HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 309 / 2017 Pr. Commissioner of Income Tax, Jaipur-3, Statue Circle, C- scheme, Jaipur. ----Appellant Versus M/s Aditya Propcon Pvt. Ltd., A-2, Pushp Enclave, Pratap Nagar, Sector-5, Jaipur AY 2011-12 ----Respondent For Appellant(s) : Mr.Daksh Pareek for Mr.Sameer Jain For Respondent(s) : Ms. Archana for Mr. Sanjay Jhanwar HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 07/11/2017 1. By way of this appeal, appellant has challenged judgment and order of Tribunal whereby Tribunal has dismissed appeal preferred by department. 2. Learned counsel for appellant framed following substantial questions of law : 1. Whether on facts and in circumstances of case and in law, Hon ble ITAT was justified in holding that provision of expenses of Rs.30,36,540/- calculated on estimate basis is allowable to assessee, merely because actual expenditure incurred in future years is more than expenses estimated by assessee wile making provision? 2.Whether on facts and circumstances of case, assessee can claim as interest expenditure of Rs.3,24,92,621/- as business expenditure which is neither in consonance of method of accounting nor practice/accounting policy followed by assessee. 3. Counsel for appellant has taken us to order of AO as well as he is praying that issue is covered by (2 of 12) [ITA-309/2017] decision of this Court in case of D.B. Income Tax Appeal No. 82/2014, Commissioner of Income Tax, Jaipur-II Vs. M/s. Aditya Propcon (P) Ltd. Pushp Enclave, Pratap Nagar, Sector-5, Jaipur, decided on 10.10.2017 which reads as under:- 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. In appeal No.164/2017, application (21970/2017) for amending substantial question of law is allowed. 3. said appeal (164/2017) has not been admitted which is now admitted on following amended substantial question of law:- Whether on facts and in circumstances of case, assessee can claim as interest expenditure of Rs.2,32,13,786/- as business expenditure which is neither in consonance of method of accounting nor practice/accounting policy followed by assessee? 4. By way of these appeals, appellant has assailed judgment and order of Tribunal whereby Tribunal has dismissed appeal of department and confirmed order of CIT(A). 5. This court while admitting appeals framed following substantial question of law:- 5.1 Appeal No.82/2014 admitted on 17.1.2017 Whether on facts and in circumstances of case, assessee can claim as interest expenditure of Rs.37369323/- as business expenditure which is neither in consonance of method (3 of 11) [ITA-82/2014] of accounting nor practice/accounting policy followed by assessee? 5.2 Appeal No.163/2017 admitted on 24.7.2017 Whether on facts and circumstances of case, assessee can claim as interest expenditure of Rs.2,32,13,786/- as business expenditure which is neither in consonance of method of accounting nor practice/accounting policy followed by (3 of 12) [ITA-309/2017] assessee. 6. facts of case are that assessee has sold 15973 sq. ft. of area out of total 89966 sq. ft. saleable area. AO computed cost of goods sold at Rs.33588773/- against Rs.38485063 claimed by assessee. amount of difference of Rs.4896290/- was added in total income. Further AO made addition of Rs.1420327/- on account of estimated expenditure incurred on goods sold as assessee did not furnish any details in respect of expenses of Rs.80 lacs claimed by him. AO made addition of Rs.37369323/- on account of interest cost for project -2 in value of inventory by applying AS-16. 7. Counsel for appellant has taken us to order of AO wherein it has been observed as under:- 4.4 I have gone through reply of assessee. Reply of assessee is examined in light of method of accounting regularly adopted by it and Accounting Standard-2 and 16. a. I would like to discuss first specific provisions contained in Income-tax Act, 1961 with respect to valuation of (4 of 11) [ITA-82/2014] inventories i.e. Section 145A, hence, same is reproduced below:- 145A. Method of accounting in certain cases Notwithstanding anything to contrary contained in section 145,- (a) valuation of purchase and sale of goods and inventory for purposes of determining income chargeable under head Profits and gains of business or profession shall be- (I) in accordance with method of accounting regularly employed by assessee; and According to said Section, inventory must be valued in accordance with method regularly employed by (4 of 12) [ITA-309/2017] assessee. Now question comes what is method of valuing inventory employed by Assessee? Schedule 9 attached to Balance sheet contains significant accounting policies and relevant policies employed by assessee with respect to valuation of inventories as follows:- A. ACCOUNTING POLICIES & PRACTICES financial statements are prepared on Sales Revenue, Related cost and Inventory Valuation (a) Revenue is recognized .. (b) Stock of land, Land development is valued at cost. Cost comprises of those cost that relates directly to specific project of cost that can be attributed to project activity in general and can be allocated to specific projects. It shows that assessee is consistently valuing inventories at cost and further term cost also includes cost attributed to project in general and can be allocated to specific project. Further, while valuing inventory of Project-1, Assesse has included interest cost also which confirms that Assessee is following method as stated in Schedule 9 as (5 of 11) [ITA-82/2014] discussed hereinbefore. However, while valuing inventory of Project-2, policy laid down has not been adhered to, therefore, valuation of Project-2 is neither according to Assessee s own accounting policies nor according to policy adopted for Project-1, hence, not according to requirement of Section 145A of Incometax Act, However, to deal with reply of Assessee, wherein, Accounting Standard 2 and Accounting Standard 16 issued by Institute of Chartered Accountants of India have been discussed. (5 of 12) [ITA-309/2017] B. AS-2 deals with valuation of inventory and it says that interest cost is usually not included in value of inventory. It is important to note that said AS-2 use word Usually means it does not bar inclusion of interest cost to value of inventory. Further, it can be included if other factors allows it. In reference, AS-16 addressing issue of borrowing cost (Interest) is important and relevant Para s are reproduced as follows for ready reference:- qualifying asset is asset that necessarily takes substantial period of time to get ready for its intended use or sale. Para 5 of AS-16:- Examples of qualifying assets are manufacturing plants, power generation facilities, inventories that require substantial period of time to bring them to saleable condition, and investment properties. Other investments, and those inventories that are routinely manufactured or otherwise produced in large quantities on repetitive basis over short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. Para 10 of AS-16:- To extent that funds are borrowed specifically for purpose of obtaining qualifying asset, amount of borrowing costs eligible for capitalization on that asset should be determined as (6 of 11) [ITA- 82/2014] actual borrowing costs incurred on that borrowing during period less any income on temporary investment of those borrowings. Commencement of Capitalization Para-14:- Capitalization of (6 of 12) [ITA-309/2017] borrowing costs as part of cost of qualifying asset should commence when all following conditions are satisfied: (a) expenditure for acquisition, construction or production of qualifying asset is being incurred; (b) Borrowing costs are being incurred; and (c) Activities that are necessary to prepare asset for its intended use or sale are in progress. Para-16:- activities necessary to prepare asset for its intended use or sale encompass more than physical construction of asset. They include technical and administrative work prior to commencement of physical construction, such as activities associated with obtaining permits prior to commencement of physical construction. However, such activities exclude holding of asset when no production or development that changes asset s condition is taking place. For example, borrowing costs incurred while land is under development are capitalized during period in which activities related to development are being undertaken. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization. 8. He contended that CIT(A) has committed serious error in observing as under:- It was contended by Revenue that ITAT had grossly erred in law as well as in facts while holding that revised AS-2 (7 of 11) [ITA-82/2014] issued by ICAI was mandatory for chartered accountants for finalisation of accounts but it was not mandatory for Department. It was argued by Revenue that since assessee had valued its stores/inventories on cost or market price, whichever was less, (7 of 12) [ITA-309/2017] therefore, it could not be now valued on realisation value. That apart, it was further submitted by Revenue that assessee had valued thousands of items at 5 percent of cost irrespective of year of purchase or condition of item, therefore, Assessing Officer had committed no error in disallowing amount of Rs.68,59,108 written off as obsolete stores and claimed in profit and loss account under head Plant and machinery repairs . assessee on other hand argued that practice of writing down inventories below cost to net realisable value was consistent with view that assets should not be carried in excess of amount to be realised from their sale or use. It was submitted that assessee had valued its inventory which were entirely rusted, non-moving and unusable on account of its obsolescence/damage of deterioration at cost or realisation value, whichever was lower. Hon ble ITAT after due examination of material on record had arrived at categorical finding that stores which were valued by assessee at Rs.3.5 Lakhs or partly consumed in subsequent years at Rs.2.08 Lakhs and remaining portion was sold at Rs.3.46 Lakhs and, accordingly, value of stores came to Rs.6.54 Lakhs as against value estimated by assessee at Rs. 3.59 lakhs. Thus, keeping in view, afore-said factual position, valuation of stores at 10 percent of cost made by Commissioner of Income-tax (Appeals) confirmed by Income-tax (8 of 11) [ITA-82/2014] Appellate Tribunal could not be faulted with. Hon ble Rajasthan High Court held that as per provisions of section 145A of Act of 1961, income from business under head (8 of 12) [ITA-309/2017] Profits and gains from business had to be computed in accordance with method of accounting regularly employed by assessee. Similarly, section 145A of Act provided that inventory would be valued in accordance with method of accounting employed by assessee, therefore, if method of valuation adopted by assessee was recognised method, then, same could not be rejected on ground that net realisable value/market value had been determined on basis of certain estimate. It is to be noticed that Assessing while holding that inventories valued by assessee at 5 percent was excessive, did not care to estimate net realisable value of store and proceeded to disallow amount of Rs.68,59,108 written off as obsolete stores and claimed in profit and loss account altogether. It had come on record that assessee had valued inventories such as nut, bolt, glass fuse, bearing, bushes, lock pin, pipe, screw etc., which were rusted non-moving and unusable on account of obsolescence/damage/deterioration by efflux of time at cost and net realisation value, whichever was lower. It had also come on record that these items were 5-6 years old. It was also not disputed that assessee had made requisite efforts to dispose of same. That apart, some of these items were actually sold in subsequent years at price 8.43 percent of cost. Thus, considering totality of facts and circumstances, it was held by Hon ble Jurisdictional High Court that value of stores inventory written down taken at 10 percent of cost by (9 of 11) [ITA-82/2014] Commissioner of Income-tax (Appeals), could not be faulted with. Further no ulterior motive can be imputed to (9 of 12) [ITA-309/2017] appellant company to hold that claim of interest was not genuine. Even if it had been capitalized then it was allowable in year of sale. I therefore direct AO to allow deduction of Rs. 3,73,69,323/- on account of interest U/s 36(1)(iii) to appellant company. This ground of appeal is allowed. 9. He further contended that tribunal has also committed error in observing as under:- 18. We have heard parties and perused material available on record and also orders of authorities below. We find that books of accounts of assessee are audited and ld. Auditor has not given any adverse comment for not following accounting standards which are mandatory for company u/s 211 of Companies Act, 1956. We also find that there is n dispute that said land is part of inventory for assessee and is not capital asset. assessee has produced evidences of no increase in land price and AO has not brought anything on record to support that assessee would be able to realise interest cost incurred over and above cost of purchase of land. In such circumstances, as per basic accounting principles of valuation of inventory that inventory is to be valued at cost or net realisable value which -ever is lower. uncontroverted evidences show that there is no buyer of similar land in same vicinity at price which is lesser than price paid by assessee and therefore, we are convinced with CIT(A) and A/R has stated that assessee has not taken up project activity even till 31.3.2013. delay in project is for economic reasons. In such circumstances, (10 of 11) [ITA- 82/2014] AS-16 does not allow (10 of 12) [ITA-309/2017] capitalisation of interest cost alongwith cost of land. It allows capitalisation of interest cost only during normally period of construction and not for inordinate delay in construction activity due to adverse market forces. There is specific requirement of AS-16, not to capitalise interest cost along with cost of land if it is held without any associated development activity. Accordingly, accounting treatment of interest cost is perfectly in line with Accounting Standards. We further find that despite any accounting treatment, interest on capital borrowed for purpose of business is allowable u/s 36(1) (iii). proviso has been inserted w.e.f. 1.4.2004 which reads as under:- Provided that any amount of interest paid, in respect of capital borrowed for acquisition of asset for extension of existing business or profession (whether capitalised in books of account or not); for any period beginning from date on which capital was borrowed for acquisition of asset till date on which such asset was first put to use, shall not be allowed as deduction . proviso specifically referred to interest paid in respect of capital borrowed for acquisition of any asset for extension of existing business. present case is of acquisition of land for its development in course of real estate activity of assessee. Assessee is about to complete one project and to continue activities has purchased another land to develop another project. argument of ld. DR that proviso would apply to assessee s case cannot be accepted. We are of considered opinion that purchase of inventory is continuation (11 of 12) [ITA-309/2017] of same business activity in routine course and cannot be termed as extension of business activity. proviso has been inserted to disentitle claim of interest on funds borrowed for acquisition of capital assets for period upto asset is put to use. term put to use here applies to capital asset only because capital assets is held to facilitate business (11 of 11) [ITA-82/2014] activity and sometimes it needs to be prepared after its acquisition for being used to facilitate business activity. As against this, purchase and holding of inventory item itself is business activity. In absence of this proviso, section 36(1) (iii) earlier entitled assessee to claim interest in respect of capital assets, even for period during which they were under construction as held in various judgments pointed out by ld. AR of assessee. interest was found allowable despite its capitalization in books of accounts in judgments. We are therefore, of opinion that interest on funds borrowed to purchase land which is part of inventory of assessee company is allowable deduction u/s 36(1)(iii). We accordingly reject this ground of departmental appeal also. 10. Counsel for respondent has supported order of authorities and contended that both authorities have rightly held in favour of assessee inasmuch as even if contentions which have been advanced by department, no tax liability has been reduced or there is any case of evasion of tax. 11. We are in complete agreement with view taken by both authorities i.e. CIT(A) and tribunal. 12. In that view of matter, issue is answered in favour of assessee and (12 of 12) [ITA-309/2017] against department. 13. appeals stand dismissed. 4. In that view of matter, no substantial question of law arises. Hence appeal is dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Chauhan/3 Pr. Commissioner of Income-tax, Jaipur-3, Jaipur v. Aditya Propcon Pvt. Ltd