Pranav Kirit Inamdar Vs DCIT (ITAT Mumbai)
Summary: The Income Tax Appellate Tribunal (ITAT), Mumbai Bench “C”, held that interest expenditure incurred on borrowed funds utilised for acquiring Non-Convertible Debentures (NCDs) constitutes part of their cost of acquisition under Section 48 of the Income-tax Act, 1961. The Tribunal allowed the appeal filed by Pranav Kirit Inamdar for Assessment Year 2020-21 and directed the Assessing Officer to capitalise interest expenditure of ₹73,36,433 while recomputing capital gains arising from the sale of NCDs.
The assessee had filed his return declaring total income of ₹1,81,53,547. During scrutiny assessment, the Assessing Officer observed that the assessee had borrowed funds from IIFL Wealth and Sankhya Financial Services to invest in NCDs. The subsequent sale of these debentures resulted in short-term capital gains of ₹88,51,632. However, the assessee claimed interest expenditure of ₹73,36,433 as a deduction under Section 57 against income from other sources. The Assessing Officer rejected the claim on the ground that the expenditure had no direct nexus with income taxable under that head. Consequently, the assessed income increased to ₹2,54,89,980. The CIT(A), NFAC, upheld the disallowance and also rejected the alternative claim for capitalisation of interest.
Before the Tribunal, the assessee submitted that the loans were obtained specifically for applying for allotment of NCDs and were repaid immediately after their sale. The assessee relied on documentary evidence showing the dates of borrowings, allotment, sale and repayment to establish the direct relationship between the borrowed funds and acquisition of the debentures. Alternatively, the assessee argued that interest incurred for acquiring NCDs should be treated as part of their acquisition cost under Section 48. Reliance was placed on the Madras High Court judgment in CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad), which recognised capitalisation of interest incurred on borrowings used to acquire shares.
The Tribunal accepted the alternative contention. Following the Madras High Court’s decision in Trishul Investments Ltd., it held that interest paid on borrowings utilised for acquiring NCDs formed part of the actual cost of acquisition. Accordingly, the Assessing Officer was directed to add ₹73,36,433 to the acquisition cost of the NCDs and recompute the capital gains. The assessee’s appeal was allowed. The decision grants relief through capitalisation under Section 48 rather than through a deduction under Section 57.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by assessee is directed against order of ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide No. ITBA/NFAC/S/250/2025-26/1082738336 dated 18.11.2025 arising from assessment order passed by the Assessment Unit of the Income-tax Department under section 143(3) r.w.s. 144B of Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) for assessment year 2020-21.
2. Grounds of appeal raised by the assessee are as under:
1. The National Faceless Appeal Centre erred in confirming the disallowance of interest of Rs. 73,36,433/- incurred by Appellant under section 57(iii) and consequential set off against income under the head short-term capital gains.
2. Without prejudice to the above, NFAC failed to appreciate that interest of Rs. 73,36,433/- ought to be treated as cost of acquisition of Non-Convertible Debentures and ought to have been considered for calculating income under the head Capital gains.
3. Without prejudice to the above, NFAC failed to appreciate that activity of purchase and sale of Non-Convertible Debentures should have been treated as business, and interest of Rs. 73,36,433/- ought to be treated as business expenditure and should have been allowed as deduction under the head Profits and gains of business or profession.”
3. Brief facts of the case are that assessee filed his return of income on 15.12.2020, reporting total income at Rs. 1,81,53,547/-. Case was selected for scrutiny and assessment was completed u/s 143(3) read with section 144B on 13.09.2022, wherein ld. Assessing Officer assessed total income at Rs. 2,54,89,980/- after making disallowance of interest expenditure amounting to Rs. 73,36,433/- claimed u/s 57. During assessment proceedings, ld. Assessing Officer noted that assessee had taken loans from M/s IIFL Wealth and Sankhya Financial Services and utilized said borrowed funds to invest in Non-Convertible Debentures (NCDs). Sale of these NCDs resulted in short-term capital gains of Rs. 88,51,632/-, which assessee offered under the head Capital Gains. However, interest payment of Rs. 73,36,433/- paid towards borrowings was claimed as deduction u/s 57 under Income from Other Sources. Ld. Assessing Officer disallowed deduction holding that there was no direct nexus between interest expenditure and income earned under Other Sources. Aggrieved, assessee went in appeal before ld. CIT(A), who confirmed disallowance holding that interest expenditure could not be allowed u/s 57 nor could it be added to cost of acquisition. Aggrieved, assessee is now in appeal before the Tribunal.
4. We have heard rival submissions and perused material available on record. Ld. Counsel for assessee submitted that loans were availed specifically for the purpose of making applications for allotment of NCDs and were repaid immediately after sale of NCDs, thereby establishing direct nexus. He contended that without borrowed funds, assessee could not have acquired NCDs and earned capital gains. Statement showing date of allotment of NCDs, date of sale, date of availing loans and date of repayment of loans is placed on record and perused. This statement shows that loans were availed just before the date of making application of NCDs and were repaid immediately after sale of the NCDs, establishing direct nexus. Without prejudice to claim under section 57, ld. Counsel strongly argued that interest paid for acquisition of NCDs partakes character of cost of acquisition and therefore ought to be added to cost of acquisition under section 48 for computing capital gains, relying on jurisdictional decisions and judgments of Hon’ble Madras High Court in CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad). On other hand, ld. Sr. DR supported orders of authorities below.
5. We have carefully considered rival stands and examined judicial precedents cited. Controversy before us relates to allowability of interest expenditure of Rs. 73,36,433/- incurred on funds borrowed for acquiring NCDs, either as deduction u/s 57 or alternatively as part of cost of acquisition while computing capital gains under section 48. We find that identical issue regarding capitalization of interest paid on borrowed funds utilized for acquiring securities/shares as cost of acquisition came up before Hon’ble Madras High Court in the case of CIT v. Trishul Investments Ltd. (supra) wherein it was held that interest paid for acquisition of shares partakes character of cost of asset and therefore, same is rightly capitalised along with cost of acquisition for purpose of computing capital gains.
5.1. Factual matrix of the present case not in dispute, respectfully following judicial precedent laid down by Hon’ble Madras High Court, we hold that interest paid on borrowings utilized for acquiring NCDs constitutes part of actual cost of acquisition and is to be taken into account towards cost of acquisition under section 48. Accordingly, we direct ld. Assessing Officer to add interest expenditure of Rs. 73,36,433/- to cost of acquisition of NCDs and re-compute capital gains accordingly. Ground raised by assessee is allowed.
6. In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 14 October, 2026
