Project work-in-progress and TDS disallowance: only directly attributable borrowing costs are capitalised, and consistent treatment matters.

Only borrowing cost directly attributable to a project is required to be capitalised in work-in-progress; the balance may be charged to the profit and loss account under the project accounting policy and AS-16, so the assessee succeeded on that point. A disallowance under section 40(a)(ia) for failure to deduct tax at source cannot remain embedded in project work-in-progress and must reduce it, so the revenue succeeded on that point. An item booked only as a transfer between inventory heads was not a current-year expenditure or prior-period claim, and the assessee succeeded. Where an identical advertisement expense issue had already been accepted in an earlier year, the revenue could not take a contrary stand in the later year.

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Issues: (i) Whether the borrowing cost, other than the portion directly attributable to the project, could be debited to the profit and loss account instead of being capitalised in work-in-progress. (ii) Whether the disallowance under section 40(a)(ia) required reduction of the project work-in-progress for non-deduction of tax at source. (iii) Whether the amount treated by the Assessing Officer as prior period expenses was in fact a current-year claim warranting reduction of work-in-progress. (iv) Whether the revenue could challenge the deletion of advertisement /expenses for the subsequent year when an identical issue had been accepted in the earlier year.

Issue (i): Whether the borrowing cost, other than the portion directly attributable to the project, could be debited to the profit and loss account instead of being capitalised in work-in-progress.

Analysis: The assessee followed the percentage completion method and capitalised only the borrowing cost directly relatable to the project. The remaining borrowing cost was debited to the profit and loss account in accordance with the project accounting policy and AS-16. Only costs directly attributable to the project were required to be capitalised in work-in-progress.

Conclusion: The borrowing cost debited to the profit and loss account was correctly allowed, and the assessee succeeded on this issue.

Issue (ii): Whether the disallowance under section 40(a)(ia) required reduction of the project work-in-progress for non-deduction of tax at source.

Analysis: Where an expenditure is not allowable for failure to comply with tax deduction at source requirements under section 40(a)(ia), it cannot form part of the project cost accumulated in work-in-progress. The disallowance must therefore be reflected by reducing the work-in-progress to that extent.

Conclusion: The disallowance was rightly restored and the revenue succeeded on this issue.

Issue (iii): Whether the amount treated by the Assessing Officer as prior period expenses was in fact a current-year claim warranting reduction of work-in-progress.

Analysis: The amount represented a transfer between inventory heads for presentation purposes and was not claimed as an expenditure in the profit and loss account for the year. Since no deduction was claimed for the relevant year, the question of prior period expenditure did not arise.

Conclusion: The deletion of the adjustment was justified, and the assessee succeeded on this issue.

Issue (iv): Whether the revenue could challenge the deletion of advertisement /expenses for the subsequent year when an identical issue had been accepted in the earlier year.

Analysis: The identical claim had already been accepted in the earlier assessment year and no appeal had been pursued by the revenue on that issue. In such circumstances, a different stand on the same issue for a subsequent year was not maintainable.

Conclusion: The revenue's challenge failed and the assessee succeeded on this issue.

Final Conclusion: The appeal resulted in mixed relief, with one issue decided in favour of the revenue and the remaining issues decided in favour of the assessee.

Ratio Decidendi: Only borrowing cost directly attributable to a project is capitalisable in work-in-progress under project accounting, and an expenditure disallowed for non-compliance with tax deduction at source provisions cannot be retained as part of work-in-progress; an identical issue accepted in an earlier year cannot ordinarily be reopened against the assessee in a subsequent year without just cause.

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