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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI PAWAN SINGH, JM
सुनवाई क� तार�ख / : 12.12.2017 Date of Hearing घोषणा क� तार�ख / : 05.03.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Commissioner of Income Tax dated 07.12.2016 passed u/s. 263 and pertains to the assessment year 2013-14.
The grounds of appeal read as under: 1. That the learned Pr. CIT - 3 exercise power under section 263 and order so passed is quite illegal.
(A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT 2. That the disallowance of interest expenses amounting to Rs.8,07,14,446/- u/s. 36(l)(iii) and capitalization of same as work in progress but not giving the direction for corresponding allowability of work in progress to the Profit and Loss account is quite illegal, arbitrary, unwarranted, unjustified and bad in law.
That the learned Pr. CIT - 3 not considered the proper facts of the case and the order so passed u/s 263 is quite illegal, arbitrary, unwarranted, unjustified and bad in law.
3. In this case notice was issued u/s. 263 of the Income Tax Act as under: “During the year under consideration, it is found that you had claimed finance cost of Rs.8.52 crores in P & L Account whereas entire fund borrowed is used in project work in progress of Rs.129.06 crores. Last year, you have included interest claimed of Rs.8.81 crores in project work in progress. Therefore, it is clear that you should have included the finance cost of Rs.8.52 crores on work in progress. By not including, this income is under assessed.”
The assessee in this regard responded as under:
“1. That the assessee company claimed finance cost of Rs.8.52 crore sin profit and loss account as against in the earlier year Rs.8.81 crores included in inventory work in progress. The assessee company followed the percentage completion method of accounting and in the earlier the payment of interest included in work in progress as per accounting standard/guideline issued by the institute of Chartered Accountant of India. During the year under consideration, assessee company has paid interest on loan taken for its real estate project i.e. construction and development of an integrated Residential Township at Bhopal. As per the Generally Accepted Accounting Principal (GAAP) and in purview of accounting standard, assessee company has charged such interest on loan directly to profit and loss account as administrative expenses. Moreover, as per the accounting standard 16 issued by ICAI, Borrowing Cost directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period o of time to get ready for its intended use or sale are capitalized as part of the cost of the respective asset. Assessee other borrowing costs are expenses in the period they occur. Under the purview of Accounting Standard 16, Borrowing Cost will be capitalized if the amount borrowed is used to develop inventory till substantial time. In the case of assessee company till the end of financial year 2012-13, the (A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT equity and the advance received from customers both put together were sufficient to meet out project development expenses. Therefore, the amount so borrowed was used to meet out working capital requirement and administrative expenditures. Therefore, in purview of Accounting Standard 16, assessee company has not transferred interest on loan to inventory Work in Progress Account and charged such interest directly to profit and loss account as administrative expenses. Assessee company has also submitted such facts before Assessing Officer during the course of assessment proceedings and such change in accounting policy was accepted by learned Assessing Officer.”
However, the ld. Commissioner of Income Tax was not convinced. He observed as under:
“4.1.4 In the present case, the very fact that the assessee had changed the treatment of interest expenses as revenue expenditure instead of adding it in work in progress as last year should have alerted the A.O. to dig deeper to unearth the reality of the assessee’s claim. Unfortunately, nothing of this sort was done by him. It is a perfect citation for a complete non-application of mind by the Assessing Officer. The enquiry for a complete non-application of mind by the Assessing Officer. The enquiry conducted by the Assessing Officer’s is exceedingly inadequate and hence fall in the category of ‘no enquiry’ conducted by the Assessing Officer. The highly inadequate enquiry conducted by the Assessing Officer resulting in drawing incorrect assumption of facts, makes the orders erroneous and prejudicial to the interest of the revenue. 4.1.5 Thus, the instant case is a glaring example of not making relevant enquiry, which amounts to ‘no enquiry’ and hence it becomes a case of non application of mind by the Assessing Officer and hence the proceedings u/s. 263 are valid in law. 4.2.3 The assessee in its submission vide letter dated 27.09.2016 has tried to rely on Accounting Standard 16. The contention of the assessee is not acceptable in view of the fact that the borrowed capital had actually been deployed in the preceding years toward development of its project. Hence, all the expenses relating to project have to be capitalized. 4.2.5 It is observed that in the preceding year the assessee capitalized expenses pertaining to its project which interalia includes interest to work in progress. However, for the year under consideration, the assessee has taken a totally different stand in respect of interest expenses pertaining to its project without any change in situation or facts. From the statement of project work in progress can be seen that even without interest, work in progress increased to 124.28 (A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT crores from 121.19 crores last year which included interest of more than Rs.8 crores. Even last year also Rs.47 crores where transferred to cost of goods sold. Therefore, on facts, there is absolutely no change and therefore assessee has wrongly claimed interest expenses even when project was not completed and as such interest expenses is not allowable u/s. 36(i)(iii) read with the proviso. The assessee has claimed such interest expenses as revenue expenses instead of capitalizing them as done in preceding years. Thus, the assessee has not maintained consistency in its method of account if respect of interest expenses pertaining to its project and claimed the same against facts and law. Hence, interest expenses of Rs.8,07,14,446/- needs to be capitalized.
5. In light of the aforementioned facts, I, Principal Commissioner of Income Tax-3, Mumbai in exercise of powers conferred upon me u/s. 263 of the I. T. Act, direct the A.O. to disallow interest expenses claimed u/. 36(1)(iii) amounting to Rs.8,07,14,446/- and capitalize the same as work in progress. The A.O. will revise the assessment order dated 19.03.2016 by disallowing claim of interest u/s. 36(1)(iii) of the I.T. Act, 1961.”
Against the above order, the assessee is in appeal before us.
We have heard both the ld. Counsel of the assessee and perused the records.
The ld. Counsel of the assessee contended that the assessee has followed the Accounting Standard – 16 issued by the Institute of Chartered Accountants of India.
According to which after the project has been substantially completed, the interest cost need not be capitalized. He submitted that in accordance with its Accounting Standard, the assessee has debited interest cost to profit and loss account. He submitted that this issue was duly enquired by the Assessing Officer. For this, he referred to the paper book submitted regarding the enquires made by the Assessing Officer. He further referred to the assessee’s reply in this regard submitted in paper book. He submitted that the assessee has duly explained to the Assessing Officer and after that he was convinced. He submitted that if two views are possible, the (A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT Assessing Officer has adopted one view. Hence, he pleaded that the ld. Commissioner of Income Tax (Appeals) cannot assume the jurisdiction u/s. 263 of the Act.
Per contra, the ld. Departmental Representative relied upon the orders of the ld. Commissioner of Income Tax (Appeals). He submitted that the assessee has changed the method of accounting without any disclosure. Hence, he submitted that the ld. Commissioner of Income Tax (Appeals) has rightly assumed jurisdiction u/s. 263 of the I. T. Act.
We have carefully considered the submissions and perused the records. We find that section 263 of the I. T. Act reads as under:
Revision of orders prejudicial to revenue. 263. (1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
The Hon’ble Apex Court in the case of CIT vs. Max India Ltd. [2008] 166 Taxman 188 (SC) had the occasion to dwell upon this section. It has expounded that when two views were possible and the Assessing Officer has adopted one of the views, the ld. Commissioner of Income Tax (Appeals) cannot exercise the jurisdiction u/s. 263 of the Act if he was of another view.
(A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT 11. Now we examine the present case as touch stone of the above said case law.
We find that the Assessing Officer has duly asked the assessee and made enquiry regarding the charge of interest. The specific question asked was: “the assessee is asked to explain why interest has not been capitalized.” The assessee’s response vide letter dated 14.3.2016 reads asunder:
“3. During the year under consideration. Assesses Company has paid interest on loan taken for its real estate project of construction and development of an Integrated Residential Township at Bhopal and under the Generally Accepted Accounting Principal (GAAP), Assessee Company has charged such interest on loan directly to Profit and Loss Account as administrative expenses. Moreover, as per the accounting standard 16 issued by ICAI, Borrowing Cost directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its Intended use or sale are capitalized as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. The project under consideration was substantially developed till the end of FY 2012-13 and therefore in purview of Accounting Standard 16, Assessee Company has not transferred interest on loan to Inventory Work in Progress Account and charged such interest directly to Profit and Loss Account as administrative expenses.”
From the above, it is apparent that the charge of interest to profit and loss account and non capitalization of the same was duly enquired by the Assessing Officer. In response, the assessee has referred to Accounting Standard 16 issued by the Institute of Chartered Accountant of India. The said Accounting Standard 16 in its direction for accounting of borrowing cost vide para 19 has directed as under:
Cessation of Capitalization 19. Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
(A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT 20. An asset is normally ready for its intended use or sale when its physical construction or production is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete.
When the construction of a qualifying asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalization of borrowing costs in relation to a part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete.
From the above, it is evident that the issue was duly enquired by the Assessing Officer. The assessee has responded by submitting that it has followed Accounting Standard 16 issued by Institute of Chartered Accountant of India which has mandated that capitalization of borrowed cost should seize when all the activities necessary to prepare the qualifying asset for its intent to use or sale are complete. It was the assessee’s case that the assessee’s project was substantially complete hence it has ceased the capitalization of borrowing cost and charged the same to P & L account.
Now we note that it is not the case of the ld. Commissioner of Income Tax (Appeals) that the said project was not substantially completed as submitted by the assessee.
Hence, prima facie, the view adopted by the Assessing Officer cannot be said to be incorrect. Hence, if the Assessing Officer has adopted one of the views, it cannot be said that the assessment order needs to be visited by revisionary powers of the ld. Commissioner of Income Tax (Appeals). Furthermore, it is also not the case of the ld. Commissioner of Income Tax (Appeals) that the project is not substantially complete
(A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT and the said Accounting Standard – 16 has not been rightly completed. Hence, on the anvil of aforesaid Hon’ble Apex Court decision in the case of Max Ltd. (supra), when the Assessing Officer has adopted one of the possible view, revision u/s. 263(1) cannot be done.
Furthermore, we find that if the debit in the profit and loss account on account of interest cost is adjusted by adding it to the work in progress in the closing stock, then this closing stock is to be taken as opening stock in the next year. The debit of interest cost is automatically then reflected in the next year’s profit and loss account.
Hence, the charge is overall revenue neutral inasmuch as it is only the different year in which the charge is reflected. It is not the case that by doing this, any tax planning or tax evasion has been done. Hence, the transaction being revenue neutral, it cannot be said that the ld. Commissioner of Income Tax (Appeals) needed to exercise his power u/s. 263 of the I. T. Act. Moreover, it is also not the case that the debit to the profit and loss account was prima facie wrong in view of the Accounting Standard 16 issued by the Institute of Chartered Accountant of India which mandated that when the project is substantially completed, interest cost need not be capitalized. Accordingly, in the background of the aforesaid discussion and precedent, we set aside the order of the ld. Commissioner of Income Tax (Appeals) and quash the order passed u/s. 263 of the Act.
(A.Y. 2013-14) M/s. Brightstar Infrastructure Pvt. Ltd. vs. Pr. CIT 15. In the result, this appeal by the assessee stands allowed. प�रणामतः �नधा�रती क� अपील �वीकृत क� जाती है । Order pronounced in the open court on 05.03.2018 Sd/- Sd/- (Pawan Singh) (Shamim Yahya) �या�यक सद�य / Judicial Member लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांक Dated : 05.03.2018 व.�न.स./Roshani, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. आयकर आयु�त(अपील) / The CIT(A) 3. आयकर आयु�त / CIT - concerned 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6. आदेशानुसार/ BY ORDER,