AI Drafter 
TaxTMI 
TaxTMI 
2005 (5) TMI 552
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.... the assessee-company is following the completed contract method for recognizing its income/loss. The return of income was filed by the assessee company for the impugned assessment year, on the above basis. 3. In the course of assessment proceedings, the assessing authority has observed that the entire finance cost (interest expenditure) incurred by the assessee-company during the relevant previous year has been debited to the profit and loss account as an item of expenditure thereby claiming the said finance cost as a deduction in computing its taxable income/loss for the impugned assessment year. When asked to explain, the assessee-company submitted that the finance cost as far as construction business carried on by the assessee is concerned, is a period cost, and, therefore, has to be allowed as expenditure in the year in which it was incurred or accrued. The assessee relied on the decision of the Bombay High Court in the case of CIT v. V.S. Dempo & Co. (P.) Ltd. [1996] 131 CTR (Bom.) 203 and also on the decision of the ITAT, Bangalore Bench in the case of K. Raheja Development Corpn. v. Dy. CIT [IT Appeal No. 240 (Bang.) of 1997, dated 22-9-1997]. The explanation offered by ....
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....e of period cost and, therefore, need to be allowed as a deduction on yearly basis. The CIT(A) further observed that the reliance placed by the assessing authority in the case of S.K. Estates (P.) Ltd. (supra) is not proper as the facts of that case were fundamentally different from the facts of the impugned case. In the case of S.K. Estates (P.) Ltd. (supra), the only activity carried on by the assessee was development of properties and, therefore, the finance cost could be directly attributed to the said line of business. But as far as the assessee is concerned, it is having many other sources of income and the business of developing properties is only one amongst them. The assessee is having business in shares, it is having investments in various partnership firms, it is having interest income and other service charges and, therefore, it is not possible to hold that the borrowed funds were exclusively attributable to the business of developing properties. In view of the above discussion, the CIT(A) accepted the contention of the assessee and deleted the disallowance of Rs. 94,70,835. It is against the above that the revenue has come in appeal before us. 5. The only ground rai....
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....ilized in this project has to have the same treatment. The expenditure is to be accumulated and to be allowed in the year when the project is completed. . . ." 7. The learned Commissioner contended that in the light of above categorical finding of the Tribunal in a case arising out of same set of facts and circumstances, the action of the assessing authority in deferring the interest expenditure is to be upheld and the order of the CIT(A) on this point need to be set aside. 8. Shri S.E. Dastur, the learned Senior Counsel appeared for the respondent-assessee along with Shri Nitesh Joshi. Shri Dastur contended that the assessee-company is carrying of different business activities out of which construction project is only one line of activity. The assessee-company has availed borrowings not for any particular business line or not in respect of any particular project pursued by the assessee-company during the relevant previous year. The borrowings are availed by the assessee company as a whole for the purpose of utilizing them in various business activities carried on by it. There is no identity between a particular borrowing and a particular line of business. A particular borrow....
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....as been established and it was in such circumstances that the Tribunal has held that the expenditure need to be deferred till the date of completion of the project. As far as the present case is concerned, the assessee is having multiple activities and it is not possible to hold that a particular borrowing has been utilized towards a particular project. The application of funds is indivisible as far as the activities of the assessee is concerned. He, therefore, submitted that the finding of the Tribunal in the case of S.K. Estates (P.) Ltd. (supra) is not at all applicable to the present case. 10. Shri Dastur invited our attention to the decision of the Tribunal in the case of S.K. Estates (P.) Ltd. (supra) wherein the Tribunal has considered the Accounting Standard-7 issued by the Institute of Chartered Accountants of India. He referred particularly to paragraph 8.2 of the Accounting Standard where it has been stated that costs not specifically attributable to any contract incurred by the contractor before a contract is secured are usually treated as expenses of the period in which they are incurred. However, if costs attributable to securing the contract can be separately iden....
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....] 260 ITR 579 . He further stated that the very same consistent view has been taken by the Tribunal in the appeals concerning the assessee, M/s. Lokhandwala Construction Industries Ltd. He placed before us copies of all the orders in that case for assessment years 1987-88, 1988-89 and 1989-90. He submitted that the finding of the Tribunal has been upheld by the Bombay High Court in Lokhandwala Construction Industries Ltd.'s case (supra) wherein the issue was considered by the High Court for the assessment year 1987-88. 12. The learned senior counsel further submitted that all the positions explained by him are the off-shoot of the statutory provision contained in section 36(1)(iii) of the Act. As per section 36(1)(iii) of the Act, the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession is to be deducted as an expenditure. The learned senior counsel submitted that the purpose for which the borrowed capital was deployed is immaterial in considering the allowability of interest on the said loan as an item of expenditure. The only condition to be satisfied is that the borrowed funds must be utilized for the purposes of the busines....
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....: "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow interest on the loans taken for the development of land and cost of construction as revenue expenditure without appreciating the facts that the assessee is followings 'Completed Project' method of accounting as per their accounts adopted in annual general meeting." 15. While considering the above question which is exactly the same question involved in the present appeal, the Tribunal has held that the method employed by the assessee is in conformity with the Accounting Standard-7 issued by the Institute of Chartered Accountants of India and, therefore, the CIT(A) has rightly allowed the claim of the assessee by way of deduction. In that case, for the assessment year 1988-89, the Tribunal has taken the same view in ITA No. 8995/Bom./1991, dated December 10, 1998 by holding that the method followed by the assessee was in conformity with the Accounting Standard-7. He, therefore, submitted that he has rightly placed reliance on the decision of Lokhandwala Construction Industries Ltd.'s case (supra ). 16. We heard both sides in detail and considered the rival submissi....
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....rtain cases, this principle has been exempted by the Accounting Standard-7 issued by the Institute of Chartered Accountants of India. One of the instances of that exemption is where the expenditure is general in nature and not attributable to any specific activity carried on by the assessee. Finance cost is also generally treated as an expenditure falling under this category. Therefore, in the Accounting Standard it has been suggested that in such cases, where the expenditure could not be attributed to a particular activity carried on by the assessee, the same may be allowed as a period cost. This issue of identity between the borrowed funds and the project works carried on by the assessee is one of the main thrust of arguments advanced by the learned counsel appearing for the assessee. It is basically a question of fact. As argued by the learned Commissioner, it may not be altogether impossible to work out the quantum of borrowed funds utilized for a project if the accounts are maintained by the assessee in such a befitting manner. Such an attribution can be made, may be at the cost of a cumbersome exercise. There is a point in the argument of the revenue that such expenditure sho....