2023 (7) TMI 367 - AT - Income Tax

Disallowances of interest and capitalizing in inventory of work in progress - scope of matching concept allowance to set off the interest expenses as and when the revenue is recognized for the purposes of taxation - expenditure incurred and claimed in the nature of interest is for completion of the project (on which no income has been offered for tax during the year) or for buying a capital asset or for any other business activity - HELD THAT - Under the matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In the instant case, it is an admitted position that the assessee has not offered revenue from the project to tax on the grounds that it is the first year of operations and less than 15% of the project is completed. Therefore, applying the matching principle, the interest incurred needs to be transferred to WIP and would be liable to be claimed in the year that revenue is earned We deem it fit to remand the matter to the file of the A.O. and the assessee is directed to provide the details of interest that has been capitalized in work in progress (WIP) and the interest that has been deducted in the Profit and Loss Account. After receiving the assessee s submission, the A.O has to examine the nature of interest expense and verify why only Rs. 93,13,592/- forms part of WIP while the remaining interest is claimed as an expense. If the expense is incurred for any other business activity, then it would be allowable in the year under consideration. The A.O is directed to verify the nature of the interest expense and accordingly pass an order in line with the observations/directions made above. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues involved:
The judgment involves the disallowance of interest claimed in Profit and Loss Account and capitalizing it in inventory of work-in-progress for assessment years 2012-13 and 2013-14.

I.T.A. No. 3153/DEL/2018 (A.Y. 2012-13):
The assessee contested the disallowance of interest and the relevance of Accounting Standards for allowability of interest expenses. The CIT(A) upheld the disallowance. The main contention was the recognition of revenue from the project and the applicability of tax accounting standards. The AO disallowed interest under sections 92CA(3) and 36(1)(iii), leading to a total income determination. The CIT(A) deleted the addition under section 92CA(3) but sustained the disallowance of interest. The assessee argued that revenue recognition was not mandatory at the project's initial stage and expenses were for business purposes. The DR argued that interest claimed was for earning revenue. The Tribunal remanded the matter to the AO to determine the nature of interest expense and its allowability based on revenue recognition.

I.T.A. No. 7197/DEL/2017 (A.Y. 2013-14):
Similar grounds were raised for AY 2013-14. The AO assessed the loss and made additions based on Accounting Standard-7. The assessee challenged the additions and interest levied under section 234B. The Tribunal remanded this matter to the AO as well, mirroring the directions given for AY 2012-13.

The Tribunal allowed both appeals for statistical purposes, directing a re-examination of the interest expenses in light of revenue recognition principles for the respective assessment years.