2014 (2) TMI 578 - AT - Income Tax

Deletion made on excess cost claimed on sales made - Admission of additional evidences Held that - There is no finding of the assessing officer that any of the information regarding financial statement or books of account was no provided by the assessee - it is wrong to consider the calculation as additional evidences - The CIT(A) has to his satisfaction, verified the calculations which he found has correct there was no merit in the arguments of revenue that verification of computation of allocation of cost, which has not been done by the AO is not within the jurisdiction of the CIT(A) Decided against Revenue. Deletion made on proportionate cost of area sold Held that - The assessee started booking sale of certain units of which possessions have been handed over to customers - the assessee made a systematic estimation of cost still to be incurred which is very near to the expenditure actually incurred at the later stage - the amount of cost still to be incurred for the units of which sale has been booked should be reduced in computing the Profit realizable from sale of those units - The assessee has made a reasonable estimate of entire cost and its proportion to the units already sold - The expenditure finally incurred is higher than the estimate made by the assessee there was no infirmity in the order passed by the CIT(A) Decided against Revenue. Deletion of amount including interest cost Held that - The books of accounts of the assessee are audited and the Auditor has not given any adverse comment for not following the accounting standards which are mandatory for a company u/s 211 of the Companies Act, 1956 - the inventory of land cannot be valued at a price higher than it is bought - the AS-16 does not allow capitalisation of interest cost alongwith the cost of land - 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 - purchase and holding of inventory item itself is a business activity - In absence of this proviso, section 36(1)(iii) earlier entitled assessees to claim interest in respect of capital assets, even for the period during which they were under construction - thus, the 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) Decided against Revenue.

Issues Involved:
1. Deletion of addition of Rs. 48,96,290/- for excess cost claimed in respect of sales.
2. Admission of additional evidences.
3. Deletion of addition of Rs. 14,20,327/- for proportionate cost of area sold.
4. Deletion of addition of Rs. 3,73,69,323/- for including interest costs in the value of inventory.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 48,96,290/-
The AO noticed discrepancies in the cost of goods sold by the assessee, claiming an excess cost of Rs. 48,96,290/-. The AO calculated the cost of goods sold at Rs. 3,35,88,773/- against the assessee's claim of Rs. 3,84,85,063/-. The CIT(A) found the AO's pro-rata method unsuitable, especially for land cost allocation, and justified the assessee's weighted average method based on selling prices. This method was deemed rational and aligned with the revenue recognition principle. The CIT(A) relied on precedents, including DCIT vs Mahesh Edible Oil Ind. Ltd. and Investment Ltd Vs CIT, which support consistent accounting methods unless proven incorrect.

Issue 2: Admission of Additional Evidences
The department challenged the admission of additional evidences regarding cost computation. The CIT(A) verified the assessee's allocation method, which was part of the financial statements and not new evidence. The CIT(A) found the AO's calculations flawed and upheld the assessee's method, dismissing the department's appeal.

Issue 3: Deletion of Addition of Rs. 14,20,327/-
The AO added Rs. 14,20,327/- for future estimated construction costs, doubting the scientific basis of the estimate. The CIT(A) found the estimate reasonable and aligned with the accrual and matching concepts. The CIT(A) referenced Bharat Earthmovers Vs CIT and Calcutta Co Ltd Vs CIT, which allow deduction of business liabilities incurred in the accounting year. The CIT(A) noted that the actual future expenditure exceeded the estimate, justifying the provision and deleting the addition.

Issue 4: Deletion of Addition of Rs. 3,73,69,323/-
The AO included interest costs of Rs. 3,73,69,323/- in the inventory value of Project-2, arguing it was a direct cost. The CIT(A) disagreed, noting the land was stock-in-trade, not a capital asset, and the interest was deductible under section 36(1)(iii). The CIT(A) cited several precedents, including CIT Vs Alembic Glass Industries Ltd., supporting the deduction of interest for business purposes. The CIT(A) also referenced AS-2 and AS-16, which usually exclude interest from inventory costs unless it results in future economic benefits. Given the project's indefinite postponement, the CIT(A) found no basis to capitalize the interest and deleted the addition.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds, confirming the deletion of the additions and the admission of additional evidences. The judgment emphasized the importance of consistent accounting methods, reasonable estimation of future costs, and proper application of accounting standards and tax provisions.

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