Interest expenses reclassified as inventory: Tribunal orders AO re-examine for revenue recognition compliance.

The case involved the disallowance of interest claimed in Profit and Loss Account and capitalizing it in inventory of work-in-progress for assessment years 2012-13 and 2013-14. The Tribunal remanded the matter to the AO for both years to determine the nature of interest expense and its allowability based on revenue recognition principles, directing a re-examination of the interest expenses.

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Issues involved:
The judgment involves the disallowance of interest claimed in Profit and Loss Account and capitalizing it in inventory of work-in-progress for assessment years 2012-13 and 2013-14.

I.T.A. No. 3153/DEL/2018 (A.Y. 2012-13):
The assessee contested the disallowance of interest and the relevance of Accounting Standards for allowability of interest expenses. The CIT(A) upheld the disallowance. The main contention was the recognition of revenue from the project and the applicability of tax accounting standards. The AO disallowed interest under sections 92CA(3) and 36(1)(iii), leading to a total income determination. The CIT(A) deleted the addition under section 92CA(3) but sustained the disallowance of interest. The assessee argued that revenue recognition was not mandatory at the project's initial stage and expenses were for business purposes. The DR argued that interest claimed was for earning revenue. The Tribunal remanded the matter to the AO to determine the nature of interest expense and its allowability based on revenue recognition.

I.T.A. No. 7197/DEL/2017 (A.Y. 2013-14):
Similar grounds were raised for AY 2013-14. The AO assessed the loss and made additions based on Accounting Standard-7. The assessee challenged the additions and interest levied under section 234B. The Tribunal remanded this matter to the AO as well, mirroring the directions given for AY 2012-13.

The Tribunal allowed both appeals for statistical purposes, directing a re-examination of the interest expenses in light of revenue recognition principles for the respective assessment years.

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