ACIT, Jaipur V. ADITYA PROPCON P LTD., Jaipur

ITA 762/JPR/2012

• Counselvise Citation: 76223114 RSA 2012
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 10-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C SHARMA
• Assessee Lawyers: SANDEEP JHANWAR
• Keywords: Capital asset; Business expenditure; Additional evidence; Competent authority; Commercial expediency

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH, JAIPUR (BEFORE SHRI HARI OM MARATHA AND SHRI N.K. SAI NI) ITA NO. 762/JP/2012 ASSESSMENT YEAR : 2009-10 PAN: AAACD 6226 A THE ACIT VS. M/S. ADITYA PROPCON (P) LTD. CIRCLE- 6 A-2, PUSHP ENCLAVE, PRATAP NAGAR JAIPUR SECTOR 5, JAIPUR (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SANDEEP JHANWAR DEPARTMENT BY: SHRI D.C. SHARMA DATE OF HEARING: 24-01-2014 DATE OF PRONOUNCEMENT: 30-01-2014 ORDER PER HARI OM MARATHA, JM:- THE PRESENT APPEAL OF THE REVENUE FOR A.Y 2009-10 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A),JAIPUR, DATED 06/06/2012. THE REVENUE HA S TAKEN 4 GROUNDS OF APPEAL. 1.0. THE FIRST GROUND OF APPEAL IS TAKEN AGAINST DE LETION OF ADDITION OF RS. 48,96,290/- IN RESPECT OF EXCESS COST CLAIMED IN RESPECT OF SAL ES MADE BY THE ASSESSEE DURING THE YEAR. GROUND NO. 2 IS AGAINST ADMISSION OF ADDITIONAL EVI DENCES IN THIS RESPECT. THE ASSESSEE IS A REAL ESTATE DEVELOPER. DURING THE COURSE OF ASSES SMENT PROCEEDINGS THE AO NOTICED THAT ASSESSEE WAS HAVING TWO PIECES OF LAND. FIRST IS H AS BEEN DISCLOSED AS PROJECT-1 ON WHICH THE ASSESSEE HAS UNDERTAKEN MULTISTORY COMMERCIAL C UM RESIDENTIAL BUILDING PROJECT. SECOND HAS BEEN DISCLOSED AS PROJECT-2 ND ON WHICH NO PROJECT HAS YET BEEN UNDERTAKEN. THE AO NOTICED THAT THE ENTIRE SALES CONSIDERATION RECEIVED DURING THE YEAR BELONGS TO PROJECT-1 ONLY. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS VIDE REPLY DATED 4.8.2011, 2 THE COMPLETE DETAILS OF EXPENDITURE INCURRED ON PRO JECT-1 ALONG WITH TOTAL EXPENSES INCURRED TILL 31.3.2009 ON PROJECT-1 WERE SUBMITTED . IT WAS FURTHER SUBMITTED THAT THE TOTAL CONSTRUCTION AREA OF PROJECT-1 WAS 89,966 SP. FEET AND OUT OF THE SAID TOTAL AREA, 15,973 SQ. FEET AREA WAS SOLD FOR CONSIDERATION OF RS. 5,4 8,70,223/-. THE BREAKUP OF THE COST OF SAID PROJECT-1 AS SUBMITTED BEFORE THE AO IS SUMMAR IZED AS UNDER:- PARTICULARS AMOUNT (IN RS.) OPENING WIP (PROJECT-1) 15,08,48,293 ADD: EXPENDITURE INCURRED DURING THE YEAR 3,03,36,6 08 TOTAL EXPENDITURE INCURRED 18,11,84,901 THE FOLLOWING IS BREAK UP OF TOTAL AREA:- PARTICULARS SQ. FEET TOTAL AREA OF CONSTRUCTION 89,966 SOLD DURING THE YEAR 15,973 AREA REMAINING TO BE SOLD 73,993 THE AO ALLEGED THAT ACCORDING TO THE ABOVE FACTS AN D THE ELEMENTS OF COST TAKEN BY THE ASSESSEE ITSELF, THE COST OF GOODS SOLD CAME OUT TO BE RS. 3,35,88,773/- WHEREAS THE ASSESSEE HAD CLAIMED THE COST OF GOODS SOLD AT RS. 3,84,85,063/-. HENCE, IT CLAIMED THE EXCESS COST BY RS. 48,96,290/-. HE HAD GIVEN THE FO LLOWING CALCULATION: PARTICULARS AMOUNT (IN RS.) TOTAL COST OF GOODS SOLD (RS. 18,11,84,901/89,966)* 15,973 3,21,68,446 COST TO BE INCURRED APPORTIONED ON AREA SOLD @ RS. 88.92 PER SQ. FEET * 15,973 14,20,327 TOTAL 3,35,88,773 3 2.0 IN THE FIRST APPEAL, THE LD. CIT(A) HAS FOUND T HAT LD. AO DID NOT ACCORD THE PROPER COGNIZANCE TO THE FACTS OF THE PRESENT CASE. IT IS THE CASE OF REAL ESTATE DEVELOPER, THE COMPLETION OF A PARTICULAR PROJECT IS ALWAYS SP READ OVER A NUMBER OF YEARS. LD CIT(A) HAS OBSERVED THAT ASSESSEE IS CONSISTENTLY FOLLOWIN G A METHOD OF ACCOUNTING WHEREBY THE REVENUE IS RECOGNIZED IN THE BOOKS OF ACCOUNTS WHEN THE POSSESSION OF THE UNIT IS HANDED OVER TO THE CUSTOMERS THROUGH A REGISTERED SALE DEE D. HE HELD THAT AO HAD WORKED OUT THE COST OF CONSTRUCTION ON PRO-RATA BASIS, WHICH COULD HAVE VERY WELL BEEN APPLIED ON THE CONSTRUCTION COST BUT LAND COST CANNOT BE APPORTION ED AMONGST VARIOUS UNITS IN THE SAME MANNER. HE FURTHER OBSERVED THAT THE SELLING RATE OF VARIOUS UNITS ALWAYS FETCHED UP DIFFERENT PRICES SINCE THE UNITS ON GROUND FLOOR CO MMANDED HIGHER RATE WHEREAS UNITS LOCATED ON HIGHER FLOORS COMMANDED LESSER RATE. SIM ILARLY THE UNIT LOCATED IN THE FRONT PORTION OF THE BUILDING ALWAYS FETCHED UP HIGHER PR ICE THAN THAT LOCATED IN THE BACK SIDE OF THE BUILDING. THE ASSESSEE HAS SOLD COMMERCIAL PREM ISES AT THE RATE OF RS. 7000/- PER SQ FT ON THE GROUND FLOOR WHEREAS THAT LOCATED ON FIRST F LOOR WAS SOLD FOR RS. 3000/- PER SQ FT AND THE ONE LOCATED ON THE SECOND FLOOR WAS SOLD FO R RS. 2500/- PER SQ FT. SIMILARLY THE RESIDENTIAL UNITS ALWAYS FETCHED UP LESSER PRICE TH EN THE COMMERCIAL UNITS. TO OVERCOME THE PROBLEM, THE APPELLANT COMPANY HAD ALLOCATED TH E CONSTRUCTION COST EQUALLY AMONG ALL THE UNITS HOWEVER THE LAND COST WAS ALLOCATED ON TH E BASIS OF WEIGHTED AVERAGE SELLING PRICE OF EACH UNIT. HE FURTHER OBSERVED THE STATE G OVERNMENT ALSO RECOGNIZES THIS FACT WHILE DECIDING THE CIRCLE RATE FOR THE IMMOVABLE PR OPERLY WHEREBY THE DLC RATES OF LOWER FLOORS ARE ALWAYS HIGHER THAN THAT ON THE UPP ER FLOORS. ON THE BASIS OF TABLE GIVEN BELOW, LD. CIT(A) HAS OBSERVED THAT IF THE LAND COS T WAS TAKEN ON PRORATE BASIS, IT WOULD YIELD ABSURD RESULTS. :- 4 UNIT NO. SQ. FT. SELLING RATE SALE VALUE PROPORTIONATE CONSTRUCTION COST PROPORTIONATE LAND COST PROFIT/ (LOSS) 301 2122 1800 3819564 2670897 1791306 (642639) 501 2435 1800 4382370 3064443 2055252 (737325) 2 343 2250 772583 432194 289862 50527 24-30 2060 5000 10300700 2593060 1739103 5968537 B-9 244 2250 549540 307420 206179 35940 ONE CAN OBSERVE THAT IN THE FIRST 2 UNITS WHICH ARE AT THE HIGHER FLOORS AND FETCHING LESSER SELLING RATES, THERE IS A LOSS WHILE THERE IS VERY HIGH PROFIT ON THE UNIT ON THE GROUND FLOOR. AND THEREFORE, ACCORDING TO THE LD. CIT(A), THE MET HOD OF ALLOCATION OF LAND COST ON THE BASIS OF WEIGHTED AVERAGE SELLING PRICE IS NOT ONLY RATIONAL BUT ALSO JUSTIFIED. HE OBSERVED THAT EVEN OTHERWISE, THERE WILL NOT BE ANY GAIN TO THE REVENUE AS THE ASSESSEE WOULD BE ENTITLED TO CLAIM THE REMAINING COST OF CONSTRUCTIO N IN THE SUBSEQUENT YEARS THEREBY REDUCING THE PROFITS OF THOSE YEARS. HE PLACED REL IANCE IN THE CASE OF DCIT VS MAHESH EDIBLE OIL IND. LTD. (2010-TIOL-479-ITAT-DELHI) WHE RE IT IS HELD THAT THE METHOD OF VALUATION OF CLOSING STOCK CONSISTENTLY AND REGULAR LY ADOPTED BY THE ASSESSEE SINCE LAST SO MANY YEARS COULD NOT BE REJECTED MERELY ON THE VIEW OF THE AO THAT THE ASSESSEE SHOULD HAVE ADOPTED A DIFFERENT METHOD UNLESS THE METHOD F OLLOWED WAS FOUND TO BE INCORRECT AND UNSUSTAINABLE ONE. HE FURTHER SUPPORTED HIS FIN DING WITH THE HELP OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF INVESTMENT LTD VS CIT (77 ITR 533), WHERE IT WAS HELD THAT A TAX PAYER IS FREE TO DEPLOY HIS OWN ME THOD OF KEEPING ACCOUNTS FOR THE PURPOSE OF HIS TRADE. A METHOD OF ACCOUNTING ADOPTE D BY THE ASSESSEE CONSISTENTLY AND REGULARLY COULDNT BE DISCARDED BY THE DEPARTMENT A UTHORITIES ON THE VIEW THAT HE SHOULD 5 HAVE ADOPTED A DIFFERENT METHOD OF KEEPING ACCOUNT OR OF VALUATION. IT CAN BE DISCARDED ONLY IF IN THE OPINION OF TAXING AUTHORITIES, INCOM E OF THE TRADE COULD NOT BE PROPERLY DEDUCED THERE FROM. 3.0 BEFORE US, THE LD. DR SUBMITTED THAT THE LD. AO S METHOD OF COMPUTATION OF COST WAS CORRECT AS THE COST PER SQUARE FEET OF ALL THE UNITS SHOULD BE SAME. LD. DR ALSO POINTED OUT GROUND NO. 2 WHEREIN THE DEPARTMENT HAS CHALLENGED ENTERTAINING OF THE ADDITIONAL EVIDENCES IN CONNECTION WITH THE COMPUTA TION OF COST. ACCORDING TO HIM THE AO DID NOT EXAMINE THE COMPUTATION OF COST OF EACH AND EVERY UNIT MADE BY THE ASSESSEE. HE THEREFORE URGED THAT THE ADDITION HAS WRONGLY BE EN DELETED. 4.0 THE LD. AR ON THE OTHER HAND SUPPORTED THE ORDE R OF LD CIT(A) BY INVITING OUR ATTENTION TO STATEMENT AT PAPER BOOK PAGES 1 TO 4. THE STATEMENT SHOWS ALLOCATION OF TOTAL COST OF CONSTRUCTION OF RS. 11,32,38,123/- AND THE TOTAL COST OF LAND OF RS. 7,59,46,350/- TO EACH AND EVERY UNIT CONSTRUCTED IN PROJECT 1. A CCORDINGLY THE TOTAL COMBINED COST OF LAND AND CONSTRUCTION OF RS. 18,91,84,473/- HAS BEE N ALLOCATED TO EACH AND EVERY UNIT AS PER UNIT WISE DETAILS PRESENTED IN THIS STATEMENT. THOUGH THE PER SQUARE FEET COST OF CONSTRUCTION IS ALLOCATED PRO-RATA FOR EACH UNIT IN PROPORTION TO THE SIZE OF THE UNIT, BUT THE ALLOCATION OF LAND COST HAS BEEN DIFFERENTLY DONE. WEIGHTED AVERAGE ALLOCATION IS MADE ON THE BASIS OF SELLING PRICE OF EACH OF THE UNIT F OR THE REASONS EXPLAINED IN DETAIL BY THE LD CIT(A). HE SUBMITTED THAT THE METHOD OF ALLOCAT ION IS PRE-DEFINED AND SHALL PERSIST IN ALL THE YEARS. WHICHEVER UNIT IS SOLD IN ANY OF TH E YEAR, THE COST OF SALES IS TO BE TAKEN ON THE BASIS OF THIS STATEMENT AND THEREFORE, THERE IS NO POSSIBILITY OF LEAKAGES. 6 5.0 HE FURTHER SUBMITTED THAT THOUGH THERE WERE SOM E INCOMPLETE WORKS IN THE BUILDING DURING THE YEAR, THE ASSESSEE HANDED OVER POSSESSION OF CERTAIN UNITS TO ITS CUSTOMERS WITH A REGISTERED SALE DEED AND RECOGNISE D SALE OF THE SAME. NOW, WHEN SALE WAS RECOGNISED, THE COST OF THE SOLD UNIT HAD TO BE COMPUTED ON THE BASIS OF ACCOUNTING ESTIMATES. THE ASSESSEE ESTIMATED THE COST OF THE F LATS SOLD DURING THE YEAR AT RS. 3,84,85,063/- AS AGAINST WHICH THE AO HAD WORKED OU T THE SAME AT RS. 3,35,88,773/-. THE AO HAD WORKED OUT THIS COST WITHOUT MAKING PROPER A PPRAISAL OF FACTS OF THIS CASE AND WITHOUT UNDERSTANDING THE MANNER OF CALCULATION MAD E BY THE ASSESSEE. ACCORDING TO THE LD. A/R WHILE COMPUTING THE COST OF SALES, AO HAD M ADE SIMPLE PROPORTION OF BOTH THE LAND COST AND THE CONSTRUCTION COST WHICH WAS NOT C ORRECT FOR THE FOLLOWING REASONS: A. THE CONSTRUCTION COST IS TO BE PROPORTIONATELY DIVI DED IN THE AREA OF EACH UNIT, HOWEVER THE LAND COST COULD NOT BE SO DIVIDED. THE RATE OF UNITS VARIED FROM FLOOR TO FLOOR (HIGHER RATES ON THE GROUND FLOOR AN D LOWER ON HIGHER FLOORS) AND LOCATION TO LOCATION (HIGHER RATES IN FRONT AND LOW ER RATES IN THE BACK SIDE). FOR EXAMPLE, THE FOLLOWING RATES HAD BEEN REALIZED FOR VARIOUS UNITS OF THE BUILDING: UNIT NO. RATE CHARGED FLOOR LOCATION TYPE OF PROPERTY 20 2250 BASEMENT CORNER COMMERCIAL 24 7000 GROUND FRONT COMMERCIAL 130 3000 FIRST BACK COMMERCIAL 212 2500 SECOND FRONT COMMERCIAL 406 1800 FOURTH FRONT RESIDENTIAL THE RATE CHARGED FOR ALL THE UNITS WAS INDICATED IN THE ABOVE CHART. THE CONSTRUCTION COST FOR ALL FLOORS WAS SAME AND HIGHER RATES ATTRIBUTED TO THE LAND ONLY WHICH MIGHT BE BECAUSE OF PROXIMITY OF UNIT WITH LAND AND THE FRON TAGE OF LAND TOWARDS THE ROAD OR OTHER LOCATION ADVANTAGES. 7 B. THE GOVERNMENT ALSO, WHILE DECIDING THE CIRCLE RATE FOR REGISTRATION OF THE PROPERTY, CONSIDERED THIS FACT AND ACCORDINGLY, THE DLC RATES OF LOWER FLOORS WERE HIGHER THAN THE RATES OF UPPER FLOORS. THE APP ELLANT ALSO SUBMITTED A COPY OF DLC RATES AND THE MANNER OF CALCULATION OF THESE RATES SHOWING THAT EH REASON FOR DIFFERENCE ON SUCH RATE ON EACH FLOOR WA S DUE TO TAKING DIFFERENT VALUE OF LAND AT DIFFERENT FLOORS. C. THE APPLICATION OF PROPORTIONATE LAND AS DONE BY AO GAVE ABSURD PROFIT MARGIN FIGURES IN THE CASE OF DIFFERENT FLATS AS ST ATED IN THE TABLE GIVEN IN THE ORDER OF LD CIT(A). THE SAID TABLE SHOWED CASES OF LOSS IN CASE OF FLATS AT HIGHER FLOORS WHERE THE SELLING PRICES WERE LOW WHI CH WAS NOT CORRECT. HE SUBMITTED THAT THE ASSESSEE HAD TAKEN A BETTER M ETHOD OF ALLOCATING COST. THE CONSTRUCTION COST HAD BEEN EQUALLY DIVIDED IN ALL T HE UNITS. HOWEVER, THE COST OF LAND WAS PROPORTIONATELY DIVIDED IN THE WEIGHTED AVERAGE PRO PORTION OF AREA & RATE OF EACH UNIT. IT WAS SUBMITTED THAT THE OVERALL TOTAL PROFIT OF THE PROJECT SPREAD IN VARIOUS FINANCIAL YEARS WOULD BE SAME. A METHOD OF ESTIMATING PROFIT ATTRIB UTABLE TO A PARTICULAR UNIT HAD TO BE ARRIVED AT SO THAT THE SAME COULD BE TAXED IN THE Y EAR OF SALE OF THAT PARTICULAR UNIT. THE ESTIMATES MADE BY THE ASSESSEE WERE BETTER THAT THE WORKING MADE BY THE ASSESSING OFFICER IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, THE ADDITION MADE WAS NOT JUSTIFIED AND WAS RIGHTLY DELETED BY THE LD CIT(A). 6.0 REGARDING ISSUE OF ADDITIONAL EVIDENCES, THE LD . AR SUBMITTED THAT THE FINANCIAL STATEMENTS OF THE ASSESSEE HAS BEEN DRAWN ON THE BA SIS OF THE SAID STATEMENT OF ALLOCATION OF COST. ALL THE FIGURES TALLIES WITH THE FINANCIAL STATEMENTS. THE AO, WITHOUT CONSIDERING AND UNDERSTANDING THE BASIS OF ALLOCATI ON OF COST, HAS APPLIED HIS OWN FORMULA OF COMPUTATION OF COST. LD. CIT(A), ACCEPT ED THE ASSESSEES BASIS AND AFTER VERIFICATION OF COMPUTATION OF UNIT WISE COST MADE BY THE ASSESSEE IN THE SAID STATEMENT HAS CONSIDERED THE SAME AS CORRECT. ACCORDING TO L D. AR, THERE IS NO ADDITIONAL EVIDENCE BUT IT IS A WORKING OF ALLOCATION OF COST TO THE UN IT WHICH HAS BEEN PART AND PARCEL OF BOOKS OF ACCOUNTS AND VOUCHERS PRODUCED DURING THE COURSE OF ASSESSMENT PROCEEDINGS 8 FROM TIME TO TIME. THE REFLECTION OF THIS WORKING IS ALREADY THERE IN THE FINANCIAL STATEMENTS. THE AO MADE HIS OWN CALCULATION WITHOUT REFERRING ASSESSEES CALCULATION. LD. CIT(A) NOT ONLY ACCEPTED THE METHOD ADOPTED BY THE ASSESSEE TO MAKE SUCH COMPUTATION BUT ALSO VERIFIED AND ACCEPTED THE CALC ULATIONS WHICH IS WITHIN HIS JURISDICTION. 7.0 WE HAVE HEARD THE RIVAL PARTIES. ON PERUSAL OF MATERIAL ON RECORD AND ORDERS OF THE AUTHORITIES BELOW, WE FIND THAT THE ASSESSEE HA S ALLOCATED THE ENTIRE COST ON EACH AND EVERY UNIT. THE COST OF CONSTRUCTION IS PRO-RATA I N THE RATIO OF AREA OF EACH UNIT BUT THE COST OF LAND IS ALLOCATED ON WEIGHTED AVERAGE SELLI NG RATE OF EACH UNIT AS THERE ARE LARGE VARIATIONS IN THE SELLING RATES OF THE UNITS DEPEND ING ON THEIR RESPECTIVE LOCATION. MAJOR DIFFERENCE IS BECAUSE OF THE FLOOR. GOVERNMENT ALS O RECOGNISES IT FOR THE PURPOSE OF STAMP DUTY VALUATION AND TAKE DIFFERENT VALUE OF LA ND FOR REGISTRATION OF PROPERTY AT DIFFERENT FLOORS. THE MANNER IN WHICH AO HAS ALLOCA TED THE COST IS GIVING DISTORTED RESULT OF PROFIT/LOSS ON EACH UNIT AS AGAINST WHICH THE FO RMULA DRAWN BY THE ASSESSEE BALANCES THE SAME. THERE IS NO DISPUTE AS TO THE FACT THAT THE SAME BASIS IS ADOPTED FOR ALL THE UNITS AND IN ALL THE YEARS WHENEVER SALE OF THE UNIT IS R ECOGNIZED IN THE BOOKS OF ACCOUNTS. IN OUR CONSIDERED OPINION THE METHOD ADOPTED BY THE AS SESSEE IS MORE LOGICAL AND DOES NOT LEAVE ANY POSSIBILITY OF LEAKAGES IN REVENUE ALSO. IN THESE FACTS AND CIRCUMSTANCES WE FIND NO MERIT IN THE FIRST GROUND OF DEPARTMENTAL APPEAL . REGARDING THE SECOND GROUND, WE FIND THAT THE WORKING SHOWN BY THE ASSESSEE WAS THE BASIS OF FINANCIAL STATEMENTS AND PREPARATION OF BOOKS OF ACCOUNTS. THERE IS NO FIND ING OF THE ASSESSING OFFICER THAT ANY OF THE INFORMATION REGARDING FINANCIAL STATEMENT OR BO OKS OF ACCOUNT WAS NO PROVIDED BY THE ASSESSEE. IN SUCH CIRCUMSTANCES, IT IS WRONG TO CO NSIDER THE CALCULATION AS ADDITIONAL 9 EVIDENCES. THE LD. CIT(A) HAS, TO HIS SATISFACTION , VERIFIED THE CALCULATIONS WHICH HE FOUND HAS CORRECT. WE FIND NO MERIT IN THE ARGUMENT S OF LD. DR THAT VERIFICATION OF COMPUTATION OF ALLOCATION OF COST, WHICH HAS NOT BE EN DONE BY THE AO IS NOT WITHIN THE JURISDICTION OF THE LD. CIT(A). WE ACCORDINGLY DIS MISS GROUND NO. 2 OF THE DEPARTMENTAL APPEAL ALSO. 8.0 THE THIRD GROUND OF APPEAL IS TAKEN AGAINST DEL ETION OF ADDITION OF RS. 14,20,327/- IN RESPECT OF PROPORTIONATE COST OF AREA SOLD DURIN G THE YEAR OUT OF THE TOTAL ESTIMATED COST TO BE INCURRED BY THE ASSESSEE FOR COMPLETION OF TH E PROJECT BY FURTHER REDUCING THE COST OF GOODS SOLD CLAIMED BY THE ASSESSEE. DURING THE ASSE SSMENT PROCEEDING, THE AO OBSERVED THAT THERE WAS NO SCIENTIFIC WORKING FOR THE ESTIMA TED COST TO BE INCURRED IN FUTURE. THE ASSESSEE HAD MADE AN ESTIMATE OF THE FOLLOWING CONS TRUCTION COST STILL TO BE INCURRED FOR COMPLETION OF THE PROJECT: S.NO. EXPENSES HEAD AMOUNT (RS.) 1 LIFT 30,00,000 2 LABOUR/WAGES 35,00,000 3 PUMP SETS 2,50,000 4 OTHER EXPENSES 12,50,000 TOTAL 80,00,000 OUT OF THE TOTAL ESTIMATED COST OF CONSTRUCTION, TH E COST PROPORTIONATE TO THE TOTAL AREA SOLD AREA HAD BEEN CALCULATED AT RS. 14,20,327 I.E. {(RS . 80.00 LAKHS/89,966 SQ. FEET)* 15973 SQ. FEET} AND SAME WAS ADDED TO THE COST OF GOODS S OLD. THE AO HAS OBSERVED THAT THERE IS NO SCIENTIFIC WORKING TO WORK OUT THE ESTIMATE C OST TO BE INCURRED AND IT HAD BEEN TAKEN PURELY ON ESTIMATE BASIS AND HE FURTHER FOUND THAT THE CERTAINTY OF INCURRENCE OF THIS 10 EXPENDITURE HAS NOT BEEN SATISFACTORILY EXPLAINED T O HIM AND ACCORDINGLY HE MADE AN ADDITION OF RS. 14,20,327/-. 9.0 IN THE FIRST APPEAL, THE LD CIT(A) HAS DELETED THE ADDITION BY OBSERVING THAT THE EXPENDITURE COMPRISING OF COST OF LIFTS TO BE INSTA LLED, INSTALLATION CHARGES/LABOUR CHARGES AND PUMP SETS WAS DIRECT COST ATTRIBUTABLE TO THE R EVENUE AND WITHOUT DEDUCTING THE SAME, THE TRUE PROFIT OF THE SALE TRANSACTIONS COULD NOT BE COMPUTED. SINCE THE INSTALLATION OF LIFTS, PUMP SETS AND OTHER DEVELOPMENT WORK COULD N OT BE COMPLETED IN THE YEAR UNDER REFERENCE, THE ESTIMATION WAS REQUIRED TO BE MADE A GAINST THE EXPENSES TO BE INCURRED IN FUTURE TOWARDS THE SAME. THE LIABILITY TO INCUR THI S EXPENDITURE HAD ARISEN IN THE CURRENT YEAR ON THE SALE OF UNITS. THE LD. CIT(A) HAS NOTIC ED THAT ASSESSEE HAD MADE PROVISION OF RS. 80 LACS TOWARDS THESE EXPENSES AND DETAILS FILE D BY THE COUNSEL OF THE APPELLANT SHOWED THAT THE AMOUNT ACTUALLY INCURRED WAS AT RS. 89,76,491/- IN THE SUBSEQUENT YEAR. HE FURTHER OBSERVED THAT AS IT IS IMPERATIVE TO INC UR THIS EXPENDITURE AND IT WAS ALSO OUT OF BUSINESS EXPEDIENCY, THE MOST APPROPRIATE METHOD OF ACCOUNTING WAS TO PROVIDE FOR THIS EXPENDITURE AT THE FIXED RATE OR CERTAIN PERCENTAGE OF THE TURNOVER ON PAST EXPERIENCE AS IT FULFILLED BOTH ACCRUAL CONCEPT AS WELL AS THE MATCH ING CONCEPT. FURTHER, THE LD. CIT(A) HAS MADE A RELIANCE ON THE DECISION OF HONBLE S.C DECISION IN THE CASE OF BHARAT EARTHMOVERS VS CIT (245 ITR 428) WHERE IT WAS HELD THAT IF A BUSINESS LIABILITY HAS ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT FUTURE DATE . WHAT SHOULD BE CERTAIN IS INCURRING OF THE LIABILITY. IT SHOULD BE CAPABLE OF BEING ESTIMA TED WITH A REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE . IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. IT WAS FOUND THAT THE 11 ASSESSEE MADE A PROVISION OF RS. 80 LACS AND HAD IN CURRED AN EXPENDITURE OF RS. 89,76,491/- IN THE SUBSEQUENT YEARS. THE LD CIT (A) HAS OBSERVED THAT THIS SYSTEM OF ACCOUNTING WAS REGULARLY FOLLOWED BY THE ASSESSEE S INCE LAST MANY YEARS AND NO DEVIATION WAS EVER MADE. FURTHER RELIANCE WAS MADE ON THE DEC ISION OF HONBLE S.C. HELD IN THE CASE OF CALCUTTA CO LTD VS CIT (37 ITR 1) WHEREIN I T WAS HELD THAT WHEN THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT IS ENTITLED TO DEDUCT EXPENDITURE WHICH IS INCIDENTAL TO THE BUSINESS IS DEDUCTIBLE O N ACCRUAL BASIS THOUGH IT WAS NOT ACTUALLY INCURRED DURING THE RELEVANT ACCOUNTING YE AR. RELIANCE WAS ALSO MADE ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CAS E OF CIT VS GOVIND GRAH NIRMAN SAHAKARI SAMITI LTD. (258 ITR 208) WHERE IT WAS HEL D THAT THE EXPENDITURE INCURRED IN DEVELOPING THE LAND, LAYING DOWN PIPE LINES, DIVIDI NG THE LAND INTO SMALL PLOTS WERE REQUIRED TO BE INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF SELLING THE STOCK-IN- TRADE I.E., LAND EXPENDITURE WERE ALLOWABLE AS EXPE NDITURE. FURTHER, HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS VINITEC CORPORATION LTD . (278 ITR 337) HELD THAT IT WAS A LIABILITY, WHICH WAS CAPABLE OF BEING CONSTRUED IN DEFINITE TERMS, WHICH HAD ARISEN IN THE ACCOUNTING YEAR., ALTHOUGH ITS ACTUAL QUANTIFICATIO N AND DISCHARGE MIGHT BE DEFERRED TO A FUTURE DATE. ON THE BASIS OF ABOVE DECISIONS LD. CI T(A) DELETED THE ADDITION MADE BY THE AO BY OBSERVING THAT THE ASSESSEE HAD INCURRED MORE EXPENDITURE RESULTING FROM THE PROVISION TO THE EXTENT THE PROVISION WAS MADE. ALS O THERE WAS NOTHING ON RECORD WHICH COULD SUGGEST THAT THE METHOD OF ACCOUNTANCY WAS MO TIVATED AS ALLEGED BY THE AO OR WAS IMPROPER OR THAT THE PROVISION MADE IN THE ACCOUNTI NG YEAR AND DEDUCTION CLAIMED AS BUSINESS EXPENDITURE WAS UNDULY EXCESSIVE AND WAS I NTENDED TO EVADE TAXATION. WHAT 12 SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY . IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTU AL QUANTIFICATION MAY NOT BE POSSIBLE. 10. BEFORE US, THE LD. DR SUBMITTED EMPHASIZED THAT THE ASSESSEE CANNOT BE ALLOWED AN EXPENDITURE WHICH HAS NOT YET BEEN ACTUALLY INCU RRED. ACCORDINGLY, HE SUBMITTED THAT ACTION OF THE AO WAS CORRECT IN MAKING DISALLOWANCE OF SUCH PROVISION MADE ON ESTIMATED BASIS FOR EXPENDITURE WHICH IS STILL TO B E INCURRED. HE PLACED RELIANCE ON THE ORDER OF AO AND SUBMITTED THAT LD. CIT(A) HAS WRONG LY ALLOWED THE RELIEF TO THE ASSESSEE ON THIS ISSUE. 11.0 THE LD. AR SUPPORTED THE ORDER OF LD CIT(A). HE SUBMITTED THAT THE ASSESSEE HAD MADE A BEST ESTIMATION OF COST OF WORK TO BE DONE F OR COMPLETION OF THE PROJECT AT THE END OF THE YEAR. THE ASSESSEE HAD ACTUALLY INCURRED A H IGHER COST OF RS. 89,76,491/- IN THE SUBSEQUENT YEARS THAN THE ESTIMATION SO MADE TO COM PLETE THE PROJECT. THE DETAILS WERE AS UNDER: ESTIMATION MADE AT THE END OF THE YEAR S.NO. EXPENSES HEAD AMOUNT RS. BASIS OF ESTIMATION ACTUAL EXPENSES INCURRED 1 LIFT 30,00,000 QUOTATIONS RECEIVED FROM THE SUPPLIERS 31,80,844 2 LABOUR/WAGES 35,00,000 WORK TO BE EXECUTED 38,97,149 3 PUMP SETS 2,50,000 QUOTATIONS RECEIVED FROM THE SUPPLIERS 2,80,000 4 OTHER EXPENSES 12,50,000 WORK TO BE EXECUTED 16,18,498 80,00,000 89,76,491 13 THE FIRST REASON GIVEN BY THE AO WAS THAT THE ESTIM ATE WAS NOT SCIENTIFIC. IT WAS ARGUED THAT THE ESTIMATES WERE MADE ON THE BASIS OF INFORM ATION AVAILABLE WITH THE ASSESSEE AT THE TIME OF END OF THE YEAR. EVEN OTHERWISE THE TOTAL E XPENDITURE ACTUALLY INCURRED WAS HIGHER THAN THE SAID ESTIMATION. THUS, IF THE ASSESSING OF FICER ALLEGES THAT THE ESTIMATION WAS NOT CORRECT, HE SHOULD MAKE HIS OWN ESTIMATE ON THE BAS IS OF INFORMATION AVAILABLE WITH HIM. HE SHOULD HAVE MADE DEDUCTION ON THE BASIS OF COST ACTUALLY INCURRED IN SUCH CIRCUMSTANCES. THE DETAILS OF COST ACTUALLY INCURRE D WAS PROVIDED TO THE AO VIDE LETTER DATED 20.10.2011. THE ALLEGATION MADE ABOUT CERTAIN TY OF EXPENDITURE WAS WITHOUT NAY BASIS WHEN THE ASSESSEE HAD GIVEN THE DETAILS OF AC TUAL INCURRENCE OF EXPENDITURE. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAS CLAIMED RS. 14,20,327/- ONLY WHICH IS PROPORTION OF EXPENDITURE PERTAINING TO PART OF THE PROJECT FOR WHICH REVENUE HAS ALREADY BEEN RECOGNIZED. IN FACT THIS AMOUNT OF RS. 14,20, 327/- REPRESENTS PART OF REVENUE AGAINST WHICH THE ASSESSEE HAS NOT DISCHARGED ITS OBLIGATIO N. HE ACCORDINGLY SUBMITTED THAT THE ASSESSEE HAS CORRECTLY CHARGED THIS AMOUNT IN ARRIV ING AT PROFIT/LOSS FOR THE YEAR. ON THIS BASIS HE CONCLUDED THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION AND REQUESTED TO UPHOLD THE SAME. 12.0 WE HAVE HEARD THE RIVAL PARTIES AND PERUSED TH E ORDERS OF AUTHORITIES BELOW AND ALSO THE MATERIAL ON RECORD. WE FIND THAT ASSESSEE STARTED BOOKING SALE OF CERTAIN UNITS OF WHICH POSSESSIONS HAVE BEEN HANDED OVER TO CUSTOMER S. HOWEVER, CERTAIN WORK IN THE BUILDING WAS STILL TO BE COMPLETED AND THE COST OF THE SAME SHALL OBVIOUSLY ALLOCATED TO ALL THE UNITS INCLUDING THOSE FOR WHICH SALE HAS ALREAD Y BEEN BOOKED AS ALL THE UNITS ARE PART OF THE COMMON STRUCTURE. ACCORDINGLY THE ASSESSEE M ADE A SYSTEMATIC ESTIMATION OF COST 14 STILL TO BE INCURRED WHICH IS VERY NEAR TO THE EXPE NDITURE ACTUALLY INCURRED AT THE LATER STAGE. WE ACCORDINGLY AGREE WITH THE LD. AR OF THE ASSESSEE THAT AMOUNT OF COST STILL TO BE INCURRED FOR THE UNITS OF WHICH SALE HAS BEEN BO OKED SHOULD BE REDUCED IN COMPUTING THE PROFIT REALIZABLE FROM SALE OF THOSE UNITS. THE ASSESSEE HAS MADE A REASONABLE ESTIMATE OF ENTIRE COST AND ITS PROPORTION TO THE UNITS ALRE ADY SOLD. THE EXPENDITURE FINALLY INCURRED IS HIGHER THAN THE ESTIMATE MADE BY THE AS SESSEE. THERE CANNOT BE ANY BETTER APPROACH FOR SUCH ESTIMATION. WE ACCORDINGLY FIND NO INFIRMITY IN THE ORDER PASSED BY THE CIT(A) ON THIS ISSUE AND THEREFORE REJECT THIS GROUND OF THE DEPARTMENTAL APPEAL. 13.0 THE FORTH GROUND OF APPEAL IS TAKEN AGAINST DE LETION OF ADDITION OF RS. 3,73,69,323/- IN RESPECT OF INCLUDING THE INTER EST COSTS INCURRED FOR PROJECT-2 IN THE VALUE OF INVENTORY OF PROJECT -2. THE AO HAS FOUND THAT ASSESSEE PARTICIPATED IN A BID BY THE RAJASTHAN HOUSING BOARD AND PURCHASED A PIECE O F LAND AT PLOT NO.1, SECTOR-8, PRATAP NAGAR, SANGANER, JAIPUR FOR A SUM OF RS. 26,11,44,0 00/- . ALONG WITH THE FURTHER COST INCURRED ON REGISTRATION ETC., THE ASSESSEE ACCOUNT ED TOTAL AMOUNT OF RS. 28,83,42,266/- AS INVENTORY FOR PROJECT NO. 2. TO SOURCE THE FUNDS FO R PURCHASE OF THIS LAND, THE ASSESSEE OBTAINED LOAN FROM RIICO AND ALSO OTHER UNSECURED L OANS. THE ASSESSEE INCURRED INTEREST OF RS. 2,51,22,324/- AND RS. 1,22,46,999/- ON LOAN FROM RIICO AND UNSECURED LOAN RESPECTIVELY AND CHARGED THE SAME TO THE PROFIT & L OSS ACCOUNT. THE SAID INTEREST IS CLAIMED AS EXPENDITURE ALLOWABLE U/S 36(1)(III) AGA INST THE INCOME ACCOUNTED BY THE ASSESSEE WHICH MAINLY PERTAINS TO THE OTHER PROJECT , I.E. PROJECT NO. 1. IN THE QUERIES RAISED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED AS TO WHY THIS INTEREST COST SHOULD NOT BE ADDED TO THE COST OF LAND FOR PR OJECT 2. IN RESPONSE, THE ASSESSEE EXPLAINED THAT INCLUSION OF SUCH INTEREST IN THE CO ST OF INVENTORY VALUE IS NOT PERMISSIBLE 15 AS PER THE AS-2 ON VALUATION OF INVENTORY VALUE AND ALSO AS PER AS-16 ON BORROWING COSTS. HE ALSO SUBMITTED THAT IT INTEREST IS OTHER WISE AN ALLOWABLE EXPENDITURE U/S 36(1)(III) AS IT IS NOT TOWARDS A CAPITAL ASSET BUT IT IS TOWARDS STOCK IN TRADE. THE AO, HOWEVER, DID NOT AGREE WITH THE SAME. HE NOTICED T HAT INTEREST WAS A DIRECT COST QUA PROJECT-2. FURTHER, WHILE VALUING THE INVENTORY OF PROJECT 1, THE ASSESSEE INCLUDED INTEREST COST INCURRED ON THAT PROJECT IN THE VALUE OF STOCK . HE MENTIONED THAT AS-2 SAYS THAT INTEREST COST IS NOT USUALLY INCLUDED IN THE COST OF INVENTORY WHICH MEANS THAT IT COULD BE INCLUDED IF OTHER FACTORS ALLOWS. AS PER LD. AO THE INTEREST COST SHOULD HAVE FORMED PART OF INVENTORY FOR THE FOLLOWING REASONS: A) IT WAS A FACT THAT SITE OF THE PROJECT-2 WAS PURCHA SED WITH AN INTENTION TO BUILD COMMERCIAL PROJECT THEREON AND WAS HELD AS INVENTOR Y BY THE ASSESSEE. B) THE INTEREST UNDER DISCUSSION HAD BEEN PAID AGAINST THE MONEY RAISED TO FINANCE THE SAID LAND. C) THE MAP OF THE BUILDING TO BE CONSTRUCTED WAS FILED WITH COMPETENT AUTHORITY FOR APPROVAL. D) THE ACTIVITY OF DEVELOPMENT OF MAP INVOLVED VARIOUS FACTORS LIKE: CONSIDERATION OF ULTIMATE PLAN/OBJECT, RULES AND RE GULATION, ARCHITECTURAL SKILLS, ASSESSMENT OF MARKET NEED, REQUIREMENT OF SURROUNDI NG AREAS, DRAWING SKILLS ETC. E) FILING OF MAP WITH COMPETENT OF AUTHORITY COULD NOT BE CONSIDERED MERE FULFILLING THE STATUTORY REQUIREMENT AS THE MAP OF THE COMMERCIAL PROJECT WAS NOT FORM OR MAPS READILY AVAILABLE FOR EACH AND EVE RY SITE TO BE FILED WITH THE COMPETENT AUTHORITY. F) DEVELOPMENT OF THE COMMERCIAL PROJECT REQUIRES REAS ONABLY LONG PERIOD OF TIME. THE A.O. ALSO OBSERVED THAT ACTIVITIES HAD NEITHER BEEN HOLD FOR UNCERTAIN PERIOD NOR BEEN INTERRUPTED, IT WAS AT THE MOST CAN BE SAID THAT BA SED ON COMMERCIAL EXPEDIENCY IN REGULAR COURSE OF BUSINESS SUCH PHYSICAL ACTIVITIES ARE NOT BEING CARRIED OUT. HE ACCORDINGLY MADE AN ADDITION OF RS. 3,73,69,323/-. 16 14.0 IN THE FIRST APPEAL, THE LD CIT(A) HAS OBSERVE D THAT THE LAND WAS PURCHASED FOR PROJECT-2 AND SAME CONSTITUTED STOCK IN HAND FOR TH E ASSESSEE. THE LAND WAS PURCHASED FOR CARRYING OUT REAL ESTATE BUSINESS ACTIVITY OF THE A SSESSEE. SOON AFTER PURCHASE, THE DIRECTORS REALISED THAT DEMAND OF CONSTRUCTED COMME RCIAL/ RESIDENTIAL UNITS HAD BEEN SUBSTANTIALLY REDUCED AND IT WAS NOT ECONOMICALLY V IABLE TO TAKE UP THE CONSTRUCTION ACTIVITY FOR THE SAID PROJECT AT THAT POINT OF TIME . ACCORDINGLY, NO CONSTRUCTION ACTIVITY COMMENCED FOR THE PROJECT 2. THE ASSESSEE APPLIED FOR APPROVAL OF CONSTRUCTION PLAN ON 04.09.2008 BEFORE RAJASTHAN HOUSING BOARD. HOWEVER , NO ACTIVITY HAS BEEN DONE TILL NOW. SINCE THE PROJECT-2 WAS POSTPONED FOR INDEFINI TE PERIOD, THE INTEREST COST WAS CHARGED TO P&L A/C CONSIDERING THAT IT WAS AN ALLO WABLE DEDUCTION U/S 36(1)(III). THERE IS NO DISPUTE THAT THE INTEREST COST OF RS. 3,73,69 ,323/- WAS INCURRED IN THE RELEVANT YEAR AND PAID TO RIICO FOR THE SAID PERIOD. THE LOANS WE RE BORROWED IN RESPECT OF BUSINESS ACTIVITY OF THE ASSESSEE AND WHAT WAS PURCHASED CON STITUTED STOCK IN TRADE AND NOT CAPITAL ASSET OUT OF BORROWED FUND. FURTHER OBSERVED THAT B OTH THE PROJECT I.E. PROJECT-1 AND PROJECT-2 CONSTITUTED THE SAME BUSINESS AND NOT TWO DIFFERENT BUSINESSES. EVEN IF AO TREATED THE PROJECT 1 & 2 AS TWO DIFFERENT BUSINESS ES THEN ALSO THE LOSS OF ONE BUSINESS COULD BE SET OFF AGAINST THE PROFIT OF THE OTHER BU SINESS. FOR WHICH RELIANCE WAS MADE ON CIT VS ALEMBIC GLASS INDUSTRIES LTD. (103 ITR 715), GUJARAT HIGH COURT WHERE IT WAS HELD THAT THERE WAS INTER-CONNECTION AND INTER-DEPE NDENCE BETWEEN THE TWO UNITS AND THAT THE TRIBUNAL WAS, THEREFORE, JUSTIFIED IN LAW IN HO LDING THAT THE NEW FACTORY AT BANGALORE DID NOT CONSTITUTE A NEW BUSINESS BUT WAS ONLY AN E XPANSION EXISTING BUSINESS AT BARODA. MOREOVER, THE INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS IS AN ALLOWABLE DEDUCTION U/S 36(1)(III) OF IT ACT AS HEL D BY THE HON,BLE MADRAS HIGH COURT IN 17 THE CASE OF CIT VS CARBORANDUM UNIVERSAL LTD (205 C TR 498). RELIANCE IS ALSO PLACED IN THE CASE OF CIT VS B AMRITHALAKSHMI (300 ITR 78) WHERE ASSESSEE HAVING CHANGED THE METHOD OF VALUATION OF CLOSING STOCK OF SHARES HELD AS STOCK-IN-TRADE FROM MARKET PRICE TO COST PRICE AND BOTH, CIT(A) AS WELL AS THE TRIBUNAL, HAVING GIVEN CONCURRENT FINDINGS THAT THE CHANGED METHOD HAS BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THEREFORE, THE CHANGE IN METHOD OF VALUATION IF CLOSING STOCK OF SHARES FROM MARKET PRICE TO COST PRICE WAS HELD TO BE CORRECT. RELIANCE IS ALSO MADE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARAT COMMERCE & INDUS TRIES LTD. (240 ITR 256) WHERE IT WAS HELD THAT ASSESSEE HAD AN OPTION TO CHANGE THE METHOD OF VALUATION OF CLOSING STOCK IF THE CHANGE WAS BONA FIDE AND SAME METHOD WAS FOLLOW ED BY ASSESSEE REGULARLY THEREAFTER. FURTHER RELIANCE WAS MADE IN THE CASE OF INDIA MOTO R PARTS & ACCESSORIES PVT LTD VS CIT (60 ITR 530) WHERE THE ARTICLES WITH A FALLING MARK ET WERE VALUED AT LESS THAN COST PRICE. THE HONBLE MADRAS HIGH COURT HELD THAT THIS WAS ON E OF THE RECOGNISED METHODS OF VALUATION. IN A COMPARISON OF VARIOUS INVENTORY MET HODS IN REGARD TO FALLING MARKET, IN INDUSTRIAL ACCOUNTANTS HANDBOOK, EDITED BY WYMAN P . FISKE AND JOHN A. BECKETT, IT WAS FOUND THAT SOME ARTICLES FOR WHICH THERE WAS FA LLING MARKET COULD BE REDUCED TO SELLING PRICE LESS FIFTY PERCENT MARKET OFF. THE SUGGESTION MADE IN REGARD TO DISPOSAL OF OBSOLETE MATERIAL WAS CONTAINED IN THE FOLLOWING WO RDS IN THIS BOOK: A CONSTANT REVIEW OF STORE-ROOM INVENTORY RECORD C ARDS SHOULD BE MADE, AND PERIODICALLY LISTS SHOULD BE PREPARED SHOWING ITEMS THAT HAVE BEEN INACTIVE FOR SPECIFIED PERIODS, WHICH DEPEND ON THE BASIC STOCK GROUPS AND NATURE OF THE INDUSTRY. SOMETIMES ITEMS ARE ALSO LISTED WHERE THE INVENTORY IS IN EXCESS OF SALES OR DISBURSEMENTS FOR THE LAST SIX MONTHS OR YEAR. T HE LISTS OF INACTIVE ITEMS SHOULD BE REVIEWED BY PROPER OFFICIALS FOR DECISION AS TO ACTION TO BE TAKEN. IT WAS NOT SHOWN THAT METHOD ADOPTED BY ASSESSEE WA S EITHER IMPROPER OR PATENTLY FALSE. THERE WAS, THEREFORE, NO JUSTIFICATION REQUIRING TH E ASSESSEE TO CHANGE THE METHOD WHICH 18 HAD BEEN CONSISTENTLY FOLLOWED. THE LD. CIT(A) ALSO NOTICED THAT AO HAS OVEREMPHASIZED THE FACT AS-2 AND AS-16 FOR VALUATIO N OF INVENTORY AND BORROWING COST RESPECTIVELY. FURTHER NOTICED THAT IT IS NOT IN DIS PUTE THAT EVEN AS PER PARA 11 OF AS-2, THE INTEREST AND OTHER BORROWING COST ARE USUALLY CONSI DERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION AND ARE, THEREFORE, USUALLY NOT INCLUDED IN THE COST OF INVENTORY AND THEREFORE THESE ARE US UALLY NOT INCLUDED IN THE COST OF INVENTORY. FURTHER PARA 12 OF AS-2 STIPULATES THAT INTEREST AND OTHER BORROWING COST ARE USUALLY NOT TO BE INCLUDED IN THE INVENTORY. HOWEVE R THAT THE INTEREST COST CAN BE INCLUDED IN THE INVENTORY IN TERMS OF PRINCIPLES ENUMERATED IN AS-16. AS PER PARA 6 OF AS-16, BORROWING COSTS THAT ARE DIRECTLY ATTRIBUTABLE TO T HE ACQUISITION, CONSTRUCTION OR PRODUCTION OF QUALIFYING ASSET SHOULD BE INCLUDED A S PART OF THE COST OF THAT ASSET. HOWEVER IN PARA 7 OF THE AS-16, THERE IS A VERY IMP ORTANT RIDER. AS PER PARA-7, BORROWING COST ARE INCLUDED AS PART OF QUALIFYING A SSET ONLY WHEN IT IS PROBABLE THAT THEY WILL RESULT IN FUTURE ECONOMIC BENEFIT TO THE BUSIN ESS. IN OTHER CASES, THESE WERE NEEDED TO BE EXPENSES IN THE PERIODS IN WHICH THERE WERE INCU RRED. HERE ACTIVITIES RELATING TO PROJECT-2 WERE SUSPENDED FOR THE TIME BEING. THERE WAS NO ECONOMIC BENEFIT TO THE ASSESSEE IN RELATION TO LAND PERTAINING TO PROJECT- 2. FURTHER, PARA 14 OF AS-16 ALLOWS COMMENCEMENT OF CAPITALIZATION OF BORROWING COST WH EN ACTIVITIES THAT ARE NECESSARY TO PREPARE THE ASSET FOR THE INTENDED USE OF SALE ARE IN PROGRESS. HOWEVER TILL DATE THE PROJECT-2 HAD NOT COMMENCED. MOREOVER, AS PER THE L AST LINES IN PARA 16, BORROWING COST INCURRED BY ANY ASSESSEE WHILE THE LAND ACQUIRED FO R BUILDING PURPOSE WAS HELD WITHOUT ANY ASSOCIATED DEVELOPMENT ACTIVITIES DID NOT QUALI FY FOR CAPITALIZATION. FURTHERMORE, AS PER PARA-17 OF AS-16, CAPITALIZATION OF BORROWING C OSTS SHOULD BE SUSPENDED DURING THE 19 EXTENDED PERIODS IN WHICH ACTIVE DEVELOPMENT IS INT ERRUPTED. IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT LAND FOR PROJECT-2 WAS PART OF INVENTORY AND THE INTENTION TO TAKE UP INTENTION TO TAKE UP THE PROJECT IS LIVE BUT THE PR OMOTERS FINDING IT DIFFICULT TO FILL THE GAP OF PROJECT CASH FLOWS IF PROJECT IS LAUNCHED IN THE PRESENT MARKET SCENARIO. HOWEVER THE ASSESSEE HAD TO BEAR THE PRESENT FINANCIAL OBLIGATI ONS. THUS, THOUGH THE PROJECT ACTIVITIES WERE NOT TAKEN UP YET THE LIABILITY FOR INTEREST HA D ACCRUED DURING THE RELEVANT YEAR. THE LD CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAD TAKEN THE APPROVAL FOR CONSTRUCTION PLAN FROM RAJASTHAN HOUSING BOARD DID NOT IMPLY THAT THE PROJECT HAD COMMENCED AND THE BORROWING COST WAS TO BE INCLUDED IN THE INVENTORY. DURING THE COURSE OF ASSESSMENT, IT WAS BROUGHT TO NOTICE BY ASSESSEE THAT THERE WAS NO EVIDENCE OF ANY INCREASE IN THE PRICE OF LAND IN SECTION 8, PRATAP NAGAR, SANGANER, JAIPU R. ON THIS BASIS, LD CIT(A) HELD THAT EVEN AS PER AS-16, THE ASSESSEE WAS NOT BOUND TO AD D THE INTEREST TO THE INVENTORY. SIMILARLY, AS PER AS-2 THE INVENTORY OF THIS LAND W AS TO BE VALUED AT COST OR NET REALIZABLE VALUE WHICH EVER WAS LOWER. SINCE THE NET REALIZABL E VALUE OF THE LAND DID NOT EXCEED THE PRICE AT WHICH IT WAS PURCHASED, IT WAS RIGHTLY VAL UED AT THE COST. THE CIT(A) FURTHER OBSERVED THAT NOTHING COULD HAVE STOPPED THE ASSESS EE FROM CLAIMING THE INTEREST U/S 36(1)(III) IN THE COMPUTATION OF INCOME EVEN IF IT HAD BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT. THE ACCOUNTING STANDARDS DO NOT OVERRIDE T HE PROVISIONS OF I.T. ACT. THE LD. CIT(A) RELIED ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS WOLKEM INDIA LTD. (315 ITR 211). THE FOLLOWING QUE STION WAS ANSWERED BY THE COURT IN THIS CASE :- WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AS WELL AS IN THE LAW, THE LEARNED ITAT WAS JUSTIFIED IN DIRECTING TO VALUE TH E OBSOLETE STORES AT 10 PERCENT OF THE COST WITHOUT FOLLOWING THE AS-2 ISSUED BY IC AI IN LETTER AND SPIRIT, AND THE PROVISION OF SECTION 145A OF INCOME TAX ACT ? 20 IN THIS CASE, IT WAS CONTENDED THAT ITAT HAD GROSSL Y ERRED IN LAW AS WELL AS IN FACTS WHILE HOLDING THAT THE REVISED AS-2 ISSUED BY ICAI WAS MA NDATORY FOR CHARTERED ACCOUNTANTS FOR FINALIZATION OF ACCOUNTS BUT IT WAS NOT MANDATO RY FOR THE DEPARTMENT. IT WAS ARGUED BY THE REVENUE THAT SINCE THE ASSESSEE HAD VALUED ITS STORES/INVENTORIES ON THE COST OR MARKET PRICE, WHICHEVER IS LESS, THEREFORE, IT COULD NOT B E NOW VALUED ON REALIZATION VALUE. AS PER THE PROVISIONS OF S. 145A THE INCOME FROM BUSINESS UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS' HAS TO BE COMPUTED IN ACCORDANCE WIT H METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. SIMILARLY, S. 145A PROVID ES THAT THE INVENTORY SHALL BE VALUED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING EMPLOYE D BY THE ASSESSEE, THEREFORE, IF THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE IS RECO GNIZED METHOD THEN THE SAME CANNOT BE REJECTED ON THE GROUND THAT THE NET REALIZABLE V ALUE/MARKET VALUE HAS BEEN DETERMINED ON THE BASIS OF CERTAIN ESTIMATE. IT IS TO BE NOTIC ED THAT THE AO WHILE HOLDING THAT THE INVENTORIES VALUED BY THE ASSESSEE @ 5 PER CENT IS EXCESSIVE, DID NOT CARE TO ESTIMATE THE NET REALISABLE VALUE OF THE STORE AND PROCEEDED TO DISALLOW THE AMOUNT OF RS. 68,59,108 WRITTEN OFF AS OBSOLETE STORES AND CLAIMED IN P&L A /C ALTOGETHER. IT HAS COME ON RECORD THAT THE ASSESSEE HAS VALUED THE INVENTORIES WHICH WERE RUSTED, NON-MOVING AND UNUSABLE ON ACCOUNT OF OBSOLESCENCE/ DAMAGE/DETERIORATION BY EFFLUX OF TIME AT COST AND NET REALISATION VALUE, WHICHEVER IS LOWER. IT HAS ALSO COME ON RECORD THAT THESE ITEMS WERE 5-6 YEARS OLD. IT IS ALSO NOT DISPUTED THAT THE ASSESSE E HAD MADE THE REQUISITE EFFORTS TO DISPOSE OF THE SAME. THAT APART, SOME OF THESE ITEMS WERE A CTUALLY SOLD IN SUBSEQUENT YEARS AT A PRICE 8.43 PER CENT OF THE COST. THUS, CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES, THE VALUE OF THE STORES INVENTORY WR ITTEN DOWN TAKEN AT 10 PER CENT OF THE COST BY THE LD. CIT(A), CANNOT BE FAULTED WITH. FUR THER NO ULTERIOR MOTIVE CAN BE IMPUTED 21 TO THE ASSESSEE TO HOLD THAT CLAIM OF INTEREST WAS NOT GENUINE. EVEN IF IT HAD BEEN CAPITALIZED THEN IT WAS ALLOWABLE IN THE YEAR OF SA LE. THE LD. CIT(A) THEREFORE DIRECTED THE AO TO ALLOW THE DEDUCTION OF RS. 3,73,69,323/- ON ACCOUNT OF INTEREST U/S 36(1)(III) TO THE ASSESSEE.CIT(A) ACCORDINGLY DELETED THE ADDITIO N. 15.0 BEFORE US, LD. D/R SUBMITTED THAT PROVISO TO S ECTION 36(1)(III) STATES ABOUT ADDITION OF INTEREST COST TO THE COST OF ASSET WHICH WOULD A PPLY TO THE ASSESSES CASE AND THEREFORE, THE INTEREST SHOULD BE ADDED TO THE COST OF LAND AN D IT CANNOT BE CLAIMED AS EXPENDITURE IN THE YEAR OF INCURRENCE. HE SUBMITTED THAT PROVISO DOES NOT SPECIFY THE CAPITAL ASSET OR ASSET HELD AS STOCK IN TRADE. SINCE THE LAND OF PR OJECT-2 HAS NOT BEEN PUT TO USE, THE INTEREST COST HAS TO BE ADDED TO THE VALUE OF ASSET ONLY. HE ALSO SUBMITTED THAT AS PER THE ACCOUNTING STANDARD 16 ALSO, BORROWING COST AS TO S PECIFIC PROJECT HAS TO BE ALLOCATED TO SUCH PROJECT AND ADDED TO THE VALUE OF THE INVENTOR Y RATHER THAN CHARGING THE SAME TO THE PROFIT & LOSS ACCOUNT. HE SUPPORTED THE ORDER OF A SSESSING OFFICER AND SUBMITTED THAT LD. CIT(A) HAS WRONGLY ALLOWED THE RELIEF. 16.0 THE LD. AR SUPPORTED THE ORDER OF LD CIT(A) BY STATING THE FACTS OF THE CASE THAT THE LAND IN QUESTION WAS PURCHASED FOR THE PURPOSE OF CARRYING OUT A COMMERCIAL PROJECT FOR SALE IN TERMS OF THE BUSINESS ACTIVITY OF THE A SSESSEE. HOWEVER, SOON AFTER THE PURCHASE OF LAND THE DIRECTORS OF THE ASSESSEE COMPANY HAD F ELT SUBSTANTIAL REDUCTION IN THE ANTICIPATED DEMAND OF THE COMMERCIAL SPACES IN THE AREA. THEY ALSO CARRIED OUT A FEASIBILITY STUDY OF THE PROJECT ON THE BASIS OF AN TICIPATED REVENUES BASED ON MARKET ENQUIRIES. AS PER THE DETAILS SUBMITTED THE AO ON 0 2.12.2011, THE DIRECTORS OF THE ASSESSEE COMPANY WERE NOT FINDING IT APPROPRIATE TI ME TO TAKE UP THE PROJECT IN THE MARKET 22 CONDITIONS PREVALENT DURING THE F.Y. 2008-09. STILL TO BE READY FOR TAKING UP THE PROJECT AS SOON AS THE SITUATION APPROVES, THEY APPLIED FOR TH E APPROVAL OF CONSTRUCTION PLAN ON 4TH SEPTEMBER, 2008 WITHOUT ANY INTENTION TO TAKE UP TH E PROJECT SOON AFTER APPROVAL. AS ONE CAN OBSERVE THAT WHEN IT CAME FOR DEPOSITING SUM OF RS.21,25,539/- FOR THE SAID APPROVALS AND A DEMAND LETTER WAS ISSUED BY THE HOUSING BOARD ON 26.10.2008, THE COMPANY DELAYED THE SAME. BUT, ON REMINDER BY THE HOUSING B OARD ON 17.12.2008, THE COMPANY MADE THE PAYMENT OF THE FEE BUT RESOLVED TO POSTPON E THE PROJECT TILL MARKET CONDITION/EXPECTED REALIZATION IMPROVED. EVEN AFTER MORE THAN 2 YEARS, TILL DATE, THE COMPANY HAS NOT STARTED THE ACTIVITY FOR DEVELOPMEN T OF THE PROPOSED PROJECT. HE DREW OUR ATTENTION TOWARDS THE PROVISIONS OF SECTION 36( 1)(III) OF THE INCOME TAX ACT REGARDING THE ALLOWABILITY OF THE THIS INTEREST COST WHERE TH E INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWED AS DEDUCTION IN THE YEAR WHEN IT IS INCURRED. HE ALSO REFERRED THE PROVISO OF THIS CLAUSE AND SUBMITTED THAT IT APPLIES IN CASE OF CAPITAL ASSET AND NOT ON ASSETS WHICH ARE HELD AS STOCK IN TRADE. HE REFERRED THE WORDS PUT TO USE USED IN THE PROVISO AND SUBMITTED THAT THESE WORDS ARE USED ONLY WITH REFERENCE TO CAPITAL ASSETS & DEPREC IABLE ASSETS UNDER THE PROVISIONS OF INCOME TAX ACT AND ALSO IN ACCOUNTING STANDARDS. TH E PRESENT CASE IS OF STOCK-IN-TRADE AND NOT OF CAPITAL ASSET AND THEREFORE THE PROVISO CANNOT BE APPLIED IN THIS CASE. HE ALSO SUBMITTED THAT THE PROVISO WAS INTRODUCED TO DISENT ITLE THE ASSESSEES TO CLAIM INTEREST IN RESPECT OF BORROWED FUNDS USED TO BUY CAPITAL ASSET S WHICH WAS FOUND ALLOWABLE EARLIER BY VARIOUS COURTS IN THE CASES LIKE CIT VS. CARBONA NDUM UNIVERSAL LTD. (2006) (205 CTR 498), CALICO DYEING & PRINTING WORKS (1958) VS CIT (34 ITR 265), INDIA CEMENT LTD. VS CIT (60 ITR 52), CIT VS ALEMBIC GLASS INDUSTRIES LTD. (103 ITR 715). NOW THE 23 INTEREST FOR THE PERIOD UPTO DATE OF PUT TO USE OF CAPITAL ASSET CANNOT BE CLAIMED IN TERMS OF THE PROVISO. THE LD. A/R ALSO EXPLAINED THAT AS PER ACCOUNTING STANDARD DEALING THE PRINCIPLES OF VALUATION OF INVENTORIES (AS-2), THE INVENTORY HAS TO BE VALUED AT LOWER OF COST OR NET REALISABLE VALUE. AS THERE IS NO INCREA SE IN THE VALUE OF SIMILAR LAND IN THE SAME LOCALITY, THE NET REALIZABLE VALUE OF LAND CAN T BE SAID TO HAVE INCREASED AND THEREFORE ALSO, THE VALUE OF LAND INVENTORY CANT B E TAKEN AT A VALUE OF HIGHER THAN THE PRICE AT WHICH IT IS ACQUIRED. ACCORDING TO THE LD. A/R, WHERE THERE IS ANY EVIDENCE OF LAND PRICE BEING LOWER TO THE PRICE AT WHICH IT IS PURCHASED, THE VALUE HAS TO BE TAKEN AT SUCH LOWER PRICE EVEN BELOW THE COST PRICE. HE ALS O INVITED OUR ATTENTION TO THE ASSESSEES LETTER DATED 13.12.2011 (PB PAGE 86-92, INTERNAL PA GE 5 OF THE LETTER), WHEREIN THE ASSESSEE HAD SPECIFICALLY REQUESTED THE AO TO INFOR M THE RESULT OF ANY SPECIFIC ENQUIRY MADE BY THE AO TO ARRIVE AT THE FINDING THAT THE NE T REALISABLE VALUE OF THE LAND IS HIGHER THAN THE PRICE AT WHICH IT WAS BOUGHT. HOWEVER, NO SUCH EVIDENCE OF HIGHER PRICES HAS BEEN BROUGHT ON RECORD BY THE AO. AS AGAINST THIS, LD. A/R INVITED OUR ATTENTION TOWARDS CERTAIN DOCUMENTS WHICH SHOW THAT THERE WAS NO INCR EASE IN THE REALISABLE VALUE OF THE LAND IN QUESTION. AS PER THESE DOCUMENTS, PLOT NO. 1 IN SECTOR 8 PRATAP NAGAR WAS PROPOSED FOR AUCTION AT RESERVED PRICE @ RS. 40,000 /- PER SQ. METER ON 26.02.2009 (ASSESSEE PURCHASED PLOT AT @ RS. 40,500/- PER SQ. METER). NOBODY TURNED UP IN THIS AUCTION AND THE HOUSING BOARD AGAIN PROPOSED THE SA ME PLOT FOR AUCTION IN THE YEAR2011. THIS IS A CLEAR EVIDENCE OF NO INCREASE IN FAIR MAR KET VALUE OF THE LAND HELD BY THE ASSESSEE IN STOCK IN TRADE AS ON 31.03.2009. HE FUR THER SUBMITTED THAT THE VALUATION OF INVENTORY HAS BEEN ACCEPTED AS CORRECT BY THE STATU TORY AUDITORS OF THE COMPANY. 24 17.0 HE ALSO POINTED OUT THAT AS PER PARA-12 OF AS- 2, INTEREST AND OTHER BORROWING COST ARE USUALLY CONSIDERED AS NOT RELATING TO BRINGING THE INVENTORIES TO THEIR PRESENT LOCATION AND CONDITION AND ARE, THEREFORE, USUALLY NOT INCLU DED IN THE COST OF INVENTORY. THE INTEREST COST CAN ONLY BE INCLUDED IN THE COST OF I NVENTORY IN TERMS OF PRINCIPLES CONTAINED IN ACCOUNTING STANDARD RELATING TO BORROWING COST ( AS-16). AS PER THIS STANDARD, BORROWING COSTS THAT ARE DIRECTLY ATTRIBUTABLE TO T HE ACQUISITION, CONSTRUCTION OR PRODUCTION OF QUALIFYING ASSET SHOULD BE INCLUDED A S PART OF THE COST OF THAT ASSET. HOWEVER, AS PER PARA 17 OF AS-16, CAPITALIZATION OF BORROWING COSTS SHOULD BE SUSPENDED DURING THE EXTENDED PERIODS IN WHICH ACTI VE DEVELOPMENT IS INTERRUPTED. IN THE PRESENT CASE, THE INTENTION TO TAKE UP THE PROJECT IS LIVE BUT THE DIRECTORS FELT SUBSTANTIAL REDUCTION IN THE ANTICIPATED REVENUES FROM THE PROJ ECT DUE TO ADVERSE ECONOMIC CONDITIONS IN THE REAL ESTATE MARKET IN THAT AREA. THEY WERE F INDING IT DIFFICULT TO FILL THE GAP OF PROJECTED CASH FLOWS IF PROJECT IS LAUNCHED IN THE PRESENT MARKET SCENARIO AS THEY ANTICIPATE A VERY SLOW RESPONSE OF THE MARKET ON TH E PRICES REQUIRED TO EVEN COVER UP THE COST OF THE PROJECT. IN THESE FACTS AND CIRCUMSTANC ES OF THE CASE THERE WAS NO CERTAINTY OF THE PERIOD FOR WHICH PROJECT IS SUSPENDED AND TILL DATE THERE ARE NO INDICATION OF DEMAND OF COMMERCIAL SPACES IN THE SAID LOCALITY AT THE PR ICES INTENDED TO BE ACHIEVED BY THE PROMOTERS TO COVER UP EVEN THE INTEREST AND ASSOCIA TED COST OF DEVELOPMENT. THE PROMOTERS DO NOT HAVE THE CAPACITY TO FILL THE ANTI CIPATED CASH FLOW GAPS WHICH WOULD ARISE BY TAKING UP THE PROJECT IN THE PRESENT MARKE T SCENARIO. EVEN THERE ARE NO CHANCES TO REALISE THE INTEREST COST NEITHER BY SELLING THE LA ND NOR BY LAUNCHING THE PROJECT. SINCE, THE SAID DELAY IS NOT ON ACCOUNT OF ANY TECHNICAL REASO N WHICH IS NORMAL IN SUCH PROJECTS AND NECESSARY IN COURSE OF CONSTRUCTION, INTEREST COST CANNOT BE ADDED TO THE VALUE OF THE 25 PROJECT LAND IN TERMS OF AS-16.AS EXPLAINED EARLIER , THERE ARE SPECIFIC EVIDENCES THAT THE REALISABLE VALUE OF THE LAND IS NOT MORE THAN THE C OST OF LAND IN THIS CASE, THE INTEREST COST HAS TO BE EXCLUDED FROM THE COST OF LAND IN THIS CA SE IN TERMS OF BOTH THE ACCOUNTING STANDARDS, AS-2 & AS-16. AS PER PARA 7 OF AS-16, BO RROWING COST ARE INCLUDED AS PART OF QUALIFYING ASSET ONLY WHEN IT IS PROBABLE THAT T HEY WILL RESULT IN FUTURE ECONOMIC BENEFIT TO THE ENTERPRISE. IN THE PRESENT MARKET SC ENARIO, THERE IS NO EVIDENCE OF ECONOMIC BENEFIT ASSOCIATED WITH INCURRING OF THE SAID BORRO WING COST. PARA 14 OF THIS STANDARD ALLOWS COMMENCEMENT OF CAPITALIZATION OF BORROWING COST WHEN ACTIVITIES THAT ARE NECESSARY TO PREPARE THE ASSET FOR THE INTENDED USE OF SALE ARE IN PROGRESS. THE ACTIVITIES ASSOCIATED WITH DEVELOPMENT OF THE PROJECT ARE NOT INTENDED TO BE TAKEN UP TILL AN UNCERTAIN PERIOD. THIS IS NORMAL PERIOD NECESSARILY REQUIRED FOR PREPARATION TO TAKE UP THE PROJECT. THEREFORE, THE ASSESSEE DOES NOT FULFIL TH E CONDITION TO OF PARA-14. LD. A/R ALSO REFERRED LAST LINES OF PARA 16 OF AS-16, I.E. BORR OWING COST INCURRED WHILE LAND ACQUIRED FOR BUILDING PURPOSE IS HELD WITHOUT ANY A SSOCIATED DEVELOPMENT ACTIVITIES DO NOT QUALIFY FOR CAPITALIZATION. LD. A/R ACCORDINGL Y SUBMITTED THAT ONLY GETTING THE APPROVAL OF MAP WITHOUT ANY INTENTION OF STARTING U P THE DEVELOPMENT ACTIVITY DOES NOT ALLOW THE ASSESSEE TO INCLUDE THE BORROWING COST IN THE COST OF PROJECT. THE SAID INTENTION OF THE ASSESSEE IS REFLECTED BY ACTION OF NOT TAKIN G UP THE PROJECT FOR NEXT 4 YEARS. NO ASSOCIATED ACTIVITY OTHER THAN STATUTORY REQUIREMEN T OF TAKING APPROVAL OF MAP HAS BEEN CARRIED OUT BY ASSESSEE TILL DATE. THE APPROVAL ETC . HAS BEEN TAKEN ONLY TO BE READY WHEN THE MARKET CONDITIONS GET FAVORABLE. HE THEREFORE SUBMITTED THAT THE ORDER OF THE CIT(A) IS CORRECT AND NEED NO INTERFERENCE. 26 18.0 WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD AND ALSO THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT T HE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE AUDITED AND THE LD. AUDITOR HAS NOT GIVEN ANY ADVER SE COMMENT FOR NOT FOLLOWING THE ACCOUNTING STANDARDS WHICH ARE MANDATORY FOR A COMP ANY U/S 211 OF THE COMPANIES ACT, 1956. WE ALSO FIND THAT THERE IS NO DISPUTE THAT T HE SAID LAND IS PART OF INVENTORY FOR THE ASSESSEE AND IS NOT A CAPITAL ASSET. THE ASSESSEE HAS PRODUCED EVIDENCES OF NO INCREASE IN THE LAND PRICE AND AO HAS NOT BROUGHT ANYTHING ON R ECORD TO SUPPORT THAT THE ASSESSEE WOULD BE ABLE TO REALISE THE INTEREST COST INCURRED OVER AND ABOVE THE COST OF PURCHASE OF LAND. IN SUCH CIRCUMSTANCES, AS PER BASIC ACCOUNTIN G PRINCIPLES OF VALUATION OF INVENTORY THAT THE INVENTORY IS TO BE VALUED AT COST OR NET R EALISABLE VALUE WHICH-EVER IS LOWER. THE UNCONTROVERTED EVIDENCES SHOW THAT THERE IS NO BUYE R OF THE SIMILAR LAND IN SAME VICINITY AT THE PRICE WHICH IS LESSER THAN THE PRICE PAID BY THE ASSESSEE AND THEREFORE, WE ARE CONVINCED WITH THE CIT(A) AND THE A/R OF THE ASSESS EE THAT THE INVENTORY OF LAND CANNOT BE VALUED AT A PRICE HIGHER THAN IT IS BOUGHT. LD. A/R HAS STATED THAT THE ASSESSEE HAS NOT TAKEN UP THE PROJECT ACTIVITY EVEN TILL 31.3.2013. THE DELAY IN PROJECT IS FOR ECONOMIC REASONS. IN SUCH CIRCUMSTANCES, THE AS-16 DOES NOT ALLOW CAPITALISATION OF INTEREST COST ALONGWITH THE COST OF LAND. IT ALLOWS CAPITALISATI ON OF INTEREST COST ONLY DURING NORMAL PERIOD OF CONSTRUCTION AND NOT FOR INORDINATE DELAY IN THE CONSTRUCTION ACTIVITY DUE TO ADVERSE MARKET FORCES. THERE IS SPECIFIC REQUIREME NT OF AS-16, NOT TO CAPITALISE THE INTEREST COST ALONG WITH THE COST OF LAND IF IT IS HELD WITHOUT ANY ASSOCIATED DEVELOPMENT ACTIVITY. ACCORDINGLY, THE ACCOUNTING TREATMENT OF THE INTEREST COST IS PERFECTLY IN LINE WITH THE ACCOUNTING STANDARDS. WE FURTHER FIND THA T DESPITE ANY ACCOUNTING TREATMENT, 27 THE INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS IS ALLOWABLE U/S 36(1)(III). A PROVISO HAS BEEN INSERTED W.E.F 1.4.2004 WHICH READ S AS UNDER :- PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING B USINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACCOUNT OR NOT); FOR AN Y PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION O F THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. THE PROVISO SPECIFICALLY REFERRED TO THE INTEREST P AID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF ANY ASSET FOR EXTENSION OF EXISTING BUSINESS. THE PRESENT CASE IS OF ACQUISITION OF LAND FOR ITS DEVELOPMENT IN COURSE O F REAL ESTATE ACTIVITY OF THE ASSESSEE. ASSESSEE IS ABOUT TO COMPLETE ONE PROJECT AND TO CO NTINUE THE ACTIVITIES HAS PURCHASED ANOTHER LAND TO DEVELOP ANOTHER PROJECT. THE ARGUM ENT OF THE LD. DR THAT THE PROVISO WOULD APPLY TO THE ASSESSEES CASE CANNOT BE ACCEPT ED. WE ARE OF THE CONSIDERED OPINION THAT THE PURCHASE OF INVENTORY IS CONTINUATION OF T HE SAME BUSINESS ACTIVITY IN ROUTINE COURSE AND CANNOT BE TERMED AS EXTENSION OF THE BUS INESS ACTIVITY. THE PROVISO HAS BEEN INSERTED TO DISENTITLE CLAIM OF INTEREST ON FUNDS B ORROWED FOR ACQUISITION OF CAPITAL ASSETS FOR THE PERIOD UPTO THE ASSET IS PUT TO USE. THE T ERM PUT TO USE HERE APPLIES TO CAPITAL ASSET ONLY BECAUSE A CAPITAL ASSETS IS HELD TO FACI LITATE THE BUSINESS ACTIVITY AND SOMETIMES IT NEEDS TO BE PREPARED AFTER ITS ACQUISITION FOR B EING USED TO FACILITATE THE BUSINESS ACTIVITY. AS AGAINST THIS, PURCHASE AND HOLDING OF INVENTORY ITEM ITSELF IS A BUSINESS ACTIVITY. IN ABSENCE OF THIS PROVISO, SECTION 36(1 )(III) EARLIER ENTITLED ASSESSEES TO CLAIM INTEREST IN RESPECT OF CAPITAL ASSETS, EVEN FOR THE PERIOD DURING WHICH THEY WERE UNDER CONSTRUCTION AS HELD IN VARIOUS JUDGEMENTS POINTED OUT BY THE LD. AR OF THE ASSESSEE. THE INTEREST WAS FOUND ALLOWABLE DESPITE ITS CAPITALISA TION IN THE BOOKS OF ACCOUNTS IN THE 28 JUDGEMENTS. WE ARE THEREFORE, OF THE OPINION THAT THE INTEREST ON FUNDS BORROWED TO PURCHASE LAND WHICH IS PART OF INVENTORY OF THE ASS ESSEE COMPANY IS AN ALLOWABLE DEDUCTION U/S 36(1)(III). WE ACCORDINGLY REJECT THI S GROUND OF THE DEPARTMENTAL APPEAL ALSO. 19.0 IN THE RESULT, THE APPEAL OF THE REVENUE STAND S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 -01-2014 . SD/- SD/- (.N.K. SAINI) (HARI OM MARATHA) ACCOUNTANT MEMBER JUDICIAL MEMEBR JAIPUR DATED: 30 TH JAN 2014 *MISHRA COPY FORWARDED TO:- BY ORDER 1. THE ACIT, CIRCLE- 6 JAIPUR 2. M/S. ADITYA PROPCON (P) LTD., JAIPUR 3. THE LD. CIT(A) 4. THE LD. CIT 5. THE DR 6. THE GUARD FILE (ITA NO.762/JP/12) A.R., ITAT, JAIPUR