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TMI Blog2017 (11) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... owable despite its capitalization in the books of accounts in the judgments. We are therefore, of the opinion that 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). Thus we are in complete agreement with the view above taken by both the authorities i.e. CIT(A) and tribunal. - Decided against revenue - D.B. Income Tax Appeal No. 82 / 2014, D.B. Income Tax Appeal No. 163 / 2017, D.B. Income Tax Appeal No. 164 / 2017 - - - Dated:- 10-10-2017 - K. S. Jhaveri And Dinesh Chandra Somani, JJ. For the Appellant : Mr. Prateek Kedawat for Mr. R.B. Mathur Mr. Daksh Pareek for Mr. Sameer Jain For the Respondent : Mr. Sanjay Jhanwar with Ms. Archana JUDGMENT 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. In appeal No.164/2017, the application (21970/2017) for amending the substantial question of law is allowed. 3. The said appeal (164/2017) has not been admitted which is now admitted on the following amended substantial question of law:- Whether on the facts and in circumstances of the case, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head Profits and gains of business or profession shall be- (I) in accordance with the method of accounting regularly employed by the assessee; and According to the said Section, inventory must be valued in accordance with the method regularly employed by the assessee. Now question comes what is the method of valuing the inventory employed by the Assessee? Schedule 9 attached to the Balance sheet contains significant accounting policies and relevant policies employed by the assessee with respect to the valuation of inventories as follows:- A. ACCOUNTING POLICIES PRACTICES The financial statements are prepared on Sales Revenue, Related cost and Inventory Valuation (a) Revenue is recognized .. (b) Stock of land, Land development is valued at cost. Cost comprises of those cost that relates directly to a specific project of cost that can be attributed to the project activity in general and can be allocated to specific projects. It shows that assessee is consistently valuing inventories at cost and further the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) expenditure for the acquisition, construction or production of a qualifying asset is being incurred; (b) Borrowing costs are being incurred; and (c) Activities that are necessary to prepare the asset for its intended use or sale are in progress. Para-16:- The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as the activities associated with obtaining permits prior to the commencement of the physical construction. However, such activities exclude the holding of an asset when no production or development that changes the asset s condition is taking place. For example, borrowing costs incurred while land is under development are capitalized during the period in which activities related to the development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilarly, section 145A of the Act provided that the inventory would be valued in accordance with the method of accounting employed by the assessee, therefore, if the method of valuation adopted by the assessee was recognised method, then, the same could not be rejected on the ground that the net realisable value/market value had been determined on the basis of certain estimate. It is to be noticed that the Assessing while holding that the inventories valued by the assessee at 5 percent was excessive, did not care to estimate the net realisable value of the store and proceeded to disallow the amount of ₹ 68,59,108 written off as obsolete stores and claimed in profit and loss account altogether. It had come on record that the assessee had valued the inventories such as nut, bolt, glass fuse, bearing, bushes, lock pin, pipe, screw etc., which were rusted non-moving and unusable on account of obsolescence/damage/deterioration by efflux of time at cost and net realisation value, whichever was lower. It had also come on record that these items were 5-6 years old. It was also not disputed that the assessee had made the requisite efforts to dispose of the same. That apart, some of thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest cost along with the cost of land if it is held without any associated development activity. Accordingly, the accounting treatment of the interest cost is perfectly in line with the Accounting Standards. We further find that despite any accounting treatment, the interest on capital borrowed for the purpose of business is allowable u/s 36(1) (iii). A proviso has been inserted w.e.f. 1.4.2004 which reads as under:- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction . The proviso specifically referred to the interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. The present case is of acquisition of land for its development in course of real estate activity of the assessee. Assessee is about to complete one project and to continue the activities has purchased another ..... X X X X Extracts X X X X X X X X Extracts X X X X
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