Interest Deductible for Project Completion Method Only Upon Completion and Income Realization; Tribunal Upholds Consistency.

The Tribunal ruled that for assessees using the project completion method, interest related to a project is deductible only upon project completion and income realization. It upheld the department's stance that interest costs should be added to work-in-progress, emphasizing consistency in accounting practices and adherence to AS-7. The Tribunal found the department's rejection of the yearly deduction method justified, as the assessees consistently added interest to work-in-progress in their accounts. The Bombay HC decision in Lokhandwala was deemed inapplicable. Work-in-progress was classified as stock-in-trade, reinforcing the department's position on accounting method consistency.

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Issues Involved:
1. Treatment of interest expenditure for assessees following the project completion method of accounting.
2. Classification of interest cost as period cost or part of the value of work-in-progress.
3. Consistency of the accounting method followed by the assessee.
4. Impact of Accounting Standard No. 7.
5. Applicability of the Bombay High Court decision in Lokhandwala Construction Industries Ltd.
6. Classification of work-in-progress as stock-in-trade or capital asset.
7. Validity of changing the accounting method consistently followed by the assessee.

Detailed Analysis:

1. Treatment of Interest Expenditure:
The primary issue is whether interest identifiable with a project should be allowed as a deduction in the year of project completion or on a year-to-year basis. The Tribunal held that for assessees following the project completion method of accounting, the interest identifiable with a project should be allowed as a deduction only in the year when the project is completed and the income from that project is offered for taxation.

2. Classification of Interest Cost:
The Tribunal examined whether interest cost should be classified as a period cost or added to the value of work-in-progress. The assessees argued that interest expenditure accrued in a particular year must be deducted against the income for that year. However, the Tribunal concluded that interest cost must be added to the value of work-in-progress, aligning with the project completion method of accounting.

3. Consistency of Accounting Method:
The assessees claimed that they consistently followed a method where interest cost was claimed yearly under section 36(1)(iii). The department argued that the assessees maintained accounts where interest expenditure was added to the value of work-in-progress. The Tribunal found that the method of accounting in the books consistently added interest to the value of work-in-progress, and thus, the department's rejection of the claimed method was justified.

4. Impact of Accounting Standard No. 7:
The Tribunal referred to Accounting Standard No. 7 (AS-7) which divides costs into various categories. The Tribunal noted that finance costs should usually be excluded from accumulated contract costs unless they are specifically attributable to a particular contract. The Tribunal found that in the present cases, finance costs were identifiable and should be added to the value of work-in-progress.

5. Applicability of Lokhandwala Construction Industries Ltd.:
The Tribunal determined that the Bombay High Court decision in Lokhandwala Construction Industries Ltd. did not directly address the issue at hand. The High Court dealt with whether interest expenditure was a capital or revenue expense, not whether it should be added to work-in-progress for assessees following the project completion method. Thus, the Tribunal concluded that this decision was not applicable to the present cases.

6. Classification of Work-in-Progress:
The Tribunal examined whether work-in-progress should be considered stock-in-trade or a capital asset. It concluded that for builders following the project completion method, work-in-progress should be considered stock-in-trade, and all related costs, including interest, should be added to its value.

7. Validity of Changing Accounting Method:
The Tribunal addressed whether the department could discard a system of accounting consistently followed by the assessee. It concluded that the assessees' method of adding interest to work-in-progress in the books was consistent and justified. Therefore, the department's rejection of the claimed method of yearly deduction was valid.

Conclusion:
The Tribunal held that for assessees following the project completion method of accounting, interest identifiable with a project should be allowed as a deduction only in the year when the project is completed and the income from that project is offered for taxation. The Tribunal emphasized the importance of consistency in accounting methods and adherence to accounting standards, ultimately supporting the department's position.

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