acquisition:
(i) During the appellate proceedings, the appellant contested that the appellant applied for IPO of SBI Cards for Rs.60 crore, financed primarily by a loan from MotilalOswalFinvest Ltd. The shares actually allotted were worth Rs.2,58,50,445/- and the balance was refunded and loan repaid together with interest of Rs. 16,44,724/-. The interest was incurred solely for acquisition of shares; therefore, it forms part of the cost u/s 48. In the decision of ITAT Mumbai in the case of Krishnamurthy Thagarajan v. ACIT and Neville Tuli v. DCIT has held that expenditure directly linked to acquisition of capital asset is includible in cost of acquisition.
(ii) I have carefully considered the assessment order, submissions and legal position. From the submission and material placed on record by the appellant, it is evident that the loan was taken specifically and exclusively for the purpose of applying in the IPO. The interest liability arose only because of the funds utilised for allotment of shares. The shares were allotted proportionately and the loan was repaid out of refund proceeds along with interest. There is a clear, proximate and direct nexus between the borrowing (and interest) and the acquisition of shares. Judicial precedents cited by the appellant consistently hold that interest paid for acquiring a capital asset forms part of its actual cost, unless prohibited by law. Section 48 allows deduction of expenditure “incurred wholly and exclusively in connection with the transfer” as well as “cost of acquisition”. Courts have interpreted “cost of acquisition” to include interest paid for acquisition funding. The AO’s view that the interest cannot be added to cost is therefore not sustainable. On merits, the interest of Rs. 16,44,724/- is allowable as part of cost of acquisition. The short-term capital loss declared by the appellant is therefore correct and deleted in appeal.”
7. So on merits, we find no illegality or perversity in the impugned order passed by Ld. CIT(A), hence the appeal filed by Revenue is liable to be dismissed on merits. At the same time, appeal filed by the Revenue is not maintainable in view of Circular No. 09/2024 dated 17.09.2024 issued by CBDT having come under low tax effect category, Ld. DR for the Revenue was also fairly conceded that this case does not fall under any exception to the notification no. 09/2024 (supra). In view of the matter, the appeal filed by the Revenue is hereby dismissed and Cross objection filed by the assessee are allowed.
8. Resultantly, the appeals filed by the Revenue is dismissed and Cross Objection filed by the assessee are allowed.
Order pronounced in the open court on 03-09-2026.
