AI Drafter 
TaxTMI 
TaxTMI 
2016 (7) TMI 943
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....led return of income for the A.Y. 2007-08 at Rs. 1,45,72,139. In the course of assessment proceedings, the assessee was required to give break-up of the inventory of Rs. 36.04 crores shown by it in its accounts, details of contract receipts, operating expenditure and current liabilities. Assessing Officer also required the assessee to produce books of accounts. In reply, assessee furnished copies of inventory and break-up of unsecured loans along with statement of sundry creditors as on 31.3.2007 and 31.3.2008. Nevertheless, it seems books of account and other records were not produced. AO put the assessee on notice as to why section 144 should not be invoked. It seems assessee could not justify its inability to produce the books of accounts. Since assessee did not produce books of account nor furnish the specific information called by the AO, he proceeded to make an assessment u/s. 144 of the Act. The action of the AO in invoking section 144 of the Act was confirmed by the CIT(Appeals) considering the non-compliance with the requirement of production of books of account and evidence in respect of its claim of expenditure. 5. Now before us, the ld. AR strongly submitted that inv....
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....g the order of CIT(Appeals), submitted that assessee had substantial interest free funds available with it. As per ld. AR, the interest free funds available to assessee as on 31.3.2007 was Rs. 17,90,41,923 and as on 31.3.2008 Rs. 26,47,86,988. Thus, as per ld. AR, the loans of Rs. 4.45 crores as on 31.3.2007 and Rs. 3 crores as on 31.3.2008 were given out of interest free funds. Relying on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., 313 ITR 340, the ld. AR submitted that if interest free funds and interest bearing funds were both available, then a presumption would arise that loans were first given out of interest free funds. Reliance was also placed in the case of M/s. KBD Sugars & Distilleries Ltd. v. ACIT, ITA Nos. 1362 & 1363/Bang/2011 dated 22.11.2013. 10. Per contra, ld. DR strongly supported the orders of authorities below and submitted that no presumption as argued by the ld. AR could be taken. According to him, Hon'ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries, 286 ITR 1, had taken a view that proportionate funding principle should be followed while construing interest disallowance re....
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....ceedings, it was noted by AO that assessee was holding inventory of more than Rs. 34 crores as on 31.3.2008. The average work-in-progress of the assessee for the year came to Rs. 23,85,53,685. AO was of the opinion that assessee should have capitalized the interest attributable to work-inprogress. As per AO, Section 145 of the Act required computing cost of stock including all expenditure. As per ld. AO, once the work-in-progress was completed and taken to the revenue account, corresponding material and interest costs could be allowed as expenditure. He considered 50% of the average work-in-progress of Rs. 23,85,53,685 as funded through interest bearing loans. According to ld. AO, interest ascribable to the sum of Rs. 11,92,76,842 at 15% p.a. came to Rs. 1,78,91,526. He disallowed the claim of interest to this extent and made an addition. 17. In appeal before the CIT(Appeals), argument of the assessee was that none of the work-in-progress was capital work-in-progress. As per assessee, it was undertaking road contract works. The work-in-progress and closing stock of Rs. 14,63,91,113, as per assessee, were held as part of its business. Argument of the assessee was that working cap....
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....uation of inventories states as under:- "Cost of Inventories 6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to Valuation of Inventories to their present location and condition. Costs of Purchase 7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. Costs of Conversion 8. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and the cost of factory management and....
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....costs of designing products for specific customers in the cost of inventories. 12. Interest and other borrowing costs are usually considered as not relating to bringing the inventories to their present location and condition and are, therefore, usually not included in the cost of inventories." 21. It is clear from clause 12 of the Accounting Standards 2 that normal interest and borrowing costs cannot form part of cost of inventory. When an assessee is following method of valuation of inventory which is in accordance with the Accounting Standards prescribed by ICAI, in our opinion, Revenue cannot step into the shoes of assessee and foist on it a different method, unless there is a clear statutory edict allowing a departure from such accepted standards. We cannot say that assessee had understated its work-in-progress or inventory by not charging interest relating to working capital loan to its valuation. Assessee was well justified in considering interest as a period cost and debiting in its profit & loss account. We do not find any merit in the additions made by the AO. As such, these additions are deleted and ground No.5 is allowed. 22. Vide its ground Nos.6 to 8, assessee....
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....gher side when considering the normal standards. As per ld. AR, 8% was fixed by the ld. AO relying on section 44AD of the Act, but such section applied only to contractors having turnover below 40 lakhs. Further, as per ld. AR, in assessee's own case for preceding assessment years 2006-07 and 2007-08 where assessments were done u/s. 143(3), net profits were accepted at 1.7% and 2.21% on the contract receipts. Even if average of above was taken, as per ld. AR, it would much less than 8%. Thus, according to him, estimation of profit at 8% was not justified and it had to be scaled down. Reliance was placed on the judgment of jurisdictional High Court in the case of Deluxe Roadlines Pvt. Ltd. v. DCIT in ITA No.213 of 2014 dated 14.10.2014. 26. Per contra, ld. DR submitted that AO had taken guidance from section 44AD for estimating profit at 8% of gross contract receipts. According to him, assessee had not brought out any details regarding its own income for earlier years neither raised any argument for accepting the rates of profits for earlier years before the lower authorities. Thus, according to him, estimation done by the AO was justified. 27. We have perused the record and h....
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.... as held by the Apex Court in the aforesaid judgment. 8. In that view of the matter, the impugned orders are unsustainable. Hence, the order passed by the tribunal is hereby set-aside. Matter is remitted back to the tribunal for fresh consideration in the light of the observations made above. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the revenue and appeal is partly allowed." 28. What we find from the above judgment is that in the said case, assessment was completed u/s. 144 of the Act estimating the income of assessee at 8% as done here. The concerned assessee had failed to produce books of account. The CIT(A), on assessee's appeal, had reduced the net profit to 3% of the total turnover. This was reduced by the Tribunal to 2.5%. Their Lordships had held that such adhoc estimate was not warranted, when evidence in the nature of earlier returns filed by the assessee was available. Here in the case before us also, scrutiny assessments were done for AYs 2006-07 & 2007-08 and the net profit rate accepted were much lower than 8%. Submission is that such rates came to 1.7% for AY 2007-08 and 2.21% for AY 2006-07. We, ....