2017 (11) TMI 1657 - HC - Income Tax

Claim as interest expenditure as business expenditure - allowable deduction u/s 36(1)(iii) - interest on funds borrowed to purchase land which is part of inventory of the assessee company - Held that - As decided in M/S. ADITYA PROPCON (P) LTD 2017 (11) TMI 392 - RAJASTHAN HIGH COURT the purchase of inventory is continuation of the same business activity in routine course and cannot be termed as extension of the business activity. The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for the period upto the asset is put to use. The term put to use here applies to capital asset only because a capital assets is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate the business activity. As against this, purchase and holding of inventory item itself is a business activity. In absence of this proviso, section 36(1) (iii) earlier entitled assessee to claim interest in respect of capital assets, even for the period during which they were under construction as held in various judgments pointed out by the ld. AR of the assessee. The interest was found allowable despite its capitalization in the books of accounts in the judgments. Thus interest on funds borrowed to purchase land which is part of inventory of the assessee company is an allowable deduction u/s 36(1)(iii). Thus we are in complete agreement with the view above taken by both the authorities i.e. CIT(A) and tribunal. - Decided against revenue

Summary

Issues Involved:
1. Allowability of provision of expenses calculated on an estimate basis.
2. Allowability of interest expenditure as business expenditure not in consonance with the method of accounting or accounting policy followed by the assessee.

Issue 1: Allowability of Provision of Expenses Calculated on an Estimate Basis

The appellant challenged the Tribunal's decision which dismissed the department's appeal and allowed the provision of expenses of ?30,36,540/- calculated on an estimate basis. The Tribunal held that the provision is allowable to the assessee because the actual expenditure incurred in future years exceeded the estimated expenses. The appellant argued that this decision was not justified on the facts and circumstances of the case.

Issue 2: Allowability of Interest Expenditure as Business Expenditure

The appellant also contested the Tribunal's decision that allowed the assessee to claim interest expenditure of ?3,24,92,621/- as business expenditure. The appellant argued that this claim was not in consonance with the method of accounting or the accounting policy followed by the assessee. The Tribunal's decision was based on the precedent set by the Rajasthan High Court in the case of Commissioner of Income Tax, Jaipur-II vs. M/s. Aditya Propcon (P) Ltd., which involved similar issues.

Detailed Analysis:

Provision of Expenses:

The Tribunal held that the provision of expenses calculated on an estimate basis is allowable if the actual expenditure incurred in future years is more than the estimated expenses. The appellant argued that this approach was unjustified, but the Tribunal's decision was upheld by the court, which agreed with the Tribunal's reasoning.

Interest Expenditure:

The Tribunal and the CIT(A) both concluded that the interest expenditure claimed by the assessee was allowable under Section 36(1)(iii) of the Income Tax Act. The court referred to the precedent set by the Rajasthan High Court in a similar case, where it was held that the interest on funds borrowed for the purpose of business is allowable, even if it is not in consonance with the method of accounting or the accounting policy followed by the assessee.

The court noted that the assessee's method of valuing inventory, including interest cost, was consistent with its accounting policies and AS-2 and AS-16 issued by the Institute of Chartered Accountants of India. The court also observed that the AO did not bring any evidence to contradict the assessee's claim that there was no increase in the land price, and thus, the interest cost should be included in the inventory valuation.

The court agreed with the Tribunal's observation that the interest cost is allowable as business expenditure under Section 36(1)(iii), as the proviso to this section specifically refers to capital assets and not to inventory, which is part of the business activity. The court concluded that the purchase and holding of inventory is a continuation of the same business activity and not an extension of the business.

Conclusion:

The court dismissed the appeals, agreeing with the Tribunal and CIT(A) that the provision of expenses calculated on an estimate basis and the interest expenditure claimed by the assessee were allowable. The court found no substantial question of law arising from the appellant's arguments and upheld the decisions in favor of the assessee.