K.K. BOLIYA, A.M. ORDER Hon ble President of Tribunal has constituted this Special Bench in abovementioned two cases to consider and decide following issue arising in these appeals : "Whether, where assessee is following project-completion method of accounting, interest identifiable with that project should be allowed as deduction in year when project is completed and income is offered from project or it should be allowed on year to year basis ?" 2. relevant facts, briefly stated, leading to this reference are that both assessees are engaged in business of construction. admitted position is that they are following project-completion method of accounting, which means that profits arising from particular project are offered for taxation in year in which that project is complete or substantially complete. In present cases, assessees are simultaneously constructing multiple projects and accounts are separately maintained for each project. assessees have borrowed on interest substantial funds which are used as working capital for execution of various construction projects. In respect of interest expenditure referable to borrowed funds, during assessment years under appeal, it was claimed before AO that such interest expenditure is not in nature of direct cost of project and, therefore, this expenditure has to be treated as period cost . Therefore, it was claimed that interest expenditure accrued in particular year must be deducted by way of expenditure against assessees income for that particular year. In other words, while income from particular project will be offered for taxation in year of completion, interest expenditure is claimed by assessees from year to year on basis of accrual during particular year. It was claimed that this procedure for claiming deduction in respect of interest for each year under s. 36(1)(iii), instead of adding it to cost of project, was being consistently followed by assessees. AO rejected this claim and held that interest expenditure has to be added to value of work-in-progress because assessees are following project-completion method of accounting. AO s view has been upheld by learned CIT(A), with result that this issue came to be further agitated before Tribunal. These matters were heard by Tribunal, Mumbai Bench F and during course of hearing, it was claimed on behalf of assessees that relevant issue stands covered in case of one of assessees Wall Street Construction Ltd. for asst. yr. 1994-95 vide order dt. 17th Aug., 2003 (ITA No. 3477/Mum/1998), and also in case of Natasha Construction Ltd. for asst. yrs. 1996-97 and 1997-98 (ITA Nos. 4527 and 4528/Mum/2001). Reliance was also placed on Hon ble Bombay High Court decision in case of CIT vs. Lokhandwala Construction Industries Ltd. (2003) 180 CTR (Bom) 136 : (2003) 260 ITR 579 (Bom). On other hand, on behalf of Department it was submitted that in case of Patel Plaza Ltd. (ITA No. 148/Mum/1999, dt. 9th July, 2001), method of accounting was changed only in asst. yr. 1995-96 and in case of Wall Street Construction Ltd. (supra) with effect from asst. yr. 1992-93. It was, therefore, argued that it was incorrect to say that method of claiming deduction for interest from year to year was consistently followed by assessee and was accepted by Department in earlier years. Department also relied on Tribunal, Mumbai Bench decision in case of S.K. Estates (P) Ltd. vs. Asstt. CIT (1997) 60 ITD 621 (Mumbai) wherein it was held that interest cost must be added to value of work-in-progress where assessee is following project-completion method of accounting. 3 . Tribunal found that there was divergence of opinion on this issue between different Benches of Tribunal. It was also felt that issue does not, per se, appear to be covered by Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra). Tribunal, therefore, thought it proper to refer issue to Hon ble President for constitution of Special Bench of Tribunal for resolving controversy. (a) In case of builder, following project-completion method, engaged in simultaneous construction of multiple projects, whether interest cost is period cost or it has to be added to value of work-in-progress ? (b) Whether interest on such borrowings which cannot be directly linked to particular project, is to be allowed from year to year or is to be added to value of work-in-progress ? (c) What is impact of AS No. 7 issued by Institute of Chartered Accountants ? (d) Whether Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra) concludes controversy ? (e) Whether in case of builder following project-completion method, work-in-progress is to be considered as stock-in-trade or capital asset ? (f) Whether system of accounting consistently followed by assessee n d accepted by Department in earlier years can be discarded by Department having regard to ratio of Bombay High Court in case of CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) ? 5 . Developing his arguments, learned counsel for assessees forcefully submitted that issue stands concluded by Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra). It is further submitted that insofar as case of Wall Street Construction Ltd. (supra) is concerned, issue is squarely covered in assessee s favour by following decisions of Tribunal : 1. Asst. yr. 1994-95, ITA No. 3477/Mum/1998, dt. 8th July, 2003 2. Asst. yr. 1995-96, ITA No. 2840/Mum/1999, dt. 31st Oct., 2003 3. Asst. yr. 1996-97, ITA No. 2656/Mum/2000, dt. 13th Sept., 2004. Copies of these decisions have been compiled in paper book. learned counsel then submitted that since assessees are consistently following system of accounting whereby interest cost is being claimed in each year and Department having accepted this system of accounting, Department is wholly unjustified in rejecting this system of accounting in view of finding of Hon ble Bombay High Court in case of Goodlas Nerolac Paints Ltd. (supra). learned counsel further argued that if interest cost is not deducted under s. 36(1)(iii) on basis of accrual from year to year, this would result into distortion in profits shown in case where no borrowed funds have been raised vis-a-vis case where construction activity has been carried out with help of interest-bearing borrowed funds. It is pointed out that in former, there may be no interest expenditure which can be added to value of work-in-progress, whereas in latter, substantially interest expenditure will have to be added to value of work-in-progress. Eventually, when projects are complete and constructed premises are sold, cost, being value of work-in-progress, will substantially vary in two cases, whereas market value would be same if projects are otherwise identical and similarly located. Shri Trivedi relied on Hon ble Calcutta High Court decision in case of Tetron Commercial Ltd. vs. CIT (2003) 182 CTR (Cal) 124 : (2003) 261 ITR 422 (Cal) to buttress his arguments. 6. learned counsel for assessee also drew support from AS-7. He invited our attention to paras 8.4 to 8.8 of AS-7, which are reproduced below : "8.4 Costs incurred by contractor can be divided into : (i) costs that relate directly to specific contract; (ii) costs that can be attributed to contract activity in general and can be allocated to specific contracts; (iii) costs that relate to activities of contractor generally, or that relate to contract activity but cannot be related to specific contracts. 8.5 Examples of costs that relate directly to specific contract include : (i) site labour costs, including supervision; (ii) materials used for project construction; (iii) depreciation of plant and equipment required for contract; (iv) costs of moving plant and equipment to and from site. 8.6 Examples of costs that can be attributed to contract activity in general and can be allocated to specific contracts include : (i) insurance; (ii) design and technical assistance; (iii) construction overheads. 8.7 Examples of costs that relate to activities of contractor generally, or that relate to contract activity but cannot be related to specific contracts, include : (i) general administration and selling costs; (ii) finance costs; (iii) research and development costs; (iv) depreciation of plant and equipment that cannot be allocated to particular contract. 8.8 Costs referred to in para 8.7 are usually excluded from accumulated contract costs because they do not relate to reaching present stage of completion of specific contract. However, in some circumstances general administrative expenses, development costs and finance costs are specifically attributable to particular contract and are sometimes included as part of accumulated contract costs." learned counsel specifically referred to para 8.8 and contended that finance costs should be usually excluded from accumulated contract costs. 7 . learned counsel also emphasized point that it is well-settled proposition of law that taxpayer is free to employ his own method of keeping accounts and for valuation of closing stock in accordance with established method of stock valuation. assessee is also free to change method of accounting as well as method of valuation of closing stock from time to time subject to condition that AO is satisfied that change effected by assessee is bona fide and changed method is followed regularly. For this proposition, learned counsel relied on following judgments : (i) ITO vs. Modi Rubber Ltd. (1993) 45 TTJ (Del) 415 : (1992) 43 ITD 396 (Del); (ii) CIT vs. Mopeds India Ltd. (1988) 173 ITR 347 (AP); (iii) CIT vs. Carborandum Universal Ltd. (1984) 39 CTR (Mad) 272 : (1984) 149 ITR 759 (Mad). 8. Shri Trivedi summed up his arguments by reiterating that issue not only stands concluded by Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra) and further covered in assessee s own case by orders of Tribunal for preceding assessment years, but on merits also interest has to be allowed from year to year. 9 . On behalf of Department, case was represented by Shri K.L. Maheshwari, CIT-Departmental Representative and Shri R.N. Parbat, senior Departmental Representative. Shri Maheshwari at outset, submitted that it is incorrect to say that assessees have been following consistent method of accounting wherein interest payable on borrowed funds is claimed from year to year and that such system has been accepted by Department. It is submitted that in books of account, interest expenditure has been consistently segregated between different projects and added to value of work-in- progress as reflected in books of account. This method of accounting has been followed by assessees since asst. yr. 1988-89 and in all subsequent assessment years including assessment years under appeal. In case of Wall Street Construction Ltd. upto asst. yr. 1991-92 assessee even did not claim deduction in respect of interest under s. 36(1)(iii). Similarly, in case of Patel Plaza Ltd. upto asst. yr. 1994-95 no deduction in respect of interest was claimed by assessee. Subsequently, assessees started claiming deduction only while computing total income for purpose of filing returns of income. Shri Maheshwari repeated that in books of account, interest expenditure is uniformly and consistently added to value of work-in-progress. It is, therefore, argued that assessees are actually following consistent method of accounting where interest expenditure is added to value of work- in-progress. Shri Maheshwari submitted that phrase method of accounting referred to in s. 145 of IT Act indicates method adopted by assessee while maintaining regular books of account and not method of computation of total income. learned CIT-Departmental Representative also invited our attention to provisions of s. 36(1)(iii) which prescribe that amount of interest paid in respect of capital borrowed for purposes of business is to be deducted. It is submitted that word paid as defined under s. 43(2) means actually paid or incurred according to method of accounting upon basis of which profits or gains are computed under head Profits and gains of business or profession . Here again, emphasis is on method of accounting upon basis of which profits are computed in books of account. Shri Maheshwari reiterated that insofar as books of account are concerned, interest expenditure is added to value of work-in-progress. 10. learned CIT-Departmental Representative submitted that there is no dispute that assessees are following project-completion method of accounting and all expenses referable to particular project are added to cost of project. He invited our attention to p. 9 of AO s order in case of Wall Street Construction Ltd. (supra) for asst. yr. 1993-94, where remarks of auditors in Schedule to annual accounts, narrating system of accounting followed by assessee, are reproduced as below : "The company follows completed project method of accounting, wherein profit on sale of residential and commercial units is recognized only when work in respect of project is completed/substantially completed. cost incurred and payments received while project is in progress are accumulated and carried forward as work-in-progress under inventories and as advances received from customers under current liabilities, respectively." 11. Shri Maheshwari also invited our attention to p. 11 of AO s order referred to above where on basis of order sheet noting dt. 11th March, 1997 for asst. yr. 1994-95 in case of Wall Street Construction Ltd. (supra), submissions made on behalf of company by Authorised Representatives have been reproduced as under : "The interest payment related to each project is included in cost of each project for which account is maintained project-wise. other administrative expenses are apportioned and expenses related to each project are debited to respective accounts. Only very few expenses which cannot be allocated are debited to P&L a/c. During this year total administrative expenses have been shown at Rs. 26,61,484. Out of this, Rs. 25,03,581 has been allocated to various projects which are still under progress and profits of which are not still under assessment during financial year 1993-94. balance of Rs. 1,57,903 has been debited to P&L a/c for year." 12. learned CIT-Departmental Representative, therefore, contended that there is no dispute whatsoever that all expenses including administrative expenses and finance costs have been added to cost of particular project in books of account. It is also submitted that interest cost has been identified and segregated by assessees in books of account in respect of different projects for different assessment years and details thereof are incorporated at p. 11 of AO s order referred to above. 13. learned CIT-Departmental Representative submitted that claiming interest from year to year under s. 36(1)(iii) has actually distorted profits earned by assessee of particular project because interest cost which pertains to one project has been claimed by assessee against income of another project. This has resulted into claiming of huge losses by assessee as per details given at p. 12 of AO s order referred to above as under : Asst. yr. Loss 1993-94 (-) 22,85,898 1994-95 (-) 80,28,459 1995-96 (-) 1,42,72,497 1996-97 (-) 83,47,382 14. It is reiterated that assessees are offering income on completion of project but by adopting peculiar method they are claiming deduction for interest much earlier against income of such projects, which are completed in these years. 15. Coming to Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra) learned CIT-Departmental Representative forcefully argued that in that case only issue considered by Hon ble Bombay High Court was whether interest on borrowed capital utilized for obtaining development rights in respect of loan was capital expenditure or revenue expenditure allowable under s. 36(1)(iii) in case of assessee engaged in business of construction of buildings. It is submitted that relevant question as to whether interest cost should be added to value of work-in-progress in case of assessee following project- completion method, was never addressed by Hon ble Bombay High Court. learned CIT-Departmental Representative submitted that Tribunal while deciding this issue for asst. yr. 1994-95 in case of Wall Street Construction Ltd. (supra) followed Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra). For subsequent asst. yrs. 1995-96 and 1996-97, issue was considered as covered by other Benches of Tribunal. learned CIT-Departmental Representative invited our attention to Tribunal s order dt. 9th July, 2001 in ITA No. 148/Mum/1999 in case of Patel Plaza Ltd., wherein after detailed discussion, it has been held that interest expenditure must be added to value of work-in-progress. Similar view is stated to have been adopted by Tribunal in case of Mont Blanc Properties & Industries Ltd. (ITA Nos. 1051 and 1221/Bom/1994). Copies of abovementioned orders are placed on record. learned CIT-Departmental Representative has also placed strong reliance on Mumbai Tribunal decision in case of S.K. Estates (P) Ltd. vs. Asstt. CIT (supra). 1 6 . Shri Maheshwari also advocated before us what he referred to as matching concept of income and expenditure. In other words, he argued that expenditure which is relevant to earning of income only should be deducted from such income so that correct picture of real income chargeable to tax can emerge. For this proposition, he relied on Hon ble Bombay High Court decision in case of Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Bom) 256 : (2003) 260 ITR 102 (Bom). He invited our attention to following observations of High Court, which are extracted below from para 22 of order : "Therefore, under mercantile system of accounting, in order to determine net income of accounting year, revenue and other incomes are matched with cost of resources consumed (expenses). Under mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during accounting period, irrespective of actual cash in flow, is required to be compared with expenses incurred during same period, irrespective of actual outflow of cash....... This concept is also applied by Supreme Court in case of MIIC Ltd. (supra) under following observations : Ordinarily, revenue expenditure which is incurred wholly and exclusively for purpose of business must be allowed in its entirety in year in which it is incurred. It cannot be spread over number of years even if assessee has written it off in his books, over period of years. However, facts may justify assessee who has incurred expenditure in particular year to spread and claim it over period of ensuing years. In fact, allowing entire expenditure in one year might give very distorted picture of profits of particular year. Issuing debentures is instance where, although assessee has incurred liability to pay discount in year of issue of debentures, payment is to secure benefit over number of years. There is continuing benefit to business of company over entire period. liability should, therefore, be spread over period of debentures. Therefore, matching concept, which we have referred to is well recognized by various judgments of Supreme Court. In this case, issue is whether entire expenditure distorts profits of particular year. In this case, we are concerned with computation of income and, therefore, method of accounting followed by assessee is relevant because accrual of income is to be seen in light of method of accounting. We may also point out that this matching concept is also covered by s. 36(1)(iii) r/w s. 43(2), which defines word paid . Both these sections form part of Chapter IV Computation of business income. In this case, we are concerned with payment of Rs. 55 being interest of five years paid in first year. total amount involved is Rs. 2,72,25,000. term interest has been defined under s. 2(28A) of Act. Briefly, interest payment is expense under s. 36(1)(iii). Interest on monies borrowed for business purposes is expenditure in business [see M.L.M. borrowed for business purposes is expenditure in business [see M.L.M. Muthiah Chettiar vs. CIT (1959) 35 ITR 339 (Mad)]. For claiming deduction under s. 36(1)(iii), following conditions are required to be satisfied, viz., capital must have been borrowed; it must have been borrowed for business purpose and interest must be paid. word paid is defined in s. 43(2). It means payment in accordance with method followed by assessee. In present case, therefore, word paid in s. 36(1)(iii) should be construed to mean paid in accordance with method of accounting followed by assessee i.e., mercantile system of accounting. In first year ending 31st March, 1996, assessee borrowed Rs. 495 lakhs (Rs. 4.95 crores) from Maliram Makharia Stock Brokers (P) Ltd. whereas, in accounting year ending 31st March, 1997, it borrowed Rs. 100 lakhs (Rs. 1 crore) from Sharp Knife Co. (P) Ltd. In other words, assessee got benefit of Rs. 495 lakhs for accounting year 31st March, 1996 and Rs. 100 lakhs for accounting year ending 31st March, 1997 (in all amounting to Rs. 595 lakhs). Now, if matching concept is not applied then, profits get distorted. In this connection, following facts may be seen. For year ending 31st March, 1996, assessee has submitted that it has incurred expenditure amounting to Rs. 2,72,25,000 as and by way of interest deductible under s. 36(1)(iii) of IT Act. However, in annual accounts, said amount is not debited to P&L a/c. It is interesting to note from P&L a/c for year ending 31st March, 1996, that profit after tax was Rs. 1,86,34,016. Now if expenditure incurred was Rs. 2,72,25,000 as submitted by assessee then assessee could never have earned said profit of Rs. 1,86,34,016. This is how profit got distorted. In annual report, assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, AO has recorded finding of fact which categorically brings out matching concept. He has stated that for accounting year 31st March, 1996, profit after tax increased to Rs. 1,86,34,016 from Rs. 50 lakhs in last year ending 31st March, 1995. Therefore, AO was right in apportioning expenditure at 18 per cent per annum on Rs. 495 lakhs amounting to Rs. 74,250 for three days because only then estimated expenditure could match with income of Rs. 1,86,34,016. If expenditure was Rs. 2,72,25,000, net profit cannot be Rs. 1,86,34,016. assessee followed mercantile system of accounting. In their annual accounts, assessee has shown Rs. 2,72,25,000 as deferred revenue expenditure. Therefore, in our view, expenditure of Rs. 2,72,25,000 though paid was not incurred and, in fact, what was incurred was Rs. 74,250 for year ending 31st March, 1996. To put it in different way, annual accounts show that Rs. 2,72,25,000 represented interest of five years. If so, expenditure for five years cannot match with income of one year amounting to Rs. 1,86,34,016." 17. Shri Maheshwari also relied on Hon ble Supreme Court decision in case of CIT vs. U.P. State Industrial Development Corpn. (1997) 139 CTR (SC) 267 : (1997) 225 ITR 703 (SC) for proposition that in order to determine question of taxability, well-settled legal principles as well as principles of accountancy have to be taken into account and that for purpose of ascertaining profits and gains, ordinary principles of commercial accounting should be applied. 18. Learned CIT-Departmental Representative also relied on Tribunal, Calcutta Bench decision in case of J.C.T. Ltd. vs. Asstt. CIT (1998) 61 TTJ (Cal) 206 : (1998) 65 ITD 169 (Cal), in support of his contention that deduction under s. 36(1)(iii) is not available if different treatment has been given in books of account. He invited our attention to ratio of this case, relevant para of which is extracted below from headnote : "Thus, there was no basis to hold that provisions of s. 36(1)(iii) supersede provisions of s. 43(1) relating to actual cost insofar as interest paid on borrowings made for acquisition of capital assets was concerned. Both provisions co-exit. In these circumstances, option exercised in books of account would be decisive. In case of existing business, interest paid on borrowings for acquisition of capital asset can be treated as revenue expenditure as well as capital expenditure depending upon view taken by businessman on overall appraisal of facts and circumstances of his case. While in instant case, assessee found it more advantageous to press for deduction under s. 36(1)(iii) there might be assessees who may with equal vehemence contest for capitalization of similar amounts. Thus, provisions of s. 36(1)(iii) do not require that interest on loans taken for acquisition of fixed assets should necessarily be treated as revenue expenditure in every case after business has come into existence. If interest is capitalized in books of account and treated as part of actual cost, provisions of s. 36(1)(iii) would not be applicable because amount of interest paid no longer retains its separate character and existence and represents integral part of cost of acquisition of assets itself. Therefore, assessee s contention that in view of provisions of s. 36(1)(iii), amount of interest had to be allowed as deduction irrespective of treatment given in books of account was not legally tenable and unacceptable. These provisions had no application on cost of assets to assessee which is governed by provisions of s. 43(1) and other allied provisions pertaining to depreciation allowable, etc. Therefore, AO was right in rejecting assessee s claim for deduction under s. 36(1)(iii)." 19. Shri Maheshwari also invited our attention to AS-7, relevant portion of which has been reproduced above. It is submitted that para 8.8 of AS-7 makes it very clear that if finance costs are specifically attributable to particular contract, same have to be included as part of accumulated contract costs. learned CIT-Departmental Representative submitted that this accounting mandate is further fortified by AS-16 issued in year 2000. He invited our attention to following definitions contained at para 3 of AS-16 : "Borrowing costs are interest and other costs incurred by enterprise in connection with borrowing of funds. qualifying asset is asset that necessarily takes substantial period of time to get ready for its intended use or sale." (Emphasis, italicized in print, supplied) It is submitted that building project would come under definition of qualifying asset . He then referred to method adopted for treatment of finance costs in respect of qualifying asset as prescribed at para 6 of AS-16, relevant para of which is as under : "Borrowing costs that are directly attributable to acquisition, construction or production of qualifying asset should be capitalized as part of cost of that asset." 2 0 . learned CIT-Departmental Representative reiterated that finance costs identifiable with particular project have to be added to cost of project as any other method is going to distort profits of project. 21. In his rejoinder, Shri P.R. Toprani, attending on behalf of assessee- company submitted that in books of account, interest is added to value of work-in-progress only for determination of cost of that project and insofar as deductibility is concerned, interest expenditure has to be allowed in year in which same accrues as per mandate of s. 36(1)(iii) of IT Act. 2 2 . We have given our careful consideration to arguments and submissions so ably put before us by both sides. We have also considered t h e relevant facts and legal position as emerging from various judicial pronouncements with which we have been assisted. At outset, it must be made clear that there is no dispute about factual position in respect of t w o cases. In books of account, interest expenditure is allocated to different projects and interest expenditure referable to particular project is added to value of work-in-progress in respect of that project. reference may be made to Schedules annexed to and forming part of accounts for year ended 31st March, 1993 in case of Wall Street Construction Ltd. Note No. 1 with title System of Accounting declares that company follows completed project method of accounting and that work-in-progress is valued at cost. Note No. 2 declares that cost of construction includes cost of land, development rights, construction, development, administration, marketing and finance. During course of assessment proceedings, Authorised Representatives of assessees had categorically admitted that assessees are following project-completion method of accounting. In books of account, interest expenditure has been consistently identified and added to value of work-in-progress. This factual position is conclusively established from project-wise and assessment year-wise break of interest expenditure reproduced by AO at p. 11 of his order in case of Wall Street Construction Ltd. (supra) for asst. yr. 1993-94, which is reproduced below : 91- 92-93 93-94 94-95 95-96 96-97 92 Borivli N. Nil 43,999 1,28,077 22,93,887 53,46,993 10,73,288 Manor Pune N. Nil Nil 4,614 8,73,755 9,61,671 19,19,447 Hill Bangalore Natasha Golf Nil 19,49,740 33,83,951 66,93,185 36,47,818 91,09,469 View Bangalore Nil 92,148 39,219 64,860 Nil 8 N. Penta Goa- Nil Nil 19,705 2,37,796 17,34,188 Nil Casa Natasha Goa- Nil Nil Nil Nil 24,97,267 10,99,500 Dona Natasha However, deduction under s. 36(1)(iii) is claimed by assessees while filing returns of income as per computation of total income. 23. In this factual scenario, it must be examined at very beginning as to whether Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra) concludes relevant issue. If answer is yes, we need not proceed further in this matter as Hon ble Bombay High Court decision would be binding. In that case, while stating facts, Hon ble High Court observed that assessee-company was engaged in business of construction of buildings and assessee followed mercantile system of accounting and "modified project-completion method" for computing its profits. assessee secured development rights in respect of plot of land and for this purpose, interest-bearing borrowed funds were utilized. assessee claimed deduction in respect of interest paid under s. 36(1)(iii), which was allowed by AO. CIT invoked his jurisdiction under s. 263 and held that borrowed funds were utilized in acquiring capital asset and, therefore, interest was capital expenditure. On these facts, following question of law arose before High Court : "Whether, on facts and in circumstances of case, Tribunal was correct in law in holding that interest claimed as revenue expenditure was correct in law in holding that interest claimed as revenue expenditure amounting to Rs. l4,09,942 cannot be treated as capital expenditure and added to work-in-progress in spite of fact that other expenses on project were being capitalized by assessee itself and holding that CIT was wrong in directing AO to disallow said interest and treat same as capital expenditure as part of work-in-progress, thereby quashing order under s. 263 of Act of CIT ?" 24. Hon ble High Court answered above question in affirmative on basis of following reasoning as reproduced from p. 581 of report : "From facts found by Tribunal on record, it is clear that assessee undertook two-fold activities. It bought and sold flats. Secondly, assessee was also engaged in business of construction of buildings. profits from both activities were assessed under s. 28 of IT Act. In this case, we are concerned with second activity (hereinafter referred to, for sake of brevity, as Kandivali project ). According to CIT, loan was raised for securing land/development rights from Mandal. That loan was utilized for purchasing development rights, which, according to CIT, constituted capital asset. According to CIT, since loan was raised for securing capital asset, interest accrued thereon constituted part of capital expenditure. This finding of CIT was erroneous. In case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) it was held by Supreme Court that in cases where act of borrowing was incidental to carrying on of business, loan obtained was not asset. That, for purposes of deciding claim of deduction under s. 10(2)(iii) of Indian IT Act, 1922 [s. 36(1)(iii) of present IT Act], it was irrelevant to consider purpose for which loan was obtained. In present case, assessee was builder. In present case, assessee had undertaken project of construction of flats under Kandivali project. Therefore, loan was for obtaining stock-in-trade. That, Kandivali project constituted stock-in-trade of assessee. That project did not constitute fixed asset of assessee. In this case, we are concerned with deduction under s. 36(1)(iii). Since assessee had received loan for obtaining stock-in- trade (Kandivali project), assessee was entitled to deduction under s. 36(1)(iii) of Act. That, while adjudicating claim for deduction under s. 36(1)(iii) of Act, nature of expense whether expense was on capital account or revenue account was irrelevant as section itself says that interest paid by assessee on capital borrowed by assessee was item of deduction. That, utilization of capital was irrelevant for purposes of adjudicating claim for deduction under s. 36(1)(iii) of Act [see judgment of Bombay High Court in case of Calico Dyeing & Printing Works vs. CIT (1958) 34 ITR 265 (Bom)]. In that judgment, it has been laid down that where assessee claims deduction of interest paid on capital borrowed, all that assessee had to show was that capital which was borrowed was used for business purpose in relevant year of account and it did not matter whether capital was borrowed in order to acquire revenue asset or capital asset. said judgment of Bombay High Court applies to facts of this case." 25. From above it becomes apparent that case of Lokhandwala Construction Industries Ltd. (supra) arose in entirely different facts. There Hon ble High Court was concerned with question as to whether interest expenditure is capital expenditure or revenue expenditure. Hon ble High Court referred to its earlier judgment in case of Calico Dyeing & Printing Works vs. CIT (1958) 34 ITR 265 (Bom) where it was held that for claiming deduction of interest, all that assessee has to prove is that capital was borrowed for business purposes and it was immaterial as to whether borrowed funds were utilized for acquiring capital asset or revenue asset. On contrary, controversy in present appeals is totally different. Here, we are concerned with question as to whether interest expenditure identifiable with particular project, in case of assessee following project-completion method of accounting, is to be deducted as period cost from year to year or same is to be added to cost of that particular project so as to allow deduction eventually in year of completion of project. There is no dispute regarding nature of expenditure being capital or revenue. We are, therefore, of view that Hon ble Bombay High Court decision is not applicable to facts of present appeals. However, when this issue came up before Tribunal in case of Wall Street Construction Ltd. (supra) for asst. yr. 1994-95, Tribunal reproduced relevant portion of Hon ble Bombay High Court decision in case of Lokhandwala Construction Industries Ltd. (supra) and recorded following finding at para 12 of order : "The facts of present case are exactly similar to case decided by t h e Hon ble Bombay High Court (supra), therefore, enhancement of income of assessee by Rs. 1,01,63,484 made by learned CIT(A) is unjustified. addition made by learned CIT(A) is, therefore, deleted." For asst. yrs. 1995-96 and 1996-97 in case of Wall Street Construction Ltd., issue was treated by Tribunal as covered and was accordingly decided in assessee s favour. We have already held that decision in case of Lokhandwala Construction Industries Ltd. (supra) is not applicable to facts of cases before us and therefore, this issue has to be considered and decided on merits. 26. learned counsel for assessee placed reliance on Hon ble Calcutta High Court decision in case of Tetron Commercial Ltd. (supra). relevant part of ratio of this case may be extracted below from headnote: "Whether deduction under s. 36(1)(iii) of IT Act, 1961, is available or not is dependent on question whether capital borrowed is for purpose of business of assessee. If it is found that capital was borrowed for purpose of business of assessee, interest payable thereon is admissible under said section. It is immaterial whether same is in nature of capital expenditure or revenue expenditure. If expenditure is business expenditure which relates to any stage of business activity carried on by assessee, whether isolated transaction or not, it is admissible for deduction under said section. business commences with activities undertaken even at preparatory stage for setting up of business. Acquisition of immovable property for being used in business by borrowed capital entitles assessee to claim benefit of section on interest paid thereon, even if asset acquired is not utilized for purpose of business in relevant previous year." 27. We fail to appreciate relevance of this case relied upon by learned counsel for assessee. issue was entirely different. learned counsel also strongly relied on Hon ble Bombay High Court decision in case of Goodlas Nerolac Paints Ltd. (supra) for proposition that Department is not entitled to discard regular system of accounting consistently followed by assessee. As already discussed by us above, assessees have been following system of accounting where interest expenditure is allocated project-wise and is added to value of work-in-progress in books of account. Therefore, in our view, arguments of learned counsel that method of accounting regularly followed by assessees has been unjustifiably discarded by Department, does not hold in water. Further, Hon ble Bombay High Court decision in case of Goodlas Nerolac Paints Ltd. (supra) does not in any way come to rescue of assessees, which would become clear from relevant observations of Hon ble High Court, which are reproduced below from p. 5 of report : "Before parting with this question, we consider it desirable to mention that Tribunal is final Judge of facts. High Court, in reference, does not interfere with findings of fact unless such finding is perverse or is such that no reasonable person can come to such finding. This will be so even when High Court feels that it would have come to different conclusion, if it was sitting in appeal. In that sense, when High Court declines to interfere with finding of fact given by Tribunal in earlier year, it may not mean that High Court had approved of such finding. This, however, does not mean that subsequent Bench of Tribunal should come to conclusion totally contradictory to conclusion reached by earlier Bench of Tribunal in same case for earlier year on similar set of facts. Such thing may not be in larger public interest as it is likely to shake confidence of public in system. It is, therefore, desirable that in case subsequent Bench of Tribunal is of view that finding given by Tribunal in earlier year requires reappraisal either because appreciation, in its view, was not quite correct or inequitable or some new facts have come to light justifying reappraisal or reappreciation of evidence on record, it should have matter placed before President of Tribunal so that case can be referred to larger Bench of Tribunal for adjudication and for which there is provision in IT Act." 28. Hon ble High Court observed that if subsequent Bench of Tribunal does not concur with view adopted by earlier Bench, issue must be referred for constitution of Special Bench. This is what has been done in present cases. 29. reference may also be made to some other cases relied upon by learned counsel for assessee. In case of Modi Rubber Ltd. (supra) decided by Tribunal, Delhi Bench, assessee was manufacturer of automobile tyres and tubes and question pertained to valuation of closing stock. ratio of this case may be reproduced below from head note : "It is well-settled proposition of law that taxpayer is free to employ, for purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade in accordance with established method of stock valuation. method of accounting adopted by trader consistently and regularly cannot be discarded by AO unless in his opinion income of trade cannot be properly deduced therefrom. It is also well-settled that assessee is permitted to change method of accounting as well as method of valuation of closing stock from time to time subject to condition that AO is satisfied that change effected by assessee is bona fide for meeting changed situation or changed circumstances and provided change is for regular adoption. In instant case, assessee has adopted direct-cost method in respect of goods in process and finishing goods. Three factors are to be taken into account, namely, (a) cost of purchase, (b) cost of conversion, and (c) other costs incurred in normal course of business in bringing inventories upto their present location and conditions. It was nobody s case that cost of raw material had not been correctly taken by assessee. In cost of conversion direct labour, direct expenses and sub-contracted work are to be taken into account and in addition to that production overheads are to be ascertained in accordance with other direct costing or absorption costing method. assessee, in instant case, had taken into account salary, wages, bonus, ex gratia payments, etc. to staff and workers. It had taken into account power and fuel consumed, repair and maintenance to plant and machinery, repairs and maintenance to factory buildings. items that had been excluded were administration overheads, selling and distribution overheads, interest and depreciation. There was no doubt about exclusion of administrative, selling and distribution overheads. doubt was in relation to interest and depreciation. Since in taking production overheads direct costing is permissible, fixed costs are to be excluded in determining cost. Fixed costs are defined to be those costs of production which by their very nature remain relatively unaffected in definite period of time by variations in volume of production. Depreciation would be such of items which is charged on fixed percentage irrespective of volume of production and could be excluded in working out production overheads for determination of cost of conversion of goods. As to interest on finance, since expenditure on finance had specifically been provided to be excluded in determining cost of production, it was permissible to exclude interest in respect of finances. If system of accounting was regularly followed in subsequent assessment years, there would not be any loss to Revenue. Once uniform system of accounting was adopted, determination of correct profit by such method would be fair and reasonable." 30. From above, it may be seen that facts were entirely different. There was no question regarding project-completion method and determination of cost of project in case of builder. other two cases relied upon by learned counsel for assessees namely, viz., Mopeds India Ltd. (supra) decided by Hon ble Andhra Pradesh High Court and Carborandum Universal Ltd. (supra) decided by Madras High Court are also on question of valuation of stock. These cases, in our view, cannot be applied for purpose of determination of cost of work-in-progress in case of builder, who is following project-completion method. For same reasoning, we do not find much merit in argument of learned counsel for assessee that adding finance costs to value of work-in-progress would artificially inflate market price of project. This argument may be relevant for case where profits chargeable to tax is determined from year to year. In such case, valuation of closing stock either at cost or market price whichever is lower, assumes importance. However, in case of builder following project- completion method of accounting, this has no relevance for simple reason that determination of profits chargeable to tax is postponed to year in which project is completed or is substantially completed. In our view, true profits in such case can be determined only when entire cost of project, direct or indirect, including finance cost is added to value of work-in- progress. This proposition is also fortified by matching concept, as propounded by Hon ble Bombay High Court in case of Taparia Tools Ltd. (supra). In present cases, assessees have identified interest cost and have allocated such cost to different projects in books of account, but deduction in respect of interest is claimed under s. 36(1)(iii) against income of some other projects which are completed during relevant years. In our view, this procedure results into distortion of correct profits which must be determined as per project-completion method followed by assessees. 31. For reasons discussed above, we hold that where assessee is following project-completion method of accounting, interest identifiable with that project should be allowed only in year when project is completed and income from that project is offered for taxation. 32. records shall now be placed by Registry before Division Bench for disposal of relevant appeals in accordance with our decision insofar as issue referred to us is concerned and for disposal of other grounds of appeals on merits. *** WALL STREET CONSTRUCTION LTD. & ANR. v. JOINT COMMISSIONER OF INCOME TAX