Commissioner Of Income Tax, Jaipur-Ii, Jaipur v. M/S. Aditya Propcon (P) Ltd. A

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR (1)D.B. Income Tax Appeal No. 82 / 2014 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Aditya Propcon (P) Ltd. A-2, Pushp Enclave, Pratap Nagar,Sector-5, Jaipur. ----Respondent (2)D.B. Income Tax Appeal No. 163 / 2017 Pr. Commissioner of Income Tax, Jaipur-3, Statue Circle, C-Scheme, Jaipur. ----Appellant Versus M/s. Aditya Propcon Pvt. Ltd., A-2, Pushp Enclave, Pratap Nagar, Sector-5, Jaipur. A.Y. 2010-2011. ----Respondent (2)D.B. Income Tax Appeal No. 164 / 2017Pr. Commissioner of Income Tax, Jaipur-3, Statute Circle, C-Scheme, Jaipur ----Appellant Versus M/s Aditya Propcon Pvt. Ltd., A-2, Pushp Enclave, Pratap Nagar, Sector-5, Jaipur, AY 2008-09 ----Respondent _____________________________________________________ For Appellant(s) : Mr. Prateek Kedawat for Mr. R.B. Mathur Mr. Daksh Pareek for Mr. Sameer Jain For Respondent(s) : Mr. Sanjay Jhanwar with Ms. Archana _____________________________________________________ HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE DINESH CHANDRA SOMANI 10/10/2017 Judgment 1.In all these appeals common question of law and facts areinvolved hence they are decided by this common judgment. 2.In appeal No.164/2017, the application (21970/2017) foramending the substantial question of law is allowed. 3.The said appeal (164/2017) has not been admitted which isnow admitted on the following amended substantial question of law:- “Whether on the facts and incircumstances of the case, the assesseecan claim as interest expenditure ofRs.2,32,13,786/-asbusinessexpenditure which is neither inconsonance of method of accounting northe practice/accounting policy followedby the assessee?” 4.By way of these appeals, the appellant has assailed thejudgment and order of the Tribunal whereby Tribunal hasdismissed the appeal of the department and confirmed the orderof CIT(A). 5.This court while admitting the appeals framed followingsubstantial question of law:- 5.1Appeal No.82/2014 admitted on 17.1.2017 “Whether on the facts and incircumstances of the case, the assesseecan claim as interest expenditure ofRs.37369323/- as business expenditurewhich is neither in consonance of method of accounting nor the practice/accountingpolicy followed by the assessee?” 5.2Appeal No.163/2017 admitted on 24.7.2017 “Whether on the facts and circumstancesof the case, the assessee can claim asinterest expenditure of Rs.2,32,13,786/-as business expenditure which is neitherin consonance of method of accountingnor the practice/accounting policyfollowed by the assessee.” 6.The facts of the case are that the assessee has sold 15973sq. ft. of area out of total 89966 sq. ft. saleable area. The AOcomputed cost of goods sold at Rs.33588773/- againstRs.38485063 claimed by the assessee. The amount of differenceof Rs.4896290/- was added in the total income. Further the AOmade addition of Rs.1420327/- on account of estimatedexpenditure incurred on the goods sold as the assessee did notfurnish any details in respect of expenses of Rs.80 lacs claimed byhim. The AO made addition of Rs.37369323/- on account ofinterest 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 AOwherein it has been observed as under:- “4.4 I have gone through the reply of theassessee. Reply of the assessee isexamined in the light of method ofaccounting regularly adopted by it andAccounting Standard-2 and 16. a. I would like to discuss first the specificprovisions contained in the Income-tax Act,1961 with respect to valuation of the inventories i.e. Section 145A, hence, sameis reproduced below:- “145A. Method of accounting in certaincases Notwithstanding anything to the contrarycontained in section 145,- AS-16. 7.Counsel for the appellant has taken us to the order of AOwherein it has been observed as under:- “4.4 I have gone through the reply of theassessee. Reply of the assessee isexamined in the light of method ofaccounting regularly adopted by it andAccounting Standard-2 and 16. a. I would like to discuss first the specificprovisions contained in the Income-tax Act,1961 with respect to valuation of the inventories i.e. Section 145A, hence, sameis reproduced below:- “145A. Method of accounting in certaincases Notwithstanding anything to the contrarycontained in section 145,- (a) the valuation of purchase and sale ofgoods and inventory for the purposes ofdetermining the income chargeable underthe head “Profits and gains of business orprofession” shall be- (I) in accordance with the method ofaccounting regularly employed by theassessee; and “ According to the said Section, inventorymust be valued in accordance with themethod regularly employed by theassessee. Now question comes what is themethod of valuing the inventory employedby the Assessee? Schedule 9 attached tothe Balance sheet contains significantaccounting policies and relevant policiesemployed by the assessee with respect tothe valuation of inventories as follows:- A. ACCOUNTING POLICIES & PRACTICES The financial statements are preparedon……… Sales Revenue, Related cost and InventoryValuation (a) Revenue is recognized….. (b) Stock of land, Land development isvalued at cost. Cost comprises of those costthat relates directly to a specific project ofcost that can be attributed to the projectactivity in general and can be allocated tospecific projects.” It shows that assessee is consistentlyvaluing inventories at cost and further theterm cost also includes the cost attributedto the project in general and can beallocated to specific project. Further, whilevaluing the inventory of Project-1, Assessehas included the interest cost also whichconfirms that Assessee is following themethod as stated in the Schedule 9 as discussed hereinbefore. However, whilevaluing the inventory of Project-2, thepolicy laid down has not been adhered to,therefore, valuation of Project-2 is neitheraccording to Assessee’s own accountingpolicies nor according to the policy adoptedfor Project-1, hence, not according to therequirement of Section 145A of the Income-tax Act, However, to deal with the reply of theAssessee, wherein, Accounting Standard 2and Accounting Standard 16 issued by theInstitute of Chartered Accountants of Indiahave been discussed. B. The AS-2 deals with the valuation ofinventory and it says that interest cost isusually not included in the value ofinventory. It is important to note that saidAS-2 use the word “Usually” means it doesnot bar the inclusion of interest cost to thevalue of inventory. Further, it can beincluded if other factors allows it. In the reference, AS-16 addressing theissue of borrowing cost (Interest) isimportant and relevant Para’s arereproduced as follows for ready reference:- “A qualifying asset is an asset thatnecessarily takes a substantial period oftime to get ready for its intended use orsale.” Para 5 of AS-16:- Examples of qualifyingassets are manufacturing plants, powergeneration facilities, inventories that requirea substantial period of time to bring themto a saleable condition, and investmentproperties. Other investments, and thoseinventories that are routinely manufacturedor otherwise produced in large quantities ona repetitive basis over a short period oftime, are not qualifying assets. Assets thatare ready for their intended use or salewhen acquired also are not qualifyingassets.” “A qualifying asset is an asset thatnecessarily takes a substantial period oftime to get ready for its intended use orsale.” Para 5 of AS-16:- Examples of qualifyingassets are manufacturing plants, powergeneration facilities, inventories that requirea substantial period of time to bring themto a saleable condition, and investmentproperties. Other investments, and thoseinventories that are routinely manufacturedor otherwise produced in large quantities ona repetitive basis over a short period oftime, are not qualifying assets. Assets thatare ready for their intended use or salewhen acquired also are not qualifyingassets.” Para 10 of AS-16:- To the extent that fundsare borrowed specifically for purpose ofobtaining a qualifying asset, the amount ofborrowing costs eligible for capitalization onthat asset should be determined as the actual borrowing costs incurred on thatborrowing during the period less anyincome on the temporary investment ofthose borrowings.” Commencement of Capitalization Para-14:- The Capitalization of borrowingcosts as part of the cost of a qualifyingasset should commence when all thefollowing conditions are satisfied: (a) expenditure for the acquisition,construction or production of a qualifyingasset is being incurred; (b) Borrowing costs are being incurred; and (c) Activities that are necessary to preparethe asset for its intended use or sale are inprogress.” “Para-16:- The activities necessary toprepare the asset for its intended use orsale encompass more than the physicalconstruction of the asset. They includetechnical and administrative work prior tothecommencementofphysicalconstruction, such as the activitiesassociated with obtaining permits prior tothe commencement of the physicalconstruction. However, such activitiesexclude the holding of an asset when noproduction or development that changesthe asset’s condition is taking place. Forexample, borrowing costs incurred whileland is under development are capitalizedduring the period in which activities relatedto the development are being undertaken.However, borrowing costs incurred whileland acquired for building purposes is heldwithout any associated developmentactivity do not qualify for capitalization.” 8.He contended that CIT(A) has committed serious error in observing as under:- “It was contended by the Revenue that theITAT had grossly erred in law as well as infacts while holding that the revised AS-2 8.He contended that CIT(A) has committed serious error in observing as under:- “It was contended by the Revenue that theITAT had grossly erred in law as well as infacts while holding that the revised AS-2 issued by the ICAI was mandatory forchartered accountants for finalisation ofaccounts but it was not mandatory for theDepartment. It was argued by the Revenuethat since the assessee had valued itsstores/inventories on the cost or marketprice, whichever was less, therefore, itcould not be now valued on realisationvalue. That apart, it was further submittedby the Revenue that the assessee hadvalued thousands of items at 5 percent ofthe cost irrespective of the year ofpurchase or the condition of the item,therefore, the Assessing Officer hadcommitted no error in disallowing theamount of Rs.68,59,108 written off asobsolete stores and claimed in the profitand loss account under the head “Plant andmachinery repairs”. The assessee on theother hand argued that the practice ofwriting down the inventories below cost tonet realisable value was consistent with theview that the assets should not be carriedin excess of amount to be realised fromtheir sale or use. It was submitted that theassessee had valued its inventory whichwere entirely rusted, non-moving andunusableonaccountofitsobsolescence/damage of deterioration atcost or realisation value, whichever waslower. The Hon’ble ITAT after dueexamination of the material on record hadarrived at the categorical finding that thestores which were valued by the assesseeat Rs.3.5 Lakhs or partly consumed insubsequent years at Rs.2.08 Lakhs andremaining portion was sold at Rs.3.46Lakhs and, accordingly, the value of thestores came to Rs.6.54 Lakhs as againstthe value estimated by the assessee at Rs.3.59 lakhs. Thus, keeping in view, theafore-said factual position, the valuation ofthe stores at 10 percent of the cost madeby the Commissioner of Income-tax(Appeals) confirmed by the Income-tax Appellate Tribunal could not be faultedwith. The Hon’ble Rajasthan High Courtheld that as per the provisions of section145A of the Act of 1961, the income frombusiness under the head “Profits and gainsfrom business” had to be computed inaccordance with method of accountingregularly employed by the assessee.Similarly, section 145A of the Act providedthat the inventory would be valued inaccordance with the method of accountingemployed by the assessee, therefore, if themethod of valuation adopted by theassessee was recognised method, then, thesame could not be rejected on the groundthat the net realisable value/market valuehad been determined on the basis ofcertain estimate. It is to be noticed thatthe Assessing while holding that theinventories valued by the assessee at 5percent was excessive, did not care toestimate the net realisable value of thestore and proceeded to disallow theamount of Rs.68,59,108 written off asobsolete stores and claimed in profit andloss account altogether. It had come onrecord that the assessee had valued theinventories such as nut, bolt, glass fuse,bearing, bushes, lock pin, pipe, screw etc.,which were rusted non-moving andunusableonaccountofobsolescence/damage/deteriorationbyefflux of time at cost and net realisationvalue, whichever was lower. It had alsocome on record that these items were 5-6years old. It was also not disputed that theassessee had made the requisite efforts todispose of the same. That apart, some ofthese items were actually sold insubsequent years at a price 8.43 percent ofthe cost. Thus, considering the totality ofthe facts and circumstances, it was held bythe Hon’ble Jurisdictional High Court thatthe value of the stores inventory writtendown taken at 10 percent of the cost by theCommissionerofIncome-tax(Appeals), could not be faulted with.Further no ulterior motive can be imputedto the appellant company to hold thatclaim of interest was not genuine. Even if ithad been capitalized then it was allowablein the year of sale. I therefore direct theAO to allow the deduction of Rs.3,73,69,323/- on account of interest U/s36(1)(iii) to the appellant company. Thisground of appeal is allowed.” 9.He further contended that the tribunal has also committederror in observing as under:- “18. We have heard the parties andperused the material available on recordand also the orders of the authoritiesbelow. We find that the books of accountsof the assessee are audited and the ld.Auditor has not given any adversecomment for not following the accountingstandards which are mandatory for acompany u/s 211 of the Companies Act,1956. We also find that there is n disputethat the said land is part of inventory forthe assessee and is not a capital asset. Theassessee has produced evidences of noincrease in the land price and AO has notbrought anything on record to support thatthe assessee would be able to realise theinterest cost incurred over and above thecost of purchase of land. In suchcircumstances, as per basic accountingprinciples of valuation of inventory that theinventory is to be valued at cost or netrealisable value which -ever is lower. Theuncontroverted evidences show that thereis no buyer of the similar land in samevicinity at the price which is lesser than theprice paid by the assessee and therefore,we are convinced with the CIT(A) and theA/R has stated that the assessee has nottaken up the project activity even till31.3.2013. The delay in project is foreconomic reasons. In such circumstances, the AS-16 does not allow capitalisation ofinterest cost alongwith the cost of land. Itallows capitalisation of interest cost onlyduring normally period of construction andnot for inordinate delay in the constructionactivity due to adverse market forces.There is specific requirement of AS-16, notto capitalise the interest cost along withthe cost of land if it is held without anyassociateddevelopmentactivity.Accordingly, the accounting treatment ofthe interest cost is perfectly in line with theAccounting Standards. We further find thatdespite any accounting treatment, theinterest on capital borrowed for thepurpose 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 interestpaid, in respect of capital borrowed foracquisition of an asset for extension ofexisting business or profession (whethercapitalised in the books of account or not);for any period beginning from the date onwhich the capital was borrowed foracquisition of the asset till the date onwhich such asset was first put to use, shallnot be allowed as deduction”. The proviso specifically referred to theinterest paid in respect of capital borrowedfor acquisition of any asset for extension ofexisting business. The present case is ofacquisition of land for its development incourse of real estate activity of theassessee. Assessee is about to completeone project and to continue the activitieshas purchased another land to developanother project. The argument of the ld.DR that the proviso would apply to theassessee’s case cannot be accepted. Weare of the considered opinion that thepurchase of inventory is continuation of thesame business activity in routine courseand cannot be termed as extension of thebusiness activity. The proviso has beeninserted to disentitle claim of interest onfunds borrowed for acquisition of capitalassets for the period upto the asset is putto use. The term ‘put to use’ here appliesto capital asset only because a capitalassets is held to facilitate the business activity and sometimes it needs to beprepared after its acquisition for beingused to facilitate the business activity. Asagainst this, purchase and holding ofinventory item itself is a business activity.In absence of this proviso, section 36(1)(iii) earlier entitled assessee to claiminterest in respect of capital assets, evenfor the period during which they wereunder construction as held in variousjudgments pointed out by the ld. AR of theassessee. The interest was found allowabledespite its capitalization in the books ofaccounts in the judgments. We aretherefore, of the opinion that the intereston funds borrowed to purchase land whichis part of inventory of the assesseecompany is an allowable deduction u/s36(1)(iii). We accordingly reject thisground of the departmental appeal also.” 10.Counsel for the respondent has supported the order of theauthorities and contended that the both the authorities haverightly held in favour of the assessee inasmuch as even if thecontentions which have been advanced by the department, no taxliability has been reduced or there is any case of evasion of tax. 11.We are in complete agreement with the view taken by boththe authorities i.e. CIT(A) and tribunal. 12.In that view of the matter, the issue is answered in favour ofthe assessee and against the department. 13.The appeals stand dismissed. (DINESH CHANDRA SOMANI)J. (K.S.JHAVERI)J. Brijesh 134-135 & 124.