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TMI Blog2017 (11) TMI 1657X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 - D.B. Income Tax Appeal No. 309/2017 - - - Dated:- 7-11-2017 - Mr. K.S. Jhaveri And Mr. Vijay Kumar Vyas JJ. For the Appellant(s) : Mr.Daksh Pareek for Mr.Sameer Jain For the Respondent(s) : Ms. Archana for Mr. Sanjay Jhanwar ORDER 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal preferred by the department. 2. Learned counsel for the appellant framed the following substantial questions of law : 1. Whether on the facts and in the circumstances of the case and in law, the Hon ble ITAT was justified in holding that the provision of expenses of ₹ 30,36,540/- calculated on an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. 6. The facts of the case are that the assessee has sold 15973 sq. ft. of area out of total 89966 sq. ft. saleable area. The AO computed cost of goods sold at ₹ 33588773/- against ₹ 38485063 claimed by the assessee. The amount of difference of ₹ 4896290/- was added in the total income. Further the AO made addition of ₹ 1420327/- on account of estimated expenditure incurred on the goods sold as the assessee did not furnish any details in respect of expenses of ₹ 80 lacs claimed by him. The AO made addition of ₹ 37369323/- on account of interest cost for project -2 in the value of inventory by applying AS-16. 7. Counsel for the appellant has taken us to the order of AO wherein it has been observed as under:- 4.4 I have gone through the reply of the assessee. Reply of the assessee is examined in the light of method of accounting regularly adopted by it and Accounting Standard-2 and 16. a. I would like to discuss first the specific provisions contained in the Income-tax Act, 1961 with respect to valuation of the (4 of 11) [ITA-82/2014] inventories i.e. Section 145A, hence, same is reproduced below:- 145A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the inclusion of interest cost to the value of inventory. Further, it can be included if other factors allows it. In the reference, AS-16 addressing the issue of borrowing cost (Interest) is important and relevant Para s are reproduced as follows for ready reference:- A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Para 5 of AS-16:- Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require a substantial period of time to bring them to a saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. Para 10 of AS-16:- To the extent that funds are borrowed specifically for purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset should be determined as the (6 of 11) [ITA- 82/2014] actual borrowing costs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s . The assessee on the other hand argued that the practice of writing down the inventories below cost to net realisable value was consistent with the view that the assets should not be carried in excess of amount to be realised from their sale or use. It was submitted that the assessee had valued its inventory which were entirely rusted, non-moving and unusable on account of its obsolescence/damage of deterioration at cost or realisation value, whichever was lower. The Hon ble ITAT after due examination of the material on record had arrived at the categorical finding that the stores which were valued by the assessee at ₹ 3.5 Lakhs or partly consumed in subsequent years at ₹ 2.08 Lakhs and remaining portion was sold at ₹ 3.46 Lakhs and, accordingly, the value of the stores came to ₹ 6.54 Lakhs as against the value estimated by the assessee at ₹ 3.59 lakhs. Thus, keeping in view, the afore-said factual position, the valuation of the stores at 10 percent of the cost made by the Commissioner of Income-tax (Appeals) confirmed by the Income-tax (8 of 11) [ITA-82/2014] Appellate Tribunal could not be faulted with. The Hon ble Rajasthan High Court held that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low. We find that the books of accounts of the assessee are audited and the ld. 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. We also find that there is n dispute that the said land is part of inventory for the assessee and is not a capital asset. The assessee has produced evidences of no increase in the land price and AO has not brought anything on record to support that the assessee would be able to realise the interest cost incurred over and above the cost of purchase of land. In such circumstances, as per basic accounting principles of valuation of inventory that the inventory is to be valued at cost or net realisable value which -ever is lower. The uncontroverted evidences show that there is no buyer of the similar land in same vicinity at the price which is lesser than the price paid by the assessee and therefore, we are convinced with the CIT(A) and the A/R has stated that the assessee has not taken up the project activity even till 31.3.2013. The delay in project is for economic reasons. In such circumstances, (10 of 11) [ITA- 82/2014] the AS-16 does not allow c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 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). We accordingly reject this ground of the departmental appeal also. 10. Counsel for the respondent has supported the order of the authorities and contended that the both the authorities have rightly held in favour of the assessee inasmuch as even if the contentions which have been advanced by the department, no tax liability has been reduced or there is any case of evasion of tax. 11. We are in complete agreement with the view taken by both the authorities i.e. CIT(A) and tribunal. 12. In that view of the matter, the issue is answered in favour of the assessee and against the department. 13. The appeals stand dismissed. 4. In that view of the matter, no substantial question of law arises. H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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