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2016 (1) TMI 1098 - ITAT PUNE

2016 (1) TMI 1098 - ITAT PUNE - TMI - Addition made on account of disallowance of interest paid on borrowed funds - partial allowance of interest by the CIT(A) as against the total disallowance made by AO under section 36(1)(iii) - Held that:- We find no merit in the orders of authorities below in working out the interest attributable to the loans relatable to 12 projects under construction, has been not allowable as deduction in the hands of assessee. The assessee was following unit sale method .....

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n is to be disallowed in the hands of assessee. We find no merit in the orders of authorities below in this regard.

Where the assessee is engaged in the business of construction and development and the project undertaken by the assessee constitute stock in trade / work-inprogress and are not capital assets owned by the assessee, the proviso to section 36(1)(iii) of the Act do not apply and there is no merit in restricting the deduction on account of interest expenditure on loan availe .....

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im of the assessee in totality, we find no merit in the alternate plea raised by the assessee. Consequently, the grounds of appeal raised by the assessee are allowed and the grounds of appeal raised by the Revenue are dismissed.- Decided in favour of assessee - ITA No.900/PN/2013, ITA No.1147/PN/2013 - Dated:- 29-1-2016 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For the Appellant : S/Shri R.R. Vora and Rajendra Agiwal For the Respondent : Smt. M.S. Verma, CIT and Shri Rajesh Damor ORDER PER .....

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mstances of the case and in law, M/s Kumar Company ( the Appellant ), respectfully craves leave to prefer an appeal against the order dated 2 January 2013 passed by the learned Commissioner of Incometax (Appeals) - III [ CIT(A) ] (received by the Appellant on 1 April 2013) under section 250 of the Income-tax Act, 1961 ( Act ) on the following grounds which are independent and without prejudice to each other: Addition on account of disallowance of interest 1. erred in confirming the addition of & .....

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per the provisions of section 36(1 )(iii) of the Act as incurred for the purpose of business; 4. failed to appreciate the fact that the Appellant has, followed a consistent accounting practice for recording interest expenses, wherein interest were never allocable to a particular project and the same has been accepted in past; 5. failed to appreciate that there is no such concept of qualifying asset and nonqualifying asset (as laid down by ICAI in AS16) in the Income-tax Act and the same cannot .....

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e aforesaid grounds of appeal, or otherwise, may thus be granted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon ble Tribunal to decide this appeal according to law. 4. The Revenue in ITA No. 1147/PN/2013 has raised the following grounds of appeal:- 1) The CIT (A) has erred in law and on facts by partly allowing interest amount, disallowed u/s 36(1)(iii) of .....

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paid on borrowed funds at ₹ 6,46,81,281/-. 6. The Revenue is in appeal against the partial allowance of interest by the CIT(A) as against the total disallowance made by the Assessing Officer under section 36(1)(iii) of the Act at ₹ 11,26,17,000/-. 7. The assessee has also raised ground of appeal No.7 against the levy of interest under section 234B of the Act. 8. Briefly, in the facts of the present case, the assessees was a partnership firm engaged in the business of real estate, co .....

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es of projects i.e. where the sales of the respective units in different projects were offered to tax and other projects where no sales were offered to tax. The assessee had debited sum of ₹ 14,43,90,385/- under the head finance charges to the Profit & Loss Account. As per Schedule 17 attached to the audit report, out of the above said amount, sum of ₹ 9,14,71,691/- was paid as interest on unsecured loan amounting to ₹ 100.80 crores and the balance sum of ₹ 5,29,18,69 .....

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221,79,45,000/-. In view of above, the Assessing Officer observed that the claim of deduction of entire amount of interest paid was without any basis as provisions of section 43(1) of the Act do not override the provisions of section 36(1)(iii) of the Act. The said section 43(1) of the Act talks of actual cost in so far as the interest paid on borrowings made for acquisition of capital assets are concerned. Since both the provisions co-existed under the Act, the Assessing Officer held that in su .....

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table to a particular contract and the same had to be included as part of accounting contract costs. Further, the said accounting mandate is fortified by Accounting Standard - 16 issued in the year 2000. The Assessing Officer was of the view that building project would come under the definition of qualifying asset and the method to be adopted for treatment of finance costs in respect of qualifying asset, was prescribed at para 6 of Accounting Standard - 16. The relevant para reads as under:- Bor .....

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of the assessment order along with reply of the assessee at pages 5 to 13 of the assessment order. In response, the claim of the assessee was that the said finance cost where the funds are utilized for the purchases and also for the purchase of plots, would be eligible for deduction under section 36(1)(iii) of the Act. Referring to the proviso under section 36(1)(iii) of the Act, it was further pointed out that the proviso applies only in case the capital borrowed is utilized for the purpose of .....

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disallowance thus, as per the proviso would not apply and additionally where capital borrowed had been utilized for the purpose of normal business activities of the construction and trading in properties carried on by the assessee, and not for the purpose of extension of the existing business, on this ground also, the proviso would not be applicable. Further contention of the assessee was that it was entitled to claim interest paid on borrowed capital, where capital was used for business purpos .....

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eliance was placed on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Lokhandwala Constructions Industries Ltd. reported in 260 ITR 579 (Bom), wherein following the aforesaid principle, it was held that the construction project undertaken by the assessee constituted its stock-in-trade and hence, interest payable on loan availed for execution of the said project was entitled for deduction under section 36(1)(iii) of the Act. The assessee further contended that AS-16 was not releva .....

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f the Act would prevail over any other directions / rules / provisions of other statutes / bodies / regulators and where the expenditure was disallowable / allowable under the provisions of the Act, the same had to be given effect, irrespective of the mandate under such directions / rules / provisions of other statutes. Reliance was placed on the ratio laid down by the Hon ble Supreme Court in Southern Technologies Ltd. Vs. JCIT (2010) 320 ITR 577 (SC). 11. Another claim of the assessee before t .....

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o laid down by the Mumbai Special Bench of Tribunal in Wall Street Constructions Ltd. Vs. JCIT reported in 101 ITD 156 (SB) (Mum), was not applicable, wherein it was held that the interest identifiable with a project should be allowed only in the year when the project was completed and the income from that project was offered for taxation. Another point of distinction was that the method of accounting was not regularly followed in the matter before the Special Bench, whereas the assessee was fol .....

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ance in this regard was placed on the decision of Pune Bench of Tribunal in DCIT Vs. Thakkar Developers reported in 115 TTJ 841. It was contended by the assessee that AS-16 was applicable only in cases where the cost directly attributable to construction of qualifying assets and where there is no such attribution, then the interest cost should not be capitalized and had to be recognized as interest expenses of the year. The assessee also contended that where mixed funds were available, a presump .....

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dingly, without admitting any disallowance, in view of the directions of the Assessing Officer, the disallowance of interest as per assessee s calculations could be restricted to ₹ 52,15,480/-. Rejecting the explanation of the assessee, the Assessing Officer held that building project would come under the definition of qualifying asset and the method adopted for treatment of finance costs in respect of qualifying asset would be as per para 6 of AS-16, which provides that the borrowing cost .....

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ld as under:- 5.3 The assessee has set off current liabilities and provisions - ₹ 69,99,37,929/- and partners capital account - ₹ 16,00,22,087/- against the qualifying asset which do not include advances to suppliers - ₹ 1,55,90,817/-, other advances - ₹ 2,99,06,297/- and deposits others - ₹ 4,02,22,275/- totaling ₹ 8,57,19,389/- which are held to have been made out of current liabilities and provisions and hence reduced from the same for set off against quali .....

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₹ 14.43 crores was disallowed, the same, as per the Assessing Officer, had been used for investment in qualifying assets and allowed to be capitalized. The interest capitalized was held to be set off against the profits derived from the qualifying assets. In view thereof, the Assessing Officer re-worked the proportionate interest relatable to such investments at ₹ 11,26,17,700/-. The Assessing Officer also directed that the said interest cost would be allowed to set off against the p .....

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ear. The CIT(A) was of the view that with reference to provisions of section 36(1)(iii) of the Act and its proviso, the issue has to be seen from the prospective that the interest paid excluded interest paid for execution of 12 projects at different locations and hence, the first condition that the interest was paid in respect of capital borrowed for acquisition of asset was satisfied. As regards second contention of the assessee that the extension of existing business has to be read in conjunct .....

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ittee and the CIT(A) observed that in the proviso, the Legislature has used the word assets in the final enactment, though in the recommendations of the Committee, the words were cost of capital assets. The CIT(A) held that where the language is clear, the intention of the Legislature was to be gathered from the language used. Reliance was placed upon the ratio laid down by the Hon ble Supreme Court in CIT Vs. Kelvinator of India Ltd., reported in 320 ITR 561 (SC). As per the CIT(A), the word us .....

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ects had been enlarged by increasing the number of projects, therefore, the same was extension of business by the assessee and in CIT(A) s view that the proviso to section 36(1)(iii) of the Act was applicable to the facts of the present case. Another aspect noted by the CIT(A) was that in respect of 12 projects which were in execution stage during the year, the expenses except finance cost incurred in respect of these projects were capitalized and shown as work-in-progress under the head project .....

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thod of accounting finance cost results in distortion of profits in a particular year. As per him, true profits could be determined only when the entire cost of the incomplete projects, including the finance cost was capitalized and added to the value of work-in-progress of these projects. For this proposition of matching concept, reliance was placed on the ratio laid down by the Hon ble Bombay High Court in Taparia Tools Ltd. Vs. JCIT (2003) 260 ITR 102 (Bom). The CIT(A) further held that the r .....

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ved that the same was not applicable as it was rendered prior to insertion of proviso to section 36(1)(iii) of the Act. Secondly, the controversy in the present case was not whether projects in questions are stock-in-trade or capital assets. The dispute was whether borrowing cost relatable to these projects, which take a substantial period of time to get ready for their intended use or sale, i.e. qualifying assets defined in AS-16 needs to be capitalized and added to the cost for the project. In .....

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regard, reliance was placed on the ratio laid down by the Hon ble Bombay High Court in Kotak Mahindra Finance Ltd. Vs. DCIT (2004) 265 ITR 114 (Bom). In view thereof, the CIT(A) upheld the order of Assessing Officer in treating 12 projects in question of the value of ₹ 90,93,75,727/- as qualifying assets for the purpose of capitalization of interest relatable to these projects. 14. Further, the CIT(A) considered the objections of the Assessing Officer in respect of interest attributable to .....

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after purchase or acquisition, the CIT(A) held that the proviso was not applicable. Even AS-16 recognized that the assets which are ready for use or sale when acquired are not qualified assets for the purpose of capitalization of borrowing cost. In view thereof, the CIT(A) held that the Assessing Officer was not justified in treating the land and advances for land of the aggregate value of ₹ 61,91,08,347/- as qualifying assets for the purpose of capitalization of borrowing cost relatable .....

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assessee. In this background, the CIT(A) held that for capitalization of interest in the case of incomplete projects and for ascertaining true profits of the year, recourse to relevant AS-16 was to be made, was the contention of the Assessing Officer, but the contention of the assessee in this regard was that in view of specific provisions of the Act i.e. section 36(1)(iii) of the Act, the same prevails over the treatment for the purpose of accounting and once any claim is allowable under the Ac .....

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rojects, which were in execution stage and the proviso to section 36(1)(iii) of the Act came to play in respect of these projects. In such circumstances, accounting principles or relevant accounting standards had to be taken into account to ascertain correct profits of the assessee for the year. 15. In respect of second contention of common pool of funds consisting of interest free and borrowed funds being utilized for business purpose, the CIT(A) was of the view that this was not a case of disa .....

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0/-, which was to be capitalized to form part of cost of the qualifying assets. While working out the proportionate interest relatable to qualifying assets, certain aspects were taken into consideration by the CIT(A), which are tabulated under para 5.3.7 at pages 42 and 43 of the appellate order and in this regard, disallowance to the extent of ₹ 6,46,81,280/- was sustained. 16. The assessee is in appeal against the disallowance of ₹ 6,46,81,280/-. 17. The Revenue is in appeal agains .....

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ect of AS-16, it was pointed out that the same was not binding. He further pointed out that all accounting standards wherever applicable, have been made applicable w.e.f. 01.04.2015 and at the relevant time, no accounting standards were applicable, which could override the Income-tax provisions. He also submitted that the provisions of sections 80IB(10), 145, 10A and 10B of the Act are standalone provisions, under which profits had to be determined. Referring to the proviso to section 36(1)(iii) .....

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f the assessment order calculated the disallowance at ₹ 11.26 crores against which, both the assessee and the Revenue are in appeal. Our attention was drawn to the observations of CIT(A) under paras 5 and 5.1 onwards at page 22 of the appellate order, wherein he referred to the asset meaning as work-in-progress. The next contention of the learned Authorized Representative for the assessee before us was that as per AS-16, if there was no activity of purchases and sales, then it was a qualif .....

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upon by the authorities below on the ratio laid down by the Hon ble Bombay High Court in Taparia Tools Ltd. Vs. JCIT (supra), the learned Authorized Representative for the assessee pointed out that the same was reversed by the Hon ble Supreme Court in Taparia Tools Ltd. Vs. JCIT (2015) 372 ITR 605 (SC). The copy of the judgment was placed on record. In respect of second reliance on the decision in JCIT Vs. K. Raheja (P) Ltd. reported in 106 TTJ 874, the contention of the learned Authorized Repre .....

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m 367, Jaipur Bench of Tribunal in ACIT Vs. M/s. Aditya Propcon (P) Ltd. in ITA No.762/JP/2012 , relating to assessment year 2009-10, order dated 30.01.2014 and the Hon ble Punjab & Haryana High Court in Nahar Poly Films Ltd. Vs. CIT reported in 13 taxmann.com 41. He further pointed out that Pune Bench of Tribunal in DCIT Vs. Thakkar Developers (supra) had held that the decision in Wall Street Constructions Ltd. Vs. JCIT (supra) was not applicable. Another point raised by the learned Authori .....

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(b) for extension of existing business and (c) whether capitalized or not. Since the asset was not defined under the Act, hence, reference is to be made to AS-16. Our attention was drawn to the order of CIT(A) at pages 25 to 28, who differentiated the current and capital assets. She further pointed out that the assessee himself had capitalized the cost of purchases as work-in-progress and hence, the interest cost has also to be capitalized. Further, reliance was placed on the order of CIT(A) on .....

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section 36(1)(iii) of the Act, then the same could not be disturbed. He further pointed out that stock-in-trade, extension of business and in view of various cases, loss in expenditure is met for carrying on of the business and the same is to be allowed as revenue expenditure. In respect of AS-16, it was pointed out that the same was operating from 01.04.2015 and the same could be invoked, provided it was operating and binding on the assessee. First of all, the said AS-16 was not binding as the .....

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judgment dated 17.08.2015, wherein it has been held that Accounting Standards issued by the Institute of Chartered Accountants of India were not binding. Further, the CIT(A) had relied on the ratio laid down by Hon ble Bombay High Court in Taparia Tools Ltd. (supra), which has been reversed by the Hon ble Supreme Court. 21. We have heard the rival contentions and perused the record. The assessee was a partnership firm, engaged in the business of real estate, construction, development of housing .....

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e year under consideration, the assessee had claimed interest expenditure of ₹ 14,43,90,385/- as revenue expenditure. The claim of the assessee was that it had incurred the above said interest expenditure for the purpose of carrying on its business and the same was allowable as revenue expenditure in its hands irrespective of some of the projects not being available for sale. The assessee for the year under consideration had shown total turnover of ₹ 29.87 crores and had offered sum .....

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crores and the balance sum of ₹ 5.29 crores was paid as interest on secured loans amounting to ₹ 15.44 crores. The case of the Assessing Officer was that where the assessee had made investment of ₹ 221.79 crores, then the proportionate interest cost attributable to such investment was to be disallowed in the hands of the assessee under section 43(1) of the Act. On the other hand, the claim of the assessee was that the entire interest cost was attributable to funds utilized for .....

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he assessee had paid sum of about ₹ 28 crores towards advances for properties, had invested sum of ₹ 33.90 crores in properties shown as inventories and sum of ₹ 93.94 crores in project sites and work-in-progress of various projects amounting to ₹ 65.95 crores, totaling ₹ 221.79 crores. The Assessing Officer further relied on the Accounting Standard No.7 and Accounting Standard No.16 issued by ICAI for the proposition that where the finance costs were specifically a .....

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sessee before us on the other hand was that the interest cost was in the first instance relatable to the entire business carried on by the assessee whether i.e. for construction or for sale and purchase of properties and even if part of borrowed funds were utilized for construction of the infrastructure of the properties, sale from which is not recognized in the present year, were stock in trade of the assessee and hence, business assets and there was no merit in capitalizing any part of the bor .....

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e deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 - (i) and (ii)****** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of acco .....

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he assessee to claim deduction on account of interest paid in respect of capital borrowed for the purpose of business or profession. The intention of the statute is to allow the expenditure on account of finance cost as allowable in the hands of the assessee where the capital borrowed has been utilized for the purpose of business or profession. The ambit of expression purpose of business has to be considered for allowing the deduction on account of interest paid in respect of such capital borrow .....

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period is not allowable deduction. The provisions of the statute have to be read in entirety and the same cannot be given a meaning by way of reading the provisions in dis-jointed manner. No doubt, under the proviso, the reference is made to the borrowal of capital for acquisition of asset for expansion of existing business or profession, but the concluding para refers to an asset put to use i.e. for determining the period of disallowance of interest, is to start from the date on which the capit .....

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be allowed as deduction. Reading the proviso clearly establish that the said provisions are applicable to capital assets acquired by the assessee and are not relatable to current assets. In case, we accept the proposition offered by the Revenue authorities, then in order to work out the disallowance of interest in the hands of assessee in respect of current assets held by the assessee i.e. the investment in properties which has not been sold during the current year, then the date on which such .....

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t of current assets. In other words, if the amount of capital borrowed by the assessee is utilized for acquisition of non-capital assets, then such interest is allowable in the hands of the assessee, in view of main substantive provisions of section 36(1)(iii) of the Act. The proviso restricts the disallowance of interest only for the period till which the asset is not put to use. Once the asset is put to use, then the interest relatable to acquisition of such capital asset is also allowable as .....

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d by ICAI for working out the disallowance in the hands of assessee. In this regard, we find support from the ratio laid down by the Hon ble Bombay High Court in CIT Vs. M/s. Reliance Industrial Infrastructure Ltd. in Income Tax Appeal No.3611 of 2010, order dated 17.08.2015. 25. Under para 6 of accounting standards 16, it is prescribed that the borrowing costs which are directly attributable to acquisition, construction or production of qualifying asset, then the same should be capitalized as p .....

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rit in the stand of the authorities below in this regard, in view of the specific provisions of the Act i.e. section 36(1)(iii) of the Act, which covers the allowability or otherwise of the interest cost of capital borrowed by the assessee for the purpose of carrying on its business and no resort can be made to any accounting standards by way of any directions / rules / provisions of other statutes / bodies / regulators for disallowing the expenditure in the hands of the assessee. In this regard .....

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y prescribed the borrowing costs which are directly attributable to acquisition, construction or production of qualifying asset, then the same is to be capitalized as part of the cost of assessee. The authorities below have failed to point out the borrowed finances were directly attributable to the construction of specific project, against which the disallowance is being made. In the absence of any identification of the finance costs being directly relatable to the so-called project under consid .....

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duction of Finance Cost by way of interest is in conformity with the Accounting Standard-7 issued by the Institute of Chartered Accountants of India and the exemptions provided therein? 27. The Hon ble Bombay High Court held as under:- The finding of fact recorded by the Tribunal is that there is no identity between a particular borrowing and a particular line of business and there is no basis for coming to a conclusion that interest attributable to the loans should be appointed amongst the vari .....

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the appeal is dismissed. 28. Following the above said proposition, we find no merit in the orders of authorities below in working out the interest attributable to the loans relatable to 12 projects under construction, has been not allowable as deduction in the hands of assessee. The assessee was following unit sale method of accounting, where revenue was recognized on sale of the units completed by it. The assessee was not following project completion method. Though the assessee was capitalizing .....

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the assessee under section 36(1)(iii) of the Act was rejected by the authorities below that in respect of 12 projects, which were in execution stage during the year, the expenses except the finance costs incurred were capitalized and shown as workin- progress. The assessee was in the process of constructing the aforesaid 12 projects and the expenditure incurred for construction of the said projects was capitalized as work-in-progress and was to be claimed as deduction against the sales made of t .....

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is regard. Under the provisions of the Act, the interest expenditure perse is allowable as deduction in case the same is incurred during the course of carrying on of the business. Where the assessee has conceptualized a project and started constructing the same implies that the assessee is engaged in carrying on of its business of construction activity. Merely because, the project has not been completed and the units were not sold does not mean that the business of the assessee is not being carr .....

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by us in the paras hereinabove, the business has commenced on the start of the project itself and there is no merit in holding that since no part of the 12 projects has been sold by the assessee, the business relatable to such projects had not commenced. 30. Now, coming to the alternate stand of the CIT(A) that allowance of such finance cost would result in distortion of profits in a particular year was based upon the ratio laid down by the Hon ble Bombay High Court in Taparia Tools Ltd. Vs. JC .....

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business cycle. Take an example of manufacturing industry, trading whole sale & retail, consider service industries. Scenario of closing stock / work in progress is peculiar to class of industry. 19. The main reason for which the department has to stretch this position of capitalizing the period cost to WIP / closing stock by means of AS-16 is matching concept . The AO as well as CIT(A) have heavily relied on the matching concept to change the basis for allowability of interest. Further, th .....

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t in the case Madras Industrial Corporation case 225 ITR 802 (SC) for deferred revenue expenses. The court held that in that case the assessee itself chose to defer revenue expenses so the court allowed the same. Otherwise there is no doubt that under the Act the concept of deferred revenue is not in existence. 31. Applying the said proposition laid down by the Hon ble Supreme Court, we hold that the assessee is entitled to the claim of deduction of interest expenditure in the year of claim. 32. .....

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IT(A). The so-called 12 projects of the assessee are the current assets of the assessee, as the assessee is engaged in the business of construction activity and the said projects are not capital assets of the assessee, which have to be put into use, but have to be sold in the open market and allowance of interest relatable to such current assets cannot be curtailed by invoking the provisions of proviso to section 36(1)(iii) of the Act. 33. One more aspect which has to be taken note of that in ad .....

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