TMI Blog2018 (4) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income Tax (Appeals) that the project is not substantially complete and the said Accounting Standard – 16 has not been rightly completed. Thus we set aside the order of the ld. Commissioner of Income Tax (Appeals) and quash the order passed u/s. 263 of the Act. - Decided in favour of assessee. - I.T.A. No. 799/Mum/2017 - - - Dated:- 5-3-2018 - Shri Shamim Yahya, AM And Shri Pawan Singh, JM Appellant by : Shri Bhupendra Shah Respondent by : Shri Debashis Chandra ORDER Per Shamim Yahya, A. M. This appeal by the assessee is directed against the order by the Commissioner of Income Tax dated 07.12.2016 passed u/s. 263 and pertains to the assessment year 2013-14. 2. The grounds of appeal read as under: 1. That the learned Pr. CIT - 3 exercise power under section 263 and order so passed is quite illegal. 2. That the disallowance of interest expenses amounting to ₹ 8,07,14,446/- u/s. 36(l)(iii) and capitalization of same as work in progress but not giving the direction for corresponding allowability of work in progress to the Profit and Loss account is quite illegal, arbitrary, unwarranted, unjustified and bad in law. 3. That th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount so borrowed was used to meet out working capital requirement and administrative expenditures. Therefore, in purview of Accounting Standard 16, assessee company has not transferred interest on loan to inventory Work in Progress Account and charged such interest directly to profit and loss account as administrative expenses. Assessee company has also submitted such facts before Assessing Officer during the course of assessment proceedings and such change in accounting policy was accepted by learned Assessing Officer. 5. However, the ld. Commissioner of Income Tax was not convinced. He observed as under: 4.1.4 In the present case, the very fact that the assessee had changed the treatment of interest expenses as revenue expenditure instead of adding it in work in progress as last year should have alerted the A.O. to dig deeper to unearth the reality of the assessee s claim. Unfortunately, nothing of this sort was done by him. It is a perfect citation for a complete non-application of mind by the Assessing Officer. The enquiry for a complete non-application of mind by the Assessing Officer. The enquiry conducted by the Assessing Officer s is exceedingly inadequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ₹ 8,07,14,446/- and capitalize the same as work in progress. The A.O. will revise the assessment order dated 19.03.2016 by disallowing claim of interest u/s. 36(1)(iii) of the I.T. Act, 1961. 6. Against the above order, the assessee is in appeal before us. 7. We have heard both the ld. Counsel of the assessee and perused the records. The ld. Counsel of the assessee contended that the assessee has followed the Accounting Standard 16 issued by the Institute of Chartered Accountants of India. According to which after the project has been substantially completed, the interest cost need not be capitalized. He submitted that in accordance with its Accounting Standard, the assessee has debited interest cost to profit and loss account. He submitted that this issue was duly enquired by the Assessing Officer. For this, he referred to the paper book submitted regarding the enquires made by the Assessing Officer. He further referred to the assessee s reply in this regard submitted in paper book. He submitted that the assessee has duly explained to the Assessing Officer and after that he was convinced. He submitted that if two views are possible, the Assessing Officer has ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over, as per the accounting standard 16 issued by ICAI, Borrowing Cost directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its Intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. The project under consideration was substantially developed till the end of FY 2012-13 and therefore in purview of Accounting Standard 16, Assessee Company has not transferred interest on loan to Inventory Work in Progress Account and charged such interest directly to Profit and Loss Account as administrative expenses. 12. From the above, it is apparent that the charge of interest to profit and loss account and non capitalization of the same was duly enquired by the Assessing Officer. In response, the assessee has referred to Accounting Standard 16 issued by the Institute of Chartered Accountant of India. The said Accounting Standard 16 in its direction for accounting of borrowing cost vide para 19 has directed as under: Cessation of Capitalization 19. Capitalization of borrowing costs should cease wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is adjusted by adding it to the work in progress in the closing stock, then this closing stock is to be taken as opening stock in the next year. The debit of interest cost is automatically then reflected in the next year s profit and loss account. Hence, the charge is overall revenue neutral inasmuch as it is only the different year in which the charge is reflected. It is not the case that by doing this, any tax planning or tax evasion has been done. Hence, the transaction being revenue neutral, it cannot be said that the ld. Commissioner of Income Tax (Appeals) needed to exercise his power u/s. 263 of the I. T. Act. Moreover, it is also not the case that the debit to the profit and loss account was prima facie wrong in view of the Accounting Standard 16 issued by the Institute of Chartered Accountant of India which mandated that when the project is substantially completed, interest cost need not be capitalized. Accordingly, in the background of the aforesaid discussion and precedent, we set aside the order of the ld. Commissioner of Income Tax (Appeals) and quash the order passed u/s. 263 of the Act. 15. In the result, this appeal by the assessee stands allowed. Order prono ..... X X X X Extracts X X X X X X X X Extracts X X X X
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