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2013 (1) TMI 891 - AT - Income TaxCapitalisation as a part of Expenses - Assessee company is engaged in the business of commercial construction claimed deduction in respect to administrative expenses, employee's remuneration and interest. AO said that these costs ought to have been also capitalized and, accordingly, the assessee had under-disclosed profit. Assessee explained that the construction to the extent not sold, i.e., on which no profit stands booked yet, represents only the assessee’s work-in-progress (WIP), i.e., stock-in-trade, and not a purchase of any asset/s. In fact, even if it were so, i.e., on capital account, the interest on borrowed capital would be allowable u/s. 36(1)(iii). HELD THAT:- (i) Administrative expenses & Employee's Remuneration - Any cost that adds value thereto, i.e., enables the bringing of the relevant inventory to the stage of its completion and location as at the year-end, is to be taken into account for the purpose. Administrative expenses, as it appears, are only general in nature, and even with regard to the employee’s remuneration, there is nothing to indicate that it represents an element of either direct cost of production or even of production overhead, which only would enable its inclusion as a part of the cost of production/construction. As such, being fixed (period) cost, these stand to be written off to the profit and loss account in the year of being incurred. Entire addition to the returned income is accordingly deleted. ii) Interest Expenditure- Deduction u/s 36 (1)(iii) - Allowed or not? - A project, or part thereof, may be partly sold or even remain unsold for quite some time after its completion. While revenue would stand to be booked only on the part, if any, sold, the interest cost would continue to be incurred on the entire capital, even as no corresponding gain inures in terms of value addition to the project, which stands in fact completed, so as to increase its cost by loading the said cost thereon. It is for these reasons that interest (financing) cost is normally considered as only a period (fixed) cost, and charged to the operating statement for the year in which the same is incurred. Relying on the judgement of COMMISSIONER OF INCOME-TAX VERSUS LOKHANDWALA CONSTRUCTION INDS. LTD. [2003 (1) TMI 93 - BOMBAY HIGH COURT], interest cost is to allowed u/s. 36(1)(iii), irrespective of whether it stands incurred in relation to stock-in-trade or on capital account, as the said section draws no such distinction. Decision in favour of Assessee. Disclosure of Gross Profit - In the verification proceedings u/s.143(3), it was explained that the said project had been completed as at the year-end up to 34%, and that the profit was booked and returned following the project percentage method, disclosing a gross profit of 23% on the cost of production as capitalized during the year - HELD THAT:- Considering the said cost as includable in the project cost may have a direct bearing on the gross profit rate, and which may therefore stand to decline from the reported and accepted rate of 23%, and cannot be presumed be remain as such, i.e., unchanged. Thus, no adjustment to the disclosed gross profit rate, on account of any of three items of expenditure under reference, is required under the given facts and circumstances of the case. Revenue Appeal dismissed.
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