TaxTMI 
TaxTMI 
2022 (2) TMI 915
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Project Work in Progress. 2. The CIT (Appeals) erred in not accepting the appellant's contention in attributing and apportioning finance cost to Capital Work in Progress and Project Work in Progress (Inventory) when there is specific borrowing for the Capital Work in Progress. 3. The CIT (Appeals) erred in ignoring the appellant's contention that they have been consistently following from inception the policy of charging interest to the Profit & Loss account when the borrowing is not specific towards acquisition of fixed assets or for execution of specific projects and capitalizing interest in respect of borrowings specific to acquisition of fixed assets which they have been consistently following which is in line with the Accounting Standard "AS-16 Borrowing Cost" issued under The Companies Act, 2013 amended from time to time. 4. The CIT (Appeals) erred in ignoring the appellant's contention that interest cannot be disallowed by attributing the finance cost to project work in progress which is an inventory for appellant's business." 3. Brief facts of the case extracted from ITA No. 109/Chny/2018 for the assessment year 2013-14 are that the assessee company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessment year 2013-14. During the scrutiny proceedings it is found that the assessee is also having CWIP of Rs. 9,85,95,864/- and Project Work in Progress (Capitalized in A.Y. 2014-15) of Rs. 116,31,22,097/- which is totaling - Rs. 126,17,17,961/-. In relation to above facts, the assessee was asked to explain the utilization of borrowed funds and interest break up which is apportioned towards fixed asset CWIP and Project Work in Progress (Capitalized in A.Y. 2014-15). The assessee has borrowed funds and paid a Finance cost of Rs. 64,20,50,016/- and claimed the same as revenue expenditure. On scrutiny of the books of accounts it is found that the assessee had failed to apportion the interest pertaining to capital in nature and same is computed hereunder:- The Finance cost pertaining to the Capital Work in Progress and Project Work in Progress which is claimed as revenue expenditure in profit a toss account amounting to Rs. 19,08,81,851/- will be treated as Capital in nature under section 36(1) of the income Tax Act, 1961 and the same is added back to the total income returned." 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy role for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. Similarly, the Supreme Court has also upheld the matching principle for allowing expenditure with respect to specific incomes and specific heads. J.K. Industries and another (Supreme Court) ( 297 ITR 176) The matching principle can be applied by matching expenditure against specific revenues as having been used in generating those specific revenues or by matching expenses against the revenue of a given period in general on the basis that the expenditure pertains to that period. Tuticorin Alkali Chemicals and Fertilisers Ltd. (SC) (227 ITR 172) 27. The second reason given by the High Court was that the Institute of Chartered Accountants of India was a recognised authority on accounting principles. This fact has been recognised by this Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167. Therefore, its view has to be respect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....b-section (1) of that section pro vides that in case, interest is paid on share capital issued for the purpose of raising money to defray the expenses of constructing any work or building or the provision of any plant in contingencies mentioned in that section, the sums so paid by way of interest may be charged to capital as part of the cost of construction of the work or building or the provision of the plant. The above provision thus gives statutory recognition to the principle of capitalising the interest in case the interest is paid on money raised to defray expenses of the construction of any work (sic) building or the "provision of any plant in contingencies mentioned in that section even though such money constitutes share capital. The same principle, in our opinion, should hold good interest is paid on money not raised by way or share capital but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The reason indeed would he stronger in case such interest is paid on money taken on loan for meeting the above expenses."(p. 175) This Court also relied on an English case in support of this conclusio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of capitalising interest was to be found in section 208 itself and was also consistent with the views of the English Courts. In view of the Judicial decisions as above, the action of the Assessing Officer in capitalising the interest is upheld." Being aggrieved by the learned CIT(A) order, the assessee is in appeal before us. 6. The learned AR for the assessee submitted that the learned CIT(A) has erred in confirming disallowance of financial cost attributable to capital work in progress and project work in progress without appreciating fact that the assessee has not borrowed any loans for specific purpose. The learned A.R. for the assessee further submitted that the learned CIT(A) has erred in ignoring contention of the assessee that it was following consistent method of accounting to charge interest to the profit & loss account when borrowing is not for specific purpose towards acquisition of fixed asset or for execution of specific projects. The learned AR further referring to Accounting Standard-16 issued by the ICAI for accounting borrowing cost submitted that the assessee is following Accounting Standard-16 to charge interest on borrowings, as per which interest on speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest expenses does not arise. 9. We have given our thoughtful consideration to the arguments advanced by the learned AR for the assessee in light of facts brought out by the Assessing Officer and we ourselves, do not subscribe to the arguments taken by the learned AR for the assessee for simple reason that when the assessee is debiting all direct and indirect expenses to project work in progress account, then it ought to have capitalized interest attributable to said project work in progress, when there was no revenue generation from said project. We further noted that as per principles of matching concept of accounting, specific cost relatable to income revenue segment needs to be capitalized, including interest if any, incurred on said project. In this case, it was claim of the assessee that although it has paid huge interest on borrowings from banks and financial institutions, but said loans have not taken for any specific purpose. At the same time, the assessee is also unable to explain with necessary evidence to prove that loans taken from banks and financial institutions are not for any specific purpose of acquisition of any asset or execution of project. Therefore, we a....