TMI Blog2018 (6) TMI 1613X X X X Extracts X X X X X X X X Extracts X X X X ..... - SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER For the Appellant : Shri. M. Viswanathan, CA For the Respondent : Mrs. Ruby George, CIT ORDER PER S. JAYARAMAN, ACCOUNTANT MEMBER: The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)- 8,Chennai, in ITA Nos. 451of 2013- 14,65 of 2014-15 77 of 15-16 dated 30.03.2016 for the AYs 2010- 11,2011-12 2012-13, respectively. 2. M/s Mahindra World City Developers Ltd., the assessee, is in the business of development of lands for various Industries which are in the Special Economic as well as in Non-Special Economic Zones. While making the assessments for the ays 2010-11, 2011-12 2012-13, the AO found that the assessee has added the interest expenditure incurred on the loan raised and utilized towards purchase of land in NH5 Phase V projects in the value of closing stock / work in progress and capitalized it in its books of account. However, in the computation memo, the assessee claimed such interest as an expenditure. On due examination of the assessee s submissions etc, the AO found that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the year under consideration. 2) Subsequently in the computation of income, said interest cost is claimed as deduction in the years under consideration as it relates to business operations. 3) In the year in which the said portion of land is sold, the interest cost will be reduced from the cost of sales of the said land.( ie) the interest cost will be offered as income. 4) In essence, the assessee has been consistently claiming the interest cost included in the work in progress in the year which the interest is paid and will offer the interest expenditure (claimed as deduction in previous years) as income in the subsequent year in which the said portion of land is sold by reducing from the cost of sales. 5) There is no revenue loss to the department by virtue of the said treatment The method of accounting employed by the assessee in the Books of accounts, Viz. the interest component added to the cost of closing stock/work-in-progress of inventories, does not prevent the assessee from claiming the interest as an allowable expenditure under Income tax provisions. The assessee has offered ₹ 85,08,080 (reversal of interest cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nventories) and Accounting Standard 16 (Borrowing Cost).Accounting Standard 16 explains how borrowing costs are recognized in the case of a qualifying asset as under : 6. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred. 6.1 Thus, Accounting Standard AS 16 clearly states that only those borrowing costs that are not capitalized shall only be recognised as an expense for the period in which they are incurred. Thus, the assessee has capitalized the interest expenditure in accordance the Accounting Standards and arrived its true income in its books of account. However, in the memo of computation of income, it has gone totally against the letter and spirit of the Accounting Standard 16. Therefore, the assessee s claim is neither in accordance with the Accounting Standards nor with the statutory provisions of the Income Tax Act and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory Accounting Standards notified by the Central Government of India under The Companies (Accounting Standards) Rules, 2006 and with the relevant provisions of the Companies Act, 1956. (b) Revenue recognition a. Land lease premium is recognised as income upon creation of leasehold rights in favour of the lessee or upon an agreement to create leasehold rights with handing over of possession. b. Property lease rentals, income from operation maintenance charges and water charges are recognised on an accrual basis as per terms of the agreement with the lessees. .. (g) Inventories Inventories are valued at lower of cost and net realisable value. Cost represents cost of land and all expenditure incurred in connection with, or attributable to the project, and, being a long-term project, includes interest. 7. The cost of land and related development expenditure is disclosed as work-in-progress as the company expects to incur further costs on land and infrastructure development. 8. The comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming such interest expenditure that too, in the computation memo, ie outside the books of account. The Lower authorities rejected the assessee s claim, as it is neither in accordance with the Accounting Standards nor with the statutory provisions of the Income Tax Act. The assessee challenges it. Let us examine this claim as under 7.3 The relevant portion of the Hon ble Delhi High Court decision in the case of Commissioner Of Income-tax - IV, New Delhi. vs Insilco Limited. 320 ITR 322 (Del) is extracted as under: 16.5 It is to be noted that these Accounting Standards are mandatory in nature and applied to accounts prepared after 1-4-1999. In that sense the submission of the assessee has to be accepted that the change in the accounting policy had been brought about by virtue of the issuance of the revised accounting standards issued by the Council of the ICAI, which was, applicable for the assessment year under consideration. Furthermore, the provisions of sub-sections (3A), (3B) and (3C) of section 211 of the Companies Act, 1956, clearly provide that every profit and loss account and balance sheet of a company shall comply with the Accounting Standards prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's claim for depreciation and development rebate under the Indian Income-tax Act, 1961. The assessee sought to include in the cost of asset the interest paid by it for the period prior to commencement of business on borrowings taken up by it. The Supreme Court in coming to the conclusion that the assessee's stand was correct resorted to the rules of accountancy prevailing in the industry. In this context the following observations of the Supreme Court being apposite are extracted below:- In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deductions on account of depreciation and development rebate relating to the machinery and plant of the assessee. As the expression 'actual cost' has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry.... It would appear from the above that the accepted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes. [Whimster Co. v. Commissioner of Inland Revenue [1925] 12 TC 813 (c. Sess); Commissioner of Inland Revenue v. Cock Rusell Co. Ltd [1949] 29 TC 387 (KB). This proposition has been affirmed by this Court in P.M. Mohamed Meerakhan v. CIT [1969] 73 ITR735. In the said case it has been observed: 'For that purpose it was the duty of the Income-tax Officer to find out what profit the business has made according to the true accountancy practice.' 7.4. If we apply the above ratios to the facts of this case, as discussed, supra, it is clear that the accounting practice followed by the assessee in its books of account, are in consonance with the general principles of accountancy as certified by their Auditors and the book results were also certified to give a true and fair view in conformity with the applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956. Therefore, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, when the entire facts and circumstances of this case are considered in its totality, it is clear that the impugned expenditure incurred by the assessee is in capital in nature. The accounting practice followed by the assessee in its books of account, are in consonance with the general principles of accountancy as certified by their Auditors and the book results were also certified to give a true and fair view in conformity with the applicable accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and relevant provisions of the Indian Companies Act, 1956 are also in accordance with provisions of Act read with section 36 (1) (iii). Therefore, the assessee has not made out a case in these appeals. Hence, the Lower authorities are correct in their decisions that the assessee s claim through the income computation memo, is neither in accordance with the Accounting Standards nor with the statutory provisions of the Income Tax Act. Therefore, the corresponding grounds of the assessee fail for all these assessment years. 7.6 Since, the assessee s claim is rejected for these a ys, the income, if any, admitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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