Interest Paid on Borrowings for Acquiring Non-Convertible

Interest Paid on Borrowings for Acquiring Non-Convertible Debentures Forms Part of Cost of Acquisition Under Section 48

Issue

Whether interest paid on borrowings utilized to acquire Non-Convertible Debentures (NCDs) is allowable as a deduction under Section 57 or constitutes a part of the actual cost of acquisition under Section 48 for computing capital gains.

Facts

Assessment Year: The case pertains to Assessment Year 2020-21.
Borrowing & Investment: The assessee borrowed funds from IIFL Wealth and Sankhya Financial Services and utilized them to acquire Non-Convertible Debentures (NCDs).
Capital Gains Reporting: Upon selling the NCDs, the assessee reported short-term capital gains of approximately ₹88.51 lakhs under the head “Capital Gains.”
Deduction Claim: The assessee paid interest amounting to approximately ₹73.36 lakhs on the borrowings and initially claimed it as a deduction under Section 57 under the head “Income from Other Sources.”
AO’s Order: The Assessing Officer disallowed the interest deduction claimed under Section 57.

Decision

Inclusion in Cost of Acquisition (In Favour of Assessee): Interest paid on borrowings utilized for acquiring NCDs constitutes a part of the actual cost of acquisition and must be taken into account under Section 48. [Held, yes]
Re-computation Direction (In Favour of Assessee): The Assessing Officer is directed to add the interest expenditure of ₹73.36 lakhs to the cost of acquisition of the NCDs and re-compute the capital gains accordingly. [Held, yes]

Key Takeaways

Capitalization of Interest for Capital Assets: Interest paid on funds borrowed to acquire capital assets (such as NCDs) forms an intrinsic part of the cost of acquisition.
Head of Income Reallocation: Even if a taxpayer erroneously claims borrowing interest under “Income from Other Sources” (Section 57), the expenditure is legally absorbable under “Capital Gains” via Section 48 as an addition to the cost of acquisition.

IN THE ITAT MUMBAI BENCH ‘C’

Pranav Kirit Inamdar

Deputy Commissioner of Income-tax

SAKTIJIT DEY, Vice President
and Girish Agrawal, Accountant Member

IT Appeal No. 1 (MUM) of 2026
[Assessment year 2020-21]

OCTOBER 14, 2026

Rahul Sarda, Adv. for the Appellant. Ajay Soneji, Sr. DR for the Respondent.

ORDER

Girish Agrawal, Accountant Member.- 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:

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.

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 NonConvertible Debentures and ought to have been considered for calculating income under the head Capital gains.

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 (Madras). 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 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.