TMI Blog2020 (9) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... he coordinate bench in the case of JSR Constructions [ 2016 (7) TMI 943 - ITAT BANGALORE] we do not find any infirmity in the decision rendered by Ld. CIT(A) on this issue. - Decided against revenue. - ITA No.121/Bang/2020 - - - Dated:- 4-9-2020 - Shri N.V. Vasudevan, Vice President And Shri B.R. Baskaran, Accoutant Member For the Appellant : Shri Muzaffar Hussain, D.R. For the Respondent : Shri Sharath Rao, A.R. ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: The revenue has filed this appeal challenging the decision rendered by Ld. CIT(A) Mysore in respect of disallowance of interest expenditure made by the A.O. in assessment year 2008-09. 2. We heard the parties and perused the record. The assessee is engaged in the business of trading in Refrigeration units (including Freezers and Chillers). During the course of assessment proceeding, the A.O. noticed that the assessee has shown closing stock of inventory at ₹ 12.02 crores. He also noticed that the assessee has claimed interest expenditure of ₹ 1.71 crores on the loan taken from M/s. Inger Soll Rand (I) Ltd. The A.O. noticed that the assessee did not have surplus funds equal to the inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital requirements. Section 36(1)(iii) of the Act, provides that amount of interest paid in respect of capital borrowed for the purpose of business and profession shall be allowed as deduction while computing the income from business or profession, with the only exception being where it is utilized for acquisition of a capital asset, which then has to be capitalized till the asset is put to use. In the present case, the loan is utilized for the purpose of working capital. The appellant also has relied on section 145A of the Act to contend that valuation of inventory needs to be done as per the method of accounting regularly employed by the assessee. The Appellant being a Company, is mandated to follow AS 2 issued by the ICAI for valuation of inventories. AS 2 provides for valuing the inventory at cost or net realizable value whichever is lower. It also defines the cost of inventory to comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The following relevant para of the AS-2 is reproduced here under: 6. The cost of inventories should comprise all costs of purchase, costs of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional ITAT in the case of JSR Constructions (P) Ltd is also well placed. Therefore, the appellant is justified in considering interest as a period cost and debiting the profit and loss account. Therefore, the Assessing Officer is directed to delete the addition of interest cost amounting to ₹ 1,53,37,415/-.Therefore, appeal on this ground is allowed. As the main ground no. 13 is adjudicated in the appellant's favor, ground no. 14 becomes academic in nature and as such, the same are not being adjudicated. Aggrieved by the order so passed by Ld CIT(A), the revenue has filed this appeal before us. 5. The Ld. D.R. supported the order passed by the A.O. 6. On the contrary, the Ld. A.R. supported the order passed by the Ld. CIT(A). In addition to the above, the Ld. A.R. submitted that the principle enunciated by the A.O. would be applicable only to capital assets, as per the proviso to section 36(1)(iii) of the Income Tax Act 1961 (hereinafter called as the Act). He submitted that the assessee has used borrowed funds in the normal business activities of trading in refrigeration items. Hence, the question of capitalising the interest expenditure does not arise. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. 9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Assessee was well justified in considering interest as a period cost and debiting in its profit loss account. We do not find any merit in the additions made by the AO. As such, these additions are deleted and ground No.5 is allowed. 8. There is no dispute with regard to the fact that the inventories held by the assessee are current assets and hence the requirement of capitalising the interest does not arise, as per the proviso to section 36(1)(iii) of the Act mandates capitalization of interest only in respect of capital assets purchased out of borrowed funds. We also notice that the method of valuation adopted by the assessee also gets support from Accounting Standard 2 issued by ICAI. The Ld. A.R. also submitted that the newly introduced ICDS though applicable in the subsequent year also supports the methodology adopted by the assessee. Under these set of facts and in view of the fact that the decision rendered by the Ld. CIT(A) is in consonance with the decision rendered by the coordinate bench in the case of JSR Constructions (supra), we do not find any infirmity in the decision rendered by Ld. CIT(A) on this issue. Accordingly, we uphold the same. 9. In the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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