D.b. Income Tax Appeal v. M/S Aditya Propcon Pvt. Ltd., A

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 309 / 2017Pr. 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 AY 2011-12 ----Respondent _____________________________________________________ For Appellant(s) : Mr.Daksh Pareek for Mr.Sameer JainFor Respondent(s) : Ms. Archana for Mr. Sanjay Jhanwar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYASOrder 07/11/2017 1.By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal hasdismissed 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 circumstancesof the case and in law, the Hon’ble ITAT wasjustified in holding that the provision of expensesof Rs.30,36,540/- calculated on an estimate basisis allowable to the assessee, merely because theactual expenditure incurred in future years ismore than the expenses estimated by theassessee wile making the provision? 2.Whether on the facts and circumstances of thecase, the assessee can claim as interestexpenditure of Rs.3,24,92,621/- as businessexpenditure which is neither in consonance ofmethod of accounting nor the practice/accountingpolicy followed by the assessee.” 3.Counsel for the appellant has taken us to the order ofAO as well as he is praying that the issue is covered by the decision of this Court in the case of D.B. Income Tax Appeal No.82/2014, Commissioner of Income Tax, Jaipur-II Vs. M/s. AdityaPropcon (P) Ltd. Pushp Enclave, Pratap Nagar, Sector-5, Jaipur, decided on 10.10.2017 which reads as under:- “1. In all these appeals common question of law andfacts are involved hence they are decided by thiscommon judgment. 2. In appeal No.164/2017, the application(21970/2017) for amending the substantial questionof law is allowed. 3. The said appeal (164/2017) has not been admittedwhich is now admitted on the following amendedsubstantial question of law:- “Whether on the facts and in circumstancesof the case, the assessee can claim asinterest expenditure of Rs.2,32,13,786/- asbusiness expenditure which is neither inconsonance of method of accounting northe practice/accounting policy followed bythe assessee?” of the case, the assessee can claim asinterest expenditure of Rs.2,32,13,786/- asbusiness expenditure which is neither inconsonance of method of accounting northe practice/accounting policy followed bythe assessee?” 4. By way of these appeals, the appellant has assailedthe judgment and order of the Tribunal wherebyTribunal has dismissed the appeal of the departmentand confirmed the order of CIT(A). 5. This court while admitting the appeals framedfollowing substantial question of law:- 5.1 Appeal 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(3 of 11) of accounting northe practice/accounting policy followed bythe assessee?” 5.2 Appeal 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 neither inconsonance of method of accounting northe practice/accounting policy followed by the assessee.” 5. This court while admitting the appeals framedfollowing substantial question of law:- 5.1 Appeal 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(3 of 11) of accounting northe practice/accounting policy followed bythe assessee?” 5.2 Appeal 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 neither inconsonance of method of accounting northe practice/accounting policy followed by the assessee.” 6. The facts of the case are that the assessee hassold 15973 sq. ft. of area out of total 89966 sq.ft. saleable area. The AO computed cost of goodssold at Rs.33588773/- against Rs.38485063claimed by the assessee. The amount ofdifference of Rs.4896290/- was added in the totalincome. Further the AO made addition ofRs.1420327/- on account of estimatedexpenditure incurred on the goods sold as theassessee did not furnish any details in respect ofexpenses of Rs.80 lacs claimed by him. The AOmade addition of Rs.37369323/- on account ofinterest cost for project -2 in the value ofinventory by applying AS-16. 7. Counsel for the appellant has taken us to theorder of AO wherein it has been observed asunder:- “4.4 I have gone through the reply ofthe assessee. 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 thespecific provisions contained inthe Income-tax Act, 1961 withrespect to valuation of the (4 of11) inventoriesi.e. Section 145A, hence, sameis reproduced below:- “145A. Method of accounting in certaincases Notwithstanding anything to thecontrary contained in section 145,- (a) the valuation of purchase and saleof goods and inventory for the purposesof determining the income chargeableunder the head “Profits and gains ofbusiness or profession” 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 the assessee. Now question comes what isthe method of valuing the inventoryemployed by the Assessee? Schedule 9attached to the Balance sheet containssignificant accounting policies andrelevant policies employed by theassessee with respect to the valuation ofinventories as follows:- A. ACCOUNTING POLICIES & PRACTICES The financial statements are preparedon……… Sales Revenue, Related cost andInventory Valuation (a) Revenue is recognized….. (b) Stock of land, Land development isvalued at cost. Cost comprises of thosecost that relates directly to a specificproject of cost that can be attributed tothe project activity in general and canbe allocated to specific projects.” It shows that assessee is consistentlyvaluing inventories at cost and furtherthe term cost also includes the costattributed to the project in general andcan be allocated to specific project.Further, while valuing the inventory ofProject-1, Assesse has included theinterest cost also which confirms thatAssessee is following the method asstated in the Schedule 9 as (5 of 11) discussed hereinbefore.However, while valuing the inventory ofProject-2, the policy laid down has notbeen adhered to, therefore, valuation ofProject-2 is neither according toAssessee’s own accounting policies noraccording to the policy adopted forProject-1, hence, not according to therequirement of Section 145A of theIncometax Act, It shows that assessee is consistentlyvaluing inventories at cost and furtherthe term cost also includes the costattributed to the project in general andcan be allocated to specific project.Further, while valuing the inventory ofProject-1, Assesse has included theinterest cost also which confirms thatAssessee is following the method asstated in the Schedule 9 as (5 of 11) discussed hereinbefore.However, while valuing the inventory ofProject-2, the policy laid down has notbeen adhered to, therefore, valuation ofProject-2 is neither according toAssessee’s own accounting policies noraccording to the policy adopted forProject-1, hence, not according to therequirement of Section 145A of theIncometax Act, However, to deal with the reply of theAssessee, wherein, Accounting Standard2 and Accounting Standard 16 issued bythe Institute of Chartered Accountantsof India have been discussed. B. The AS-2 deals with the valuation ofinventory and it says that interest costis usually not included in the value ofinventory. It is important to note thatsaid AS-2 use the word “Usually” meansit does not bar the inclusion of interestcost to the value of inventory. Further, itcan be included 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 readyreference:- “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 ofqualifying assets are manufacturingplants, power generation facilities,inventories that require a substantialperiod of time to bring them to asaleable condition, and investmentproperties. Other investments, andthose inventories that are routinelymanufactured or otherwise produced inlarge quantities on a repetitive basisover a short period of time, are notqualifying assets. Assets that are readyfor their intended use or sale whenacquired also are not qualifying assets.” Para 10 of AS-16:- To the extent thatfunds are borrowed specifically forpurpose of obtaining a qualifying asset,the amount of borrowing costs eligiblefor capitalization on that asset should bedetermined as the (6 of 11) actual borrowing costsincurred on that borrowing during theperiod less any income on thetemporaryinvestmentofthoseborrowings.” Commencement of Capitalization Para-14:-TheCapitalizationof borrowing costs as part of the cost of aqualifying asset should commence whenall the following conditions are satisfied: (a) expenditure for the acquisition,construction or production of aqualifying asset is being incurred; (b) Borrowing costs are being incurred;and (c) Activities that are necessary toprepare the asset for its intended use orsale are in progress.” “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 priorto the commencement of physicalconstruction, such as the activitiesassociated with obtaining permits priorto the 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 arecapitalized during the period in whichactivities related to the development arebeing undertaken. However, borrowingcosts incurred while land acquired forbuilding purposes is held without anyassociated development activity do notqualify for capitalization.” 8. He contended that CIT(A) has committed seriouserror in observing as under:- 8. He contended that CIT(A) has committed seriouserror in observing as under:- “It was contended by the Revenue thatthe ITAT had grossly erred in law aswell as in facts while holding that therevised AS-2 (7 of 11) issued by the ICAI was mandatory forchartered accountants for finalisation ofaccounts but it was not mandatory forthe Department. It was argued by theRevenue that since the assessee hadvalued its stores/inventories on the costor market price, whichever was less, therefore, it could not be now valued onrealisation value. That apart, it wasfurther submitted by the Revenue thatthe assessee had valued thousands ofitems at 5 percent of the costirrespective of the year of purchase orthe condition of the item, therefore, theAssessing Officer had committed noerror in disallowing the amount ofRs.68,59,108 written off as obsoletestores and claimed in the profit and lossaccount under the head “Plant andmachinery repairs”. The assessee onthe other hand argued that the practiceof writing down the inventories belowcost to net realisable value wasconsistent with the view that the assetsshould not be carried in excess ofamount to be realised from their sale oruse. It was submitted that the assesseehad valued its inventory which wereentirely rusted, non-moving andunusableonaccountofitsobsolescence/damage of deteriorationat cost or realisation value, whicheverwas lower. The Hon’ble ITAT after dueexamination of the material on recordhad arrived at the categorical findingthat the stores which were valued bythe assessee at Rs.3.5 Lakhs or partlyconsumed in subsequent years atRs.2.08 Lakhs and remaining portionwas sold at Rs.3.46 Lakhs and,accordingly, the value of the storescame to Rs.6.54 Lakhs as against thevalue estimated by the assessee at Rs.3.59 lakhs. Thus, keeping in view, theafore-saidfactualposition,thevaluation of the stores at 10 percent ofthe cost made by the Commissioner ofIncome-tax (Appeals) confirmed by theIncome-tax (8 of 11) Appellate Tribunal could not be faultedwith. The Hon’ble Rajasthan High Courtheld that as per the provisions ofsection 145A of the Act of 1961, theincome from business under the head “Profits and gains from business” had tobe computed in accordance withmethod of accounting regularlyemployed by the assessee. Similarly,section 145A of the Act provided thatthe inventory would be valued inaccordance with the method ofaccounting employed by the assessee,therefore, if the method of valuationadopted by the assessee wasrecognised method, then, the samecould not be rejected on the groundthat the net realisable value/marketvalue had been determined on the basisof certain estimate. It is to be noticedthat the Assessing while holding thatthe inventories valued by the assesseeat 5 percent was excessive, did not careto estimate the net realisable value ofthe store and proceeded to disallow theamount of Rs.68,59,108 written off asobsolete stores and claimed in profitand loss account altogether. It hadcome on record that the assessee hadvalued the inventories such as nut, bolt,glass fuse, bearing, bushes, lock pin,pipe, screw etc., which were rustednon-moving and unusable on account ofobsolescence/damage/deterioration byefflux of time at cost and net realisationvalue, whichever was lower. It had alsocome on record that these items were5-6 years old. It was also not disputedthat the assessee had made therequisite efforts to dispose of the same.That apart, some of these items wereactually sold in subsequent years at aprice 8.43 percent of the cost. Thus,considering the totality of the facts andcircumstances, it was held by theHon’ble Jurisdictional High Court thatthe value of the stores inventorywritten down taken at 10 percent of thecost by (9 of 11) theCommissioner of Income-tax (Appeals),could not be faulted with. Further noulterior motive can be imputed to the appellant company to hold that claim ofinterest was not genuine. Even if it hadbeen capitalized then it was allowable inthe year of sale. I therefore direct theAO to allow the deduction of Rs.3,73,69,323/- on account of interestU/s 36(1)(iii) to the appellant company.This ground of appeal is allowed.” 9. He further contended that the tribunal hasalso committed error in observing as under:- “18. We have heard the parties andperused the material available onrecord and also the orders of theauthorities below. We find that thebooks of accounts of the assessee areaudited and the ld. Auditor has notgiven any adverse comment for notfollowing the accounting standardswhich are mandatory for a companyu/s 211 of the Companies Act, 1956.We also find that there is n disputethat the said land is part of inventoryfor the assessee and is not a capitalasset. The assessee has producedevidences of no increase in the landprice and AO has not brought anythingon record to support that the assesseewould be able to realise the interestcost incurred over and above the costof purchase of land. In suchcircumstances,asperbasicaccounting principles of valuation ofinventory that the inventory is to bevalued at cost or net realisable valuewhich-everislower.Theuncontroverted evidences show thatthere is no buyer of the similar land insame vicinity at the price which islesser than the price paid by theassessee and therefore, we areconvinced with the CIT(A) and the A/Rhas stated that the assessee has nottaken up the project activity even till31.3.2013. The delay in project is foreconomicreasons.Insuchcircumstances, (10 of 11) the AS-16 does not allow capitalisationofinterestcostalongwith the cost of land. It allowscapitalisation of interest cost onlyduring normally period of constructionand not for inordinate delay in theconstruction activity due to adversemarket forces. There is specificrequirement of AS-16, not tocapitalise the interest cost along withthe cost of land if it is held withoutany associated development activity.Accordingly, the accounting treatmentof the interest cost is perfectly in linewith the Accounting Standards. Wefurther find that despite anyaccounting treatment, the interest oncapital borrowed for the purpose ofbusiness is allowable u/s 36(1) (iii). Aproviso has been inserted w.e.f.1.4.2004 which reads as under:- “Provided that any amount of theinterest paid, in respect of capitalborrowed for acquisition of an assetfor extension of existing business orprofession (whether capitalised in thebooks of account or not); for anyperiod beginning from the date onwhich the capital was borrowed foracquisition of the asset till the date onwhich such asset was first put to use,shall not be allowed as deduction”. The proviso specifically referred to theinterest paid in respect of capitalborrowed for acquisition of any assetfor extension of existing business. Thepresent case is of acquisition of landfor its development in course of realestate activity of the assessee.Assessee is about to complete oneproject and to continue the activitieshas purchased another land todevelopanotherproject.Theargument of the ld. DR that theproviso would apply to the assessee’scase cannot be accepted. We are ofthe considered opinion that thepurchase of inventory is continuation The proviso specifically referred to theinterest paid in respect of capitalborrowed for acquisition of any assetfor extension of existing business. Thepresent case is of acquisition of landfor its development in course of realestate activity of the assessee.Assessee is about to complete oneproject and to continue the activitieshas purchased another land todevelopanotherproject.Theargument of the ld. DR that theproviso would apply to the assessee’scase cannot be accepted. We are ofthe considered opinion that thepurchase of inventory is continuation of the same business activity inroutine course and cannot be termedas extension of the business activity.The proviso has been inserted todisentitle claim of interest on fundsborrowed for acquisition of capitalassets for the period upto the asset isput to use. The term ‘put to use’ hereapplies to capital asset only because acapital assets is held to facilitate thebusiness (11 of 11) activity and sometimes it needs to beprepared after its acquisition for beingused to facilitate the business activity.As against this, purchase and holdingof inventory item itself is a businessactivity. In absence of this proviso,section 36(1) (iii) earlier entitledassessee to claim interest in respectof capital assets, even for the periodduring which they were underconstruction as held in variousjudgments pointed out by the ld. ARof the assessee. The interest wasfoundallowabledespiteitscapitalization in the books of accountsin the judgments. We are therefore, ofthe opinion that the interest on fundsborrowed to purchase land which ispart of inventory of the assesseecompany is an allowable deduction u/s36(1)(iii). We accordingly reject thisground of the departmental appealalso.” 10. Counsel for the respondent has supportedthe order of the authorities and contendedthat the both the authorities have rightly heldin favour of the assessee inasmuch as even ifthe contentions which have been advanced bythe department, no tax liability has beenreduced or there is any case of evasion of tax. 11. We are in complete agreement with theview taken by both the authorities i.e. CIT(A)and tribunal. 12. In that view of the matter, the issue isanswered 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. Hence the appeal is dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J.