TMI Blog2005 (5) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the income of the assessee. Revenue admits this. The question is whether the expenditure need to be allowed in the relevant previous year itself; or it should be delayed till the completion of the project when the income is recognized from the said project. So there is no dispute on the basic question that the expenditure is revenue in nature. Finance cost is also generally treated as an expenditure falling under this category. Therefore, in the Accounting Standard it has been suggested that in such cases, where the expenditure could not be attributed to a particular activity carried on by the assessee, the same may be allowed as a period cost. This issue of identity between the borrowed funds and the project works carried on by the assessee is one of the main thrust of arguments advanced by the learned counsel appearing for the assessee. It is basically a question of fact. As argued by the learned Commissioner, it may not be altogether impossible to work out the quantum of borrowed funds utilized for a project if the accounts are maintained by the assessee in such a befitting manner. Such an attribution can be made, may be at the cost of a cumbersome exercise. There is a poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, and, therefore, has to be allowed as expenditure in the year in which it was incurred or accrued. The assessee relied on the decision of the Bombay High Court in the case of CIT v. V.S. Dempo Co. (P.) Ltd. [1996] 131 CTR (Bom.) 203 and also on the decision of the ITAT, Bangalore Bench in the case of K. Raheja Development Corpn. v. Dy. CIT [IT Appeal No. 240 (Bang.) of 1997, dated 22-9-1997]. The explanation offered by the assessee was not found favour with the assessing authority. The assessing authority referred to another assessment in the case of S.K. Estates Pvt. Ltd. which, according to the assessing authority, belonged to assessee s own group. The Assessing Officer observed that in the case of M/s. S.K. Estates Pvt. Ltd. assessment for the assessment year 1986-87 was completed by treating the finance cost as part of the total project cost to be carried forward from year to year till the completion of the project and no deduction was allowed on yearly basis. The Assessing Officer observed that the said assessment was upheld by ITAT Mumbai Bench "A" in S.K. Estates (P.) Ltd. v. Asstt. CIT [1997] 60 ITD 621 . The assessing authority observed that while passing the said order, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p firms, it is having interest income and other service charges and, therefore, it is not possible to hold that the borrowed funds were exclusively attributable to the business of developing properties. In view of the above discussion, the CIT(A) accepted the contention of the assessee and deleted the disallowance of Rs. 94,70,835. It is against the above that the revenue has come in appeal before us. 5. The only ground raised by the revenue in this appeal is that the CIT(A) has erred in deleting the disallowance of interest of Rs. 94,70,835 which was treated by the assessing authority as incurred on capital account in respect of incomplete projects and, therefore, liable to be capitalized. 6. Smt. Anuradha Bhatia, the learned Commissioner of Income-tax, appeared for the revenue and argued the case at length. She submitted that there is no dispute on the fact that the assessee is following the project completion method for recognizing its income arising out of the development projects. The assessee-company is not declaring any income on year basis. Therefore, as an inevitable consequence, the expenditure incurred for the projects also need to be deferred and postponed till completi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailed borrowings not for any particular business line or not in respect of any particular project pursued by the assessee-company during the relevant previous year. The borrowings are availed by the assessee company as a whole for the purpose of utilizing them in various business activities carried on by it. There is no identity between a particular borrowing and a particular line of business. A particular borrowing cannot be connected to a particular source of income in which the assessee was carrying on business. As long as the identity of the borrowings vis-a-vis the application of funds in the different line of business/projects is not possible, as in the case of the assessee, there is no basis in coming to a conclusion that the interest attributable to the loans should be apportioned amongst the various business activities of the assessee and the portion attributable to the construction activity should be deferred and made a part of the work-in-progress to defer the interest expenditure till completion of the project. It is very fundamental that the interest as such should be identified with a particular project. The development of projects undertaken by the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued by the Institute of Chartered Accountants of India. He referred particularly to paragraph 8.2 of the Accounting Standard where it has been stated that costs not specifically attributable to any contract incurred by the contractor before a contract is secured are usually treated as expenses of the period in which they are incurred. However, if costs attributable to securing the contract can be separately identified and either the contract has been secured or there is a clear indication that the contract will be obtained, the costs are sometimes treated as applicable to the contract and are deferred. He also invited our attention to paragraph 8.4 of the Accounting Standard where costs incurred by a contractor have been divided into three categories. The third category is that where the costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. In such cases, which also include finance costs, the expenditure need to be treated as period costs and to be allowed in computing the income of the assessee on yearly basis. The learned senior counsel, therefore, contended that the method followed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital borrowed for the purpose of the business or profession is to be deducted as an expenditure. The learned senior counsel submitted that the purpose for which the borrowed capital was deployed is immaterial in considering the allowability of interest on the said loan as an item of expenditure. The only condition to be satisfied is that the borrowed funds must be utilized for the purposes of the business or profession carried on by the assessee. As far as the present case is concerned, the assessee was carrying on the business of construction of projects besides other lines of business. There is no dispute on the fact that the funds were borrowed for the purpose of the business carried on by the assessee. The assessee has satisfied the condition laid down in section 36(1)( iii ) and, therefore, without any hesitation the order of the CIT(A) on this point need to be upheld as it is strictly in accordance with the law provided in the statute. 13. Smt. Anuradha Bhatia, the learned Commissioner, stated in her reply that the issue raised in this appeal cannot be decided on the basis of the judgment of the Bombay High Court rendered in the case of Lokhandwala Construction Industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1988-89, the Tribunal has taken the same view in ITA No. 8995/Bom./1991, dated December 10, 1998 by holding that the method followed by the assessee was in conformity with the Accounting Standard-7. He, therefore, submitted that he has rightly placed reliance on the decision of Lokhandwala Construction Industries Ltd. s case ( supra ). 16. We heard both sides in detail and considered the rival submissions. As stated by the learned Commissioner, Smt. Anuradha Bhatia, the Bombay High Court in the case of Lokhandwala Construction Industries Ltd. ( supra ) has not considered exactly the same question which is involved in the impugned present appeal. In the said case decided by the Bombay High Court, the issue was whether the interest amount of Rs. 14,09,92 was to be allowed as a revenue expenditure or to be treated as capital expenditure and added to work-in-progress. Even though the question arose out of almost similar circumstances, the issue actually considered by the High Court was within the confined limit of section 36(1)( iii ) of the Act. Relying on the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and Bombay High Court in Calico Dyeing Printing W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. It is basically a question of fact. As argued by the learned Commissioner, it may not be altogether impossible to work out the quantum of borrowed funds utilized for a project if the accounts are maintained by the assessee in such a befitting manner. Such an attribution can be made, may be at the cost of a cumbersome exercise. There is a point in the argument of the revenue that such expenditure should be deferred till the completion of the project. 18. But it has to be seen that the various Benches of the Tribunal has taken a view in favour of the assessee on the above point. That ITAT, Bangalore Bench in the case of K. Raheja Development Corporation v. Dy CIT [IT Appeal No. 240 (Bang.) of 1997, dated 22-9-1997] has held that where there is no direct nexus between the utilization of the interest bearing loan funds with the work-in-progress in construction activity, the finance charge in the form of interest need to be allowed as a period cost. The reference filed by the department against the above decision of the Bangalore Tribunal has been rejected by the Karnataka High Court through its order dated 8-11-2000 in Civil Petition No. 832/2000/(IT). In the case of Asstt. CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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