Tribunal directs reassessment of loans & interest costs for 2013-14 & 2014-15

The Tribunal allowed the appeals for both assessment years 2013-14 and 2014-15, directing the Assessing Officer to re-examine the nature of the loans and the necessity of capitalizing interest costs in accordance with the matching principle and judicial precedents. The order was pronounced on 9th February 2022.

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Issues Involved:
1. Disallowance of finance cost attributable to Capital Work in Progress (CWIP) and Project Work in Progress (PWIP).
2. Consistency of the assessee's accounting method with Accounting Standard AS-16.

Issue-wise Detailed Analysis:

1. Disallowance of Finance Cost Attributable to CWIP and PWIP:
The assessee, engaged in manufacturing, installation, commissioning, and maintenance of windmills, filed returns showing losses. The Assessing Officer (AO) noticed significant borrowings and interest expenses but found that the assessee did not allocate interest costs to CWIP and PWIP. The AO disallowed Rs. 19,08,81,851/- of interest expenses under section 36(1)(iii) of the Income Tax Act, 1961, arguing that these should be capitalized as they relate to CWIP and PWIP.

The CIT(A) upheld the AO's decision, referencing judicial precedents such as the Supreme Court's decision in Challapalli Sugars Ltd. Vs. CIT, which mandates capitalizing all expenditures necessary to bring assets into existence. The CIT(A) concluded that the principle of capitalizing interest costs related to asset acquisition or project execution is consistent with the matching principle in accounting.

2. Consistency of the Assessee's Accounting Method with AS-16:
The assessee contended that its method of accounting, which charges interest on general borrowings to the Profit & Loss account and capitalizes interest on specific borrowings, aligns with Accounting Standard AS-16. The assessee argued that since the loans were not for specific purposes, the interest should not be capitalized.

The Tribunal found the assessee's argument unconvincing, noting that when direct and indirect expenses are debited to PWIP, interest attributable to these projects should also be capitalized, especially when no revenue is generated from these projects. The Tribunal emphasized the need to adhere to the matching principle, which requires capitalizing specific costs related to income revenue segments, including interest on projects.

The Tribunal directed the AO to re-examine the nature and purpose of the loans. If loans were taken for specific purposes, the interest should be capitalized to the work in progress account. The Tribunal set aside the issue to the AO for further examination in accordance with the law.

Conclusion:
The Tribunal allowed the appeals for both assessment years 2013-14 and 2014-15 for statistical purposes, directing the AO to re-examine the nature of the loans and the necessity of capitalizing the interest costs in line with the matching principle and judicial precedents. The order was pronounced in open court on 9th February 2022.

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