Top Stories Case Digest on Treatment of Capital Investments under Income Tax Capital investments directly impact tax liabilities and benefits under the Income Tax Act, 1961 By Manu Sharma – On December 21, 2024 10:54 am – 9 mins read Capital Investments are utilised by companies to purchase fixed assets. Buildings, Machinery or Land to quote a few. The investments can be either physical or financial. Financial Investments include Shares and Bonds whereas Physical Investments are tangible assets used for the operations of the company. Being a part of equity, capital is the money available for the day-to-day functioning of the company along with other asset classes like properties, bonds and shares. A company accumulates capital, either through borrowing (debt capital) or through issuance of stocks. Capital Investments are essential for companies to acquire fixed assets like buildings, machinery, and land, or to secure financial investments such as shares and bonds. These investments directly impact tax liabilities and benefits under the Income Tax Act, 1961.

Below are some cases that were reported at Taxscan.in regarding investments on capital assets by businesses and treatment of the same. Income from Transferring Capital Asset can’t be deemed as ‘Business Income’ even if Assesse was regularly booking Flats and Selling the same: ITAT Miss Indira Vasanji Shah vs DCIT CITATION:   2017 TAXSCAN (ITAT) 131 The Income Tax Appellate Tribunal (Mumbai) has held that, Income from Capital Asset is ‘Capital Gain’ and not business Income even if Assesse was regularly booking Flats and Selling the same. Any kind of Income from Capital Assets held by the Assessee whether or not connected with his business or profession earned must be treated as capital gain. While allowing the appeal the Tribunal bench comprising of Pawan Singh (Judicial Member) and P.K.Bansal (Vice President) also observed that, the capital derived by the assessee is long term capital gain as the assessee held the right on the asset for more than 36 months. Therefore the order of the CIT(A) and direct the AO to treat the said profit as long term capital gains as returned by the assessee. Assets brought into existence for enduring benefit of business to be treated as Capital Expenditure & not Revenue Expenditure: Karnataka HC M/S. BIOPLUS LIFE SCIENCES PVT. LTD vs THE DEPUTY COMMISSIONER OF INCOME-TAX CITATION:   2020 TAXSCAN (HC) 214 The Karnataka High Court while upholding the order of the tribunal held that asset was brought into existence for the enduring benefit of the business and therefore, the same has to be treated as capital expenditure and not revenue expenditure. The division bench of Justice Alok Aradhe and Justice H.T. Narendra Prasad while noting the circumstances of the case held that an asset was brought into existence for the enduring benefit of the business and therefore, the same has to be treated as capital expenditure. ITAT rightly computed the capital gains by adopting the rate of acquisition at Rs.200:

Karnataka HC grants relief to Intel THE DIRECTOR OF INCOME-TAX vs M/S. INTEL CAPITAL (CAYMAN) CORPORATION CITATION:   2020 TAXSCAN (HC) 154 The Karnataka High Court, while ruling in the favour of the assessee, Intel Capital (Cayman) Corporation held that the ITAT rightly computed the capital gains by adopting the rate of acquisition at Rs.200. The division bench of Justice Alok Aradhe and Justice H.T. Narendra Prasad observed that bonds issued to the petitioner were issued under the FCCB scheme and the conversion price determined on the basis of the price of shares at the Bombay Stock Exchange or National Stock Exchange on the date of conversion of FCBBs into shares. There is no conflict between the provisions of the scheme and the Acts or Rules. Up-Front Fee debited on account of Term Loan for Acquiring Fixed Asset as ‘Plant’ is an allowable Business Expenditure: ITAT M/s. Brace Iron & Steel Pvt. Ltd vs Addl. Commissioner of Income Tax CITATION:   2021 TAXSCAN (ITAT) 287 The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) held that up-front fee debited on account of term loan for acquiring the fixed asset as “Plant” is an allowable business expenditure. The two-member bench of Judicial Member Suchitra Kamble and Accountant Member, R.K.Panda while setting aside the disallowance held that the up-front fee of Rs.1,10,82,175/- debited in the P & L A/c on account of term loan taken by the assessee during the relevant year for acquiring the fixed asset as“Plant” is an allowable business expenditure. Interest of Loans on Plant & Machinery and CWP cannot be capitalised and Disallowed: ITAT The Deputy Commissioner of Income Tax vs M/s GNA Duraparts Ltd CITATION:   2022 TAXSCAN (ITAT) 514 The Income Tax Appellate Tribunal (ITAT), Amritsar Bench consisting of M L Meena, Accountant Member and Anikesh Banerjee, Judicial Member has held that non-capitalisation interest of loan on plant & machinery and Capital Work in Progress (CWP) cannot be capitalised and disallowed under section 36(1)(iii) of Income Tax Act and upheld the order of CIT restricting the disallowance. The Tribunal observed infirmity in the objection of revenue to the impugned orders that CIT(A)’s restricting the disallowance of Rs. 1,19,95,692/- to Rs. 44,55,010/- made on account of non-capitalization of interest on the loan on Plant & Machinery and Rs. 1,66,89,148/- to Rs. 58,58,800/- made on account of non-capitalization of interest expenditure on Capital Work in Progress u/s 36(1)(iii) of the Income Tax Act, 1961.

It was observed that CIT(A) required the assessee to produce copies of bills of machinery u/s 250(4) of the Act, which was also produced during assessment and such documents would not constitute additional evidence. Income Tax: Investment do not lose their ‘Capital’ Nature merely because Purchase was made with an Intention to Resell, rules Calcutta HC GYAN TRADERS LIMITED Vs COMMISSIONER OF INCOME TAX, KOLKATA-II CITATION:   2022 TAXSCAN (HC) 743 In a recent ruling, the Calcutta High Court has held that the capital investment and resale do not lose their capital nature merely because the said investment/purchase of property was made with an intention to resell. Justice T.S. Sivagnanam and Justice Supratim Bhattacharya relied on a catena of decisions and observed that “a transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. Interest Paid on Borrowing by Assessee carrying out Business in Investing in Shares Allowable as Business Expenditure: ITAT RMZ Hotels Private Limited vs NFAC CITATION:   2023 TAXSCAN (ITAT) 604 The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) has recently held that interest paid on borrowing by assessee carrying out business in investing in shares allowable as business expenditure. The bench observed that, the Memorandum of Association of the company is permitted to carry on the business of investment by holding shares also to deal in shares. Amount of Subsidy received towards Investment made in expansion of Industrial unit shall be Characterized as Capital receipt: ITAT Chaitanya Steelshape Private Limited vs ITO CITATION:   2023 TAXSCAN (ITAT) 2037

The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that the amount of subsidy received towards investment made in the expansion of industrial units shall be characterized as capital receipt. The Single-member bench of R.S. Syal (Vice-President) held that the amount of subsidy received by the assessee is towards the investment made in the expansion of its industrial unit under the Package Incentive Scheme 2001. Applying the ‘purpose’ test, it would be characterized as a ‘Capital’ receipt. Further, it is not the case of the Assessing Officer that Explanation 10 to section 43(1) is attracted. Plant and Machinery Held Over 36 Months Deemed Long-Term Capital Assets u/s 2 (42 A) of Income Tax Act: ITAT D.C.I.T vs M/s Claris Lifesciences Limited CITATION:   2024 TAXSCAN (ITAT) 531 The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT) observed that plant and machinery held over 36 months deemed long-term capital assets under Section  2 (42A) of Income Tax Act, 1961. Since, the impugned plant and machinery was depreciable assets and therefore for the purpose of calculating the capital gain in pursuant to the provisions of section 48 and 49 of the Act on the sale of such depreciable assets, it was to be deemed as short-term capital gain in pursuance to the provisions of Section 50 of the Income Tax Act. The provisions of section 50 of the Act clearly specify that gain shall be deemed as short-term on the sale of depreciable assets irrespective of the period of holding provided under Section 2(42A) of the Income Tax Act Expenditure incurred by Addition to Buildings and Electrical Fittings on Leasehold Premises is Capital Expenditure: Kerala HC HOTEL ALLIED TRADES PVT. LTD vs THE ADDITIONAL COMMISSIONER OF INCOME-TAX In a recent decision a division bench of the Kerala High Court ruled that the expenditure incurred by way of addition to buildings and electrical fittings on leasehold premises is capital expenditure and not revenue expenditure. The Court of Dr Justice AK Jayasankaran Nambiar and Justice Syam Kumar VM observed that “If the assessee had in fact a case that the expenditure incurred by it was revenue in nature, then it was for the assessee to produce materials that would clearly demonstrate that the expenditure was revenue in nature. This not having been done at any stage before the First Appellate Authority or the Appellate Tribunal, we see no reason to interfere with the impugned order of the Tribunal which merely endorses the views taken by the said authorities.”

Land not a Capital Asset but a “Work-in-Progress” for Real Estate Company, Expenses to be treated as Revenue Expenditure: ITAT M/s. Kadavanthara Builders Pvt. Ltd vs Income-tax Officer CITATION:   2023 TAXSCAN (ITAT) 1214 The Income Tax Appellate Tribunal (ITAT), Bangalore bench has held that Land is not a Capital Asset but a ‘Work-in-Progress’ for a Real Estate Company. It was also observed that the Expenses incurred in connection with the same shall be treated as Revenue Expenditure. The single-member tribunal bench of Shri Laxmi Prasad Sahu (Accountant Member) held that the lower authorities have taken wrong view that no business activities have been done after the purchase of land and the value appearing under the head W-I-P are capital assets. Investment Allowance claimed u/s 32AC of Income Tax Act towards new asset shall not allowable if assessee already claim depreciation on New Asset: ITAT Bannari Amman Sugars Ltd vs The Dy. Commissioner of Income Tax CITATION:   2023 TAXSCAN (ITAT) 2108 The Income Tax Appellate Tribunal (ITAT) Chennai bench held that investment allowance claimed under Section 32AC of the Income tax Act,1961 towards the new asset should not be allowable if the assessee already claimed depreciation on the new asset. After considering the submissions of both parties the  tribunal observed that  the appellant claims that it has claimed  depreciation for the assessment year 2015-16, but as per the provisions of Section 32A of the Income Tax Act, if assessee claims depreciation in any previous year then to  that extent it could not claim deduction under Section 32AC of the Income Tax Act. Receipts from construction of Plant and Machinery eligible for adjusting against the expenses on Capital Work in Progress: ITAT Matix Fertilizers and Chemicals Ltd vs Commissioner of Income-taxCIT(A) CITATION:   2024 TAXSCAN (ITAT) 433 The Mumbai bench Income Tax Appellate Tribunal (ITAT)  receipts from construction of plant and machinery are eligible for adjusting against the expenses on capital work in progress. The tribunal observed that the Assessing Officer has rejected the contention of the assessee that  interest income is derived from or attributed to the activity of the construction of the project and therefore the same is eligible to be judged against the capital work-in-progress. Receipts from construction of Plant and Machinery Eligible for adjusting against Expenses on Capital Work in Progress: ITAT The Deputy Commissioner of Income Tax vs M/s. Algonomy Software Pvt. Ltd. CITATION:   2024 TAXSCAN (ITAT) 437 The Mumbai bench of the Income Tax Appellate Tribunal (ITAT)  receipts from construction of plant and machinery are eligible for adjusting against the expenses on capital work in progress. The tribunal observed that the Assessing Officer has rejected the contention of the assessee that  interest income is derived from or attributed to the activity of the construction of the project and therefore the same is eligible to be judged against the capital work-in-progress. No Interest Cost cannot be claimed as Business Expenditure when borrowed amount utilized for making Investment in Shares: ITAT directs to recompute STCG from Shares JPR Investments and Trading Private Limited vs Asstt. Commissioner of Income Tax CITATION:   2024 TAXSCAN (ITAT) 462 The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT )  while making directions  to recompute the Short Term Capital Gain( STCG ), held that interest cost can not be claimed as business expenditure when the borrowed amount was utilized for making investment in shares. After analyzing the submission of both parties, the bench comprising Narender Kumar Choudhry, ( Judicial Member ) & I Amarjit Singh, ( Accountant Member ) directs the assessing officer to treat the interest cost of Rs.122,26,476/- as cost of investment made towards purchasing the shares of M/s India Bull Real Estate Ltd. and re-compute the short term capital gain. Expenditure incurred by Addition to Buildings and Electrical Fittings on Leasehold Premises is Capital Expenditure: Kerala HC HOTEL ALLIED TRADES PVT. LTD vs THE ADDITIONAL COMMISSIONER OF INCOME-TAX CITATION:   2024 TAXSCAN (HC) 1207 In a recent decision a division bench of the Kerala High Court ruled that the expenditure incurred by way of addition to buildings and electrical fittings on leasehold premises is capital expenditure and not revenue expenditure. The Court of Dr Justice AK Jayasankaran Nambiar and Justice Syam Kumar VM observed that “If the assessee had in fact a case that the expenditure incurred by it was revenue in nature, then it was for the assessee to produce materials that would clearly demonstrate that the expenditure was revenue in nature. This not having been done at any stage before the First Appellate Authority or the Appellate Tribunal, we see no reason to interfere with the impugned order of the Tribunal which merely endorses the views taken by the said authorities.” Capital Invested to Purchase Shares of ‘Infrastructure Facility’ before June 1998 cannot be included in Total Income: Telangana HC THE COMMISSIONER OF INCOME TAX III vs M/S.V.B.C.FERRO ALLOYS LTD CITATION:   2024 TAXSCAN (HC) 2209 The Telangana High Court in a recent case has held that the capital invested to purchase shares of ‘infrastructure facility’ before June 1998 cannot be included in total income.

The Court viewed that Central Board of Direct Taxes ( CBDT ) press release has clarified that the exemptions available under Section 10(23G) will continue to govern the investments made prior to June 1998. The Division Bench of Justices Sujoy Paul and Namavarapu Rajeshwar Rao held that merely purchasing shares does not contribute to the income of the respondent/assessee. Since it does not count as income, no amount needs to be paid in taxes. Bonus Story – NCLT Amount given by Financial Creditor as Investment for Joint Venture to Corporate Debtor is not Financial Debt under IBC: NCLT The Guwahati Bench of the National Company Law Tribunal ruled that the amount given by financial creditor as investment for joint venture to corporate debtor is not financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). A Two-Member Bench of the Tribunal comprising Satya Ranjan Prasad, Member (Technical) and H.V. Subba Rao, Member (Judicial) observed that “Therefore, it is very clear from the plain reading of the above definition of financial debt as well as the business arrangement between the parties under the above MoU that the above amount of Rs. 3 Crore given by the Financial Creditor to the Corporate Debtor by way of an investment and not towards any loan as rightly argued by the Counsel appearing for the Corporate Debtor and the above amount shall not be considered as a financial debt.”