TMI Blog2022 (2) TMI 915X X X X Extracts X X X X X X X X Extracts X X X X ..... on borrowings from banks and financial institutions, but said loans have not taken for any specific purpose. At the same time, the assessee is also unable to explain with necessary evidence to prove that loans taken from banks and financial institutions are not for any specific purpose of acquisition of any asset or execution of project. Therefore, we are of the considered view that the issue needs to go back to file of AO to ascertain correct facts with regard to nature of loan taken by the assessee and purpose for which such loans were taken. In case, the assessee has taken any loan for specific purpose of acquisition of asset or execution of project, then interest attributable to said purpose needs to be capitalized to work in progress account. Hence, we set aside the issue to file of the AO and direct to re-examine claim of the assessee in accordance with law - Assessee appeal allowed for statistical purposes. - I.T.A. Nos. 109 & 110/Chny/2018 - - - Dated:- 9-2-2022 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For the Appellant : S. Subramanian, C.A. For the Respondents : Muralikumar, CIT ORDER Per G. Manjunatha , AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure of ₹ 64.20 crores. It was further noted that the assessee is having short term and long term borrowings of ₹ 424 crores. It was also noted that the assessee has shown capital work in progress of ₹ 9.86 crores and project work in progress of ₹ 116.31 crores. Therefore, the Assessing Officer called upon the assessee to explain as to why interest cost attributable to capital project work in progress cannot be disallowed and added back to work in progress account. In response, the assessee submitted that it is following a method of accounting to account interest pertains to loans taken for specific purpose to capital work in progress or project work in progress, however, interest paid on loans taken for general business purpose has been debited into profit loss account as and when such expenditure was incurred and therefore, question of allocation of interest expenses to capital work in progress and project work in progress does not arise. 4. The Assessing Officer, however, was not convinced with explanation furnished by the assessee and according to him, the assessee has not allocated specific cost to the projects in line with concept of match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering relevant submissions of the assessee and also by relied upon certain judicial precedents, including decision of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. Vs. CIT 98 ITR 167 (SC), sustained additions made by the Assessing Officer towards capitalization of interest relatable to capital work in progress and project work in progress. The relevant findings of the learned CIT(A) are as under:- 6. The objections of the assessee are considered. It is seen that the Assessing Officer has correctly worked out the amount of borrowed capital utilised towards creation of capital work in progress as well as business work in progress for the respective years considering the year end balances. The computation based on year end balances can be disputed. However, the principle behind the disallowance of interest as revenue expenditure and capitalisation of the same cannot be disputed. Several Courts have held that all expenditure directly and indirectly related to acquisition of any assets shall he capitalised along with the cost of the said assets. In this regard, some of the decisions are brought to focus as under:- 1. Guzdar Kajoria Coal Mines Ltd. (85 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. (supra), the Income-tax Law does not march step by step in the footprints of the accountancy profession. 29. The question in Challapalli Sugars Ltd.'s case (supra) was about computation of depreciation and development rebate under the Indian Income tax Act, 1922, In order to calculate depreciation and development rebate it was necessary to find out 'the actual cost' of the plant and machinery purchased by the company. This Court held that 'cost' is a word of wider connotation than price'. There was a difference between the price of a machinery and its cost. This Court thereafter pointed out that the expression 'actual cost' had not been defined in the Act. It was, therefore, necessary to find out the commercial sense of the phrase. Khanna, J. (as his Lordship then was) observed: 'As the expression 'actual cost' has not been defined, it should, in our opinion, be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposing to do? They are creating a capital asset by means of which they will hereafter earn, or they hope to earn profits for the company. They are not simply employing contractors to find the money and do the work. They are finding the money themselves, and they find the money by borrowing it. What does each mile of line cost them under these circumstances - what is that they expend in constructing each mile of line, taking the amount of the borrowed money expended on that line to be 10,000, that being the company's estimate? The money is borrowed for that particular purpose the 10,000. They have to pay interest on that 10,000 during the period that construction is taking place. In my opinion that asset which they are so constructing costs them not only the 10,000 but the 10,000 plus the amount of interest during the period of construction; and that is what they are out of pocket during the construction of that mile of line. Now, it seems to me that the company are entitled-1 do not say that they are bound to do it if they think fit to charge in their accounts as the cost of that mile of line not only 10,000, but the 10,000 and the interest on it during the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained additions made by the Assessing Officer. 7. The learned DR., on the other hand, strongly supporting order of the learned CIT(A) submitted that facts brought out by the authorities below clearly indicate that the assessee has huge borrowings from bank and financial institutions, however, failed to allocate interest expenses to capital work in progress and project work in progress, even though it has debited other expenses to project work in progress account. The learned D.R. further submitted that as per principles of matching concept of accounting, expenses relatable to specific revenue unit needs to be capitalized to work in progress account, when there was no revenue from such unit during relevant financial year. Since the assessee has huge debits in project work in progress, interest relatable to said projects needs to be capitalized. The Assessing Officer well as learned CIT(A) have rightly worked out interest attributable to capital work in progress and project work in progress and thus, arguments of the assessee that interest is not specific to any asset or project is not acceptable. 8. We have heard both the parties, perused material available on record and gone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or execution of project, then interest attributable to said purpose needs to be capitalized to work in progress account. Hence, we set aside the issue to file of the Assessing Officer and direct the Assessing Officer to re-examine claim of the assessee in accordance with law. 10. In the result, appeal filed by the assessee for assessment year 2013-14 is allowed for statistical purposes. ITA No. 110/Chny/2018 (A.Y. 2014-15) 11. The issue involved in this appeal is identical to the issue which we had considered in ITA No. 109/Chny/2018 for assessment year 2013-14. The reasons given by us in preceding paragraph shall equally apply to this appeal, as well. Therefore, for similar reasons we set aside the issue to file of the Assessing Officer and direct the Assessing Officer to re-examine the issue of capitalization of interest in light of our observations given hereinabove for assessment year 2013-14. 12. In the result, appeal filed by the assessee for assessment year 2014-15 is treated as allowed for statistical purposes. 13. As a result, appeals filed by the assessee for both assessment years are treated as allowed for statistical purposes. Order pronounced in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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