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TMI Blog2016 (5) TMI 1462X X X X Extracts X X X X X X X X Extracts X X X X ..... 93 and offered its income on its completion in the year 2001. The land at Badlapur was purchased in the year 1988-1990. No construction activity was undertaken in respect of land at Badlapur. The expenses incurred on fencing of land, interest on funds borrowed and utilized for purchase of said land etc. were capitalized with the cost of land. The assessee had never undertaken any activity of the construction on this land at Badlapur, since the land was acquired in the year 1988-1990. Interest incurred on the funds borrowed for acquiring it and other cost incurred for its fencing etc. were added in its cost and shown as work-in-progress in the balance sheet year after year. Assessee had not claimed these expenses as revenue expenses during any of the preceding years in which these were incurred. During the year under consideration the assessee sold the land and gain was offered as capital gain, however, the AO did not accept assessee's contention and asked the assessee as to why the gains should not be treated as income from business. It was replied that in the year 1998 there was a dispute between the partners and assessee firm was facing difficulty in completing the project at Lal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tories, as the same are not relating to bringing the inventories to their present location and conditions. Our attention was also invited to the 'Chart showing year wise details of Capitalisation of Badlapur Land', wherein the assessee has purchased land in A.Y.1988-89 to 1990-91 for an aggregate consideration of Rs. 10,91,016/- [i.e.Rs.1,42,350 + Rs. 3,19,454 + Rs. 6,29,212]. Over the period i.e. from A.Y.1988-89 to 2009-10 the assessee has capitalized expenses aggregating to Rs. 99,01,310/- [i.e.Rs.1,09,92,326 - Rs. 10,91,016] to cost of Badlapur Land which mainly comprises of Interest Cost and other expenses like Salary, bank charges etc.. As per ld. AR even though the assessee has shown the Badlapur Land as WIP (i.e. inventory) in its books of accounts, however, the assessee has capitalized the interest cost to the WIP (i.e. inventory) which is contrary to the accounting treatment prescribed for inventories in AS-2. Thus, the capitalization of interest cost to Badlapur land is in line with the treatment for a Capital Asset i.e. investment. 6. In view of the above, it was argued by ld. AR that the AO also at para 6.3(g) on page 9 has incorrectly observed that the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as on 31-3-1998. The treatment given by the assessee in its books of account fully supports its action of treating Lalbaug land as capital asset, insofar as interest incurred on the funds borrowed for purchase of land, cost incurred on its fencing and expenses incurred on its safety was every time capitalized and not claimed as business expenditure. Even though Badlapur land was erroneously shown as WIP in assessee's books of accounts however, the accounting treatment given to Badlapur land in its books of accounts, is that of a Capital Asset. 9. From the record, we found that the assessee has capitalized interest cost in the cost of Badlapur land and this conduct of the assessee is in consonance with the treatment for a Capital Asset. It is a settled legal position that interest in respect of a Capital Asset is required to be added to the cost of Investment/Capital Asset. In this respect reliance can be placed upon the decision of Hon'ble Delhi High Court in the case of CIT Vs. MithIesh Kumari [92 ITR 9] wherein the hon'ble High Court has held that the interest paid on amount borrowed for purchase of open plot of land forms part of cost of acquisition, by observing at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon'ble Bombay High Court in the case of Lokhandwala Construction (supra) and other decisions. e) The Badlapur Land was treated as Capital Asset by the assessee through MOU dt.4.04.1998 entered into between the partners of the assessee firm which was executed on Rs. 500 stamp paper and is duly notarized. The AO did not accept the MOU solely on the basis of doubts, surmise and conjecture, without any basis. f) The nomenclature given to Badlapur Land as WIP in books of accounts is an inadvertent mistake on the part of the assessee, solely due to the reason that the books of accounts of the assessee firm are maintained by the partner's themselves year after year who are not qualified accountant's. Services of qualified Chartered Accountant's were not availed of by the assessee from last several years. Even the assessment proceedings were attended by one of the partner in earlier year without assistance of any qualified chartered accountant. 12. From the conduct of the assessee, surrounding circumstances and treatment of the assessee given to Badlapur Land it is amply clear that the Badlapur Land is a Capital Asset i.e. Investment in the hand of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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