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TMI Blog2017 (11) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... the practice/accounting policy followed by the assessee?" 4. By way of these appeals, the appellant has assailed the judgment and order of the Tribunal whereby Tribunal has dismissed the appeal of the department and confirmed the order of CIT(A). 5. This court while admitting the appeals framed following substantial question of law:- 5.1 Appeal No.82/2014 admitted on 17.1.2017 "Whether on the facts and in circumstances of the case, the assessee can claim as interest expenditure of Rs. 37369323/- as business expenditure which is neither in consonance of method of accounting nor the practice/accounting policy followed by the assessee?" 5.2 Appeal No.163/2017 admitted on 24.7.2017 "Whether on the facts and circumstances of the case, the assessee can claim as interest expenditure of Rs. 2,32,13,786/- as business expenditure which is neither in consonance of method of accounting nor the practice/accounting policy followed by the assessee." 6. The facts of the case are that the assessee has sold 15973 sq. ft. of area out of total 89966 sq. ft. saleable area. The AO computed cost of goods sold at Rs. 33588773/- against Rs. 38485063 claimed by the assessee. The amount of differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Assessee is following the method as stated in the Schedule 9 as discussed hereinbefore. However, while valuing the inventory of Project-2, the policy laid down has not been adhered to, therefore, valuation of Project-2 is neither according to Assessee's own accounting policies nor according to the policy adopted for Project-1, hence, not according to the requirement of Section 145A of the Incometax Act, However, to deal with the reply of the Assessee, wherein, Accounting Standard 2 and Accounting Standard 16 issued by the Institute of Chartered Accountants of India have been discussed. B. The AS-2 deals with the valuation of inventory and it says that interest cost is usually not included in the value of inventory. It is important to note that said AS-2 use the word "Usually" means it does not bar the inclusion of interest cost to the value of inventory. Further, it can be included if other factors allows it. In the reference, AS-16 addressing the issue of borrowing cost (Interest) is important and relevant Para's are reproduced as follows for ready reference:- "A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ICAI was mandatory for chartered accountants for finalisation of accounts but it was not mandatory for the Department. It was argued by the Revenue that since the assessee had valued its stores/inventories on the cost or market price, whichever was less, therefore, it could not be now valued on realisation value. That apart, it was further submitted by the Revenue that the assessee had valued thousands of items at 5 percent of the cost irrespective of the year of purchase or the condition of the item, therefore, the Assessing Officer had committed no error in disallowing the amount of Rs. 68,59,108 written off as obsolete stores and claimed in the profit and loss account under the head "Plant and machinery repairs". The assessee on the other hand argued that the practice of writing down the inventories below cost to net realisable value was consistent with the view that the assets should not be carried in excess of amount to be realised from their sale or use. It was submitted that the assessee had valued its inventory which were entirely rusted, non-moving and unusable on account of its obsolescence/damage of deterioration at cost or realisation value, whichever was lower. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals), could not be faulted with. Further no ulterior motive can be imputed to the appellant company to hold that claim of interest was not genuine. Even if it had been capitalized then it was allowable in the year of sale. I therefore direct the AO to allow the deduction of Rs. 3,73,69,323/- on account of interest U/s 36(1)(iii) to the appellant company. This ground of appeal is allowed." 9. He further contended that the tribunal has also committed error in observing as under:- "18. We have heard the parties and perused the material available on record and also the orders of the authorities below. We find that the books of accounts of the assessee are audited and the ld. Auditor has not given any adverse comment for not following the accounting standards which are mandatory for a company u/s 211 of the Companies Act, 1956. We also find that there is n dispute that the said land is part of inventory for the assessee and is not a capital asset. The assessee has produced evidences of no increase in the land price and AO has not brought anything on record to support that the assessee would be able to realise the interest cost incurred over and above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness activity. The proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for the period upto the asset is put to use. The term 'put to use' here applies to capital asset only because a capital assets is held to facilitate the business activity and sometimes it needs to be prepared after its acquisition for being used to facilitate the business activity. As against this, purchase and holding of inventory item itself is a business activity. In absence of this proviso, section 36(1) (iii) earlier entitled assessee to claim interest in respect of capital assets, even for the period during which they were under construction as held in various judgments pointed out by the ld. AR of the assessee. The interest was found allowable despite its capitalization in the books of accounts in the judgments. We are therefore, of the opinion that the interest on funds borrowed to purchase land which is part of inventory of the assessee company is an allowable deduction u/s 36(1)(iii). We accordingly reject this ground of the departmental appeal also." 10. Counsel for the respondent has supported the order of the authorities and contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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