ORDER
O.K. Narayanan, Accountant Member
1. This appeal is filed by the revenue. The relevant assessment year is 1996-97. The appeal is directed against the order passed by the CIT(A)-XLII, Mumbai on20-03-2001. The appeal arises out of the assessment completed Under Section 143(3) of the Income-tax Act, 1961.
2. The assessee company is engaged in the business of real estate investment in partnership firms, investment in shares and also in financing business. As part of its real estate business, the assessee company has undertaken developments of certain properties. The assessee company had about seven such development projects in its hand, during the relevant previous year. As far as the development and construction of properties are concerned, 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 and Co. 131 CTR 203 and also on the decision of the ITAT, Bangalore Bench in the case of K. Raheja Development Corporation v. DCIT in ITA No. 240(Bang)/97 dated 22-09-1997. The explanation offered by the assessee was not found favour with the assessing authority. The assessing authority referred to another assessment in the case of S.K. Estates Pvt. Ltd. which, according to the assessing authority, belonged to assessee’s own group. The assessing officer observed that in the case of M/s S.K. Estates Pvt. Ltd. assessment for the assessment year 1986-87 was completed by treating the finance cost as part of the total project cost to be carried forward from year to year till the completion of the project and no deduction was allowed on yearly basis. The assessing officer observed that the said assessment was upheld by ITAT Bombay Bench “A” in ITA No. ITA No. 4612/BOM/90 dated 31-10-1996. The assessing authority observed that while passing the said order, the Tribunal has also considered Accounting Standard-AS 7 and the assessee company in that case had not gone in further appeal. The assessing officer held the view that the decision of the Tribunal in the case of M/s S.K. Estates Pvt. Ltd. aptly applied to the case of the assessee. On the basis of the above finding, the assessing officer disallowed the claim of interest made by the assessee company to the extent of Rs. 94,70,835.
4. This issue was raised in first appeal before the CIT(A). The CIT(A) observed that the assessee company has been following project completion method and the direct cost of the project is loaded in work-in-progress, till the particular project is completed. He found that as far as the finance cost is concerned, it has been treated as period cost and this treatment is in accordance with the guidelines Issued by the Institute of Chartered Accountants of India in Accounting Standard-7. The CIT(A) also observed that in assessee’s own case, the claim has been allowed by the CIT(A) upto the assessment year 1995-96. He also observed that on an identical issue under similar circumstances, the view taken by the Bangalore Bench of the Tribunal in K. Raheja Development Corporation has become final as the reference preferred by the department Under Section 256(2) against the said order has been rejected by the Karnataka High Court. The CIT(A) also found that the very same issue has been considered by the Tribunal in the appeals relating to M/s Lokhandwala Construction Ltd. for so many assessment years and has consistently held that finance charges is in the nature 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. Estate Pvt. Ltd. is not proper as the facts of that case were fundamentally different from the facts of the impugned case. In the case of M/s S.K. Estate Pvt. Ltd. the only activity carried on by the assessee was development of properties and, therefore, the finance cost could be directly aITRibuted of 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 aITRibutable 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 raised by the revenue in this appeal is that the CIT(A) has erred in deleting the disallowance of interest of Rs. 94,70,835 which was treated by the assessing authority as incurred on capital account in respect of incomplete projects and, therefore, liable to be capitalized.
6. Smt. Anuradha Bhatia, the learned Commissioner of Income-tax appeared for the revenue and argued the case at length. She submitted that there is no dispute on the fact that the assessee is following the project completion method for recognizing its income arising out of the development projects. The assessee company is not declaring any income on yearly basis. Therefore, as an inevitable consequence, the expenditure incurred for the projects also need to be deferred and postponed till completion of the project. Then only, the method of accounting followed by the assessee company could be characterized as a proper method of accounting. In the present case, the assessee is deferring the recognition of income till the completion of the project. At the same time, the assessee is claiming the expenditure by way of deduction on an yearly basis. This contrast has not been justified by the assessee either in law or in facts. The method followed by the assessee is against the basic principle of matching concept necessarily to be followed in all accounting practices. She submitted that the assessing authority was justified in relying on the assessment order passed in the case of M/s Estate Pvt. Ltd. as the said decision was upheld by the Tribunal in the appeal filed by M/s S.K. Estates Pvt. Ltd. in ITA No. 4612/Bom/1990 dated 31-10-1996. She invited our attention to paragraph 9 of the order of the Tribunal wherein it has been observed as follows:
9. On a plain reading of this Accounting Standard, it is evident that the finance charges which include interest in its ambit, is an indirect cost and if it is identifiable with the contract of construction, it has to be accumulated and allowed only in the year in which the contract/project is completed. In this case, admittedly the Girnar Apartments Project, in which the assessee had utilized the borrowings to the extent of Rs. 25.91 lakhs, was not complete and the income from this project is being offered by the assessee itself only on the completion of the project, the interest of Rs. 4.95 lakhs pertaining to the borrowings of Rs. 35.91 lakhs utilized 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 on 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 borrowing cannot be connected to a particular source of income in which the assessee was carrying on business. As long as the identity of the borrowings vis-a-vis the application of funds in the different line of business/projects is not possible, as in the case of the assessee, there is no basis in coming to a conclusion that the interest attibutable to the loans should be apportioned amongst the various business activities of the assessee and the portion attributable to the construction activity should be deferred and made a part of the work in progress to defer the interest expenditure till completion of the project. It is very fundamental that the interest as such should be identified with a particular project. The development of projects undertaken by the assessee company are pursued at different level at a particular point of time and initiation and completion of the projects are not made on uniform time schedule. Within the project business itself, the application of funds and identify of the projects are not possible to be inter-linked. In such circumstances, the borrowings are merged with the general capital fund of the assessee company and such merged funds are used for different business activities as a whole without any distinction or without any identity. When the loans are not possible to be identified with a particular project carried on by the assessee, it is not possible to hold that a particular amount of interest is aITRibutable to a particular project. When that is not possible, it would be against law to make presumptions and make disallowances on the basis of such presumptions.
9. The learned Senior Counsel stated that the facts of the case of M/s S.K. Estates Pvt. Ltd. which has been relied on by the assessing officer are quite different from the present case. He invited our attention to the order of the Tribunal in the said case. In that case, the only activity carried on by the assessee was development of properties and construction of projects. During the relevant period of time, the assessee was concerned only with one project under the name and style ‘Girnar Apartment Project’. It means that the assessee had only one source of income and one line of business activity. Therefore, every expenditure irrespective of its nature is exclusively aITRibutable to that single project. The identity between the project and the expenditure has 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 Pvt. 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 M/s S.K. Estates Pvt. Ltd. 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 aITRibutable 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 aITRibutable to securing the contract can be separately identified and either the contract has been secured or there is a clear indication that the contract will be obtained, the costs are sometimes treated as applicable to the contract and are deferred. He also invited our attention to paragraph 8.4 of the Accounting Standard where costs incurred by a contractor have been divided into three categories. The third category is that where the costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. In such cases, which also include finance costs, the expenditure need to be treated as period costs and to be allowed in computing the income of the assessee on yearly basis. The learned senior counsel therefore, contended that the method followed by the assessee company is perfectly in harmony with the Accounting Standard issued by the Institute of Chartered Accountants of India. Even though the assessee company is following the project completion method, those expenditure, which are general in nature and which could not be aITRibuted to a particular project need to be considered as revenue expenditure of the concerned previous year. Even in a case where the expenditure is directly aITRibutable to a particular project, the Accounting Standard suggests that the deferment is called for only sometimes and not all the times. An element of discretion is available to the assessee depending upon the facts and exigencies of a case. In the present case, the assessee has not exercised any such discretion. It has meticulously followed the Accounting Standard. The interest cost incurred by the assessee company for the impugned assessment year could not be aITRibutable to any particular project carried out by the assessee. They are all general expenditure in nature. Therefore, they need not be deferred. Such expenditure need to be deducted in this assessment year only.
11. The learned senior counsel further relied on various decisions of ITAT, Mumbai Benches. In assessee’s associate concerns case, the Tribunal in Bench ‘E’ has dismissed appeal filed by the revenue on the same ground for the assessment year 1996-97 in ITA No. 4398/Mum/1999 dated 30th January, 2004. The Tribunal has dismissed the appeal filed by the revenue placing reliance on the judgement of the Bombay High Court in the case of Jt CIT v. Lokhandwala Construction Industries Ltd. in 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 CIT v. Lokhandwala Construction Industries Ltd. 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 business or profession carried on by the assessee. As far as the present case is concerned, the assessee was carrying on the business of construction of projects besides other lines of business. There is no dispute on the fact that the funds were borrowed for the purpose of the business carried on by the assessee. The assessee has satisfied the condition laid down in Section 36(1)(iii) and, therefore, without any hesitation the order of the CIT(A) on this point need to be upheld as it is strictly in accordance with the law provided in the statute.
13. Smt. Anuradha Bhatia, the learned Commissioner stated in her reply that the issue raised in this appeal cannot be decided on the basis of the judgement of the Bombay High Court rendered in the case of CIT v. Lokhandwala Construction Industries Ltd. (supra). She stated that in the said case, the High Court has considered the question whether the interest of Rs. 14,09,942 claimed by the assessee as expenditure was, in fact, revenue expenditure or capital in nature. The High Court has not considered whether the expenditure was deductible for a particular assessment year or to be deferred till completion of the project. As far as the present case is concerned, there is no dispute on the question whether the interest expenditure claimed by the assessee was capital in nature or revenue in nature. The revenue also admitted that it is revenue expenditure and it is to be allowed in computing the income of the assessee from the project. The only question is when the expenditure is to be allowed as a deduction. It is the case of the revenue that so long as the assessee is following project completion method, the expenditure is to be deferred till completion of the project and it could be allowed only on the final computation of income from the completed project. The learned Commissioner stated that this distinction should not be overlooked while relying on the decision of the Bombay High Court in Lokhandwala Construction Industries Ltd. (supra)
14. Shri Dastur replied to the above contention that the very same issue involved in this appeal has been considered in the case of Lokhandwala Construction Industries Ltd. (supra) by the Tribunal for the assessment years 1988-89 and 198.9-90. The particular question considered by the Tribunal for the assessment year 1989-90 in ITA No. 8449/Bom/92 dated 15-05-2001 is the following:
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 following “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 GIT(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.
16. We heard both sides in detail and considered the rival submissions. As stated by the learned Commissioner, Smt. Anuradha Bhatia, the Bombay High Court in the case of CIT v. Lokhandwala Construction Industries Ltd. (supra) has not considered exactly the same question which is involved in the impugned present appeal. In the said case decided by the Bombay High Court, the issue was whether the interest amount of Rs. 14,09,92 was to be allowed as a revenue expenditure or to be treated as capital expenditure and added to work-in-progress. Even though the question arose out of almost similar circumstances, the issue actually considered by the High Court was within the confined limit of Section 36(1)(iii) of the Act. Relying on the decision of the Supreme Court in India Cement Ltd. v. CIT 60 ITR 52 and Bombay High Court in Calico Dyeing and Printing Works v. CIT 34 ITR 265, the Court held that if the capital borrowed was used for business purpose in the relevant year of account, it did not matter whether the capital was borrowed in order to acquire a revenue asset or a capital asset and interest on the capital borrowed need to be allowed as a revenue expenditure Section 36(1)(iii). In the present case, the issue is of a bit different dimension. As rightly argued by the learned Commissioner, there is no dispute on the point that the finance cost booked by the assessee company in its books of account is revenue in nature. The said expenditure need to be allowed as a deduction in computing the income of the assessee. Revenue admits this. The question is whether the expenditure need to be allowed in the relevant previous year itself; or it should be delayed till the completion of the project when the income is recognized from the said project. So there is no dispute on the basic question that the expenditure is revenue in nature. The real question revolves within the narrow compass of the timing, that is, on the point of time at which the expenditure is to be allowed. This question as such has not been considered by the Bombay High Court in Lokhandwala Construction Industries Ltd. (supra).
17. There is great force in the argument of the revenue that when the assessee is postponing the recognition of income arising out of the projects till its completion, it is equally incumbent upon the assessee to postpone the corresponding expenditure. That alone will answer the demand of the matching principle. But in certain 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 aITRibutable 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 cold not be aITRibuted 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 aITRibution 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 should be deferred till the completion of the project.
18. But it has to be seen that the various Benches of the Tribunal has taken a view in favour of the assessee on the above point. The ITAT, Bangalore Bench in the case of K Raheja Development Corporation v. DCIT in ITA No. 240(Bang)/1997 dated 22-09-1997 has held that where there is no direct nexus between the utilization of the interest bearing loan funds with the work-in-progress in construction activity, the finance charge in the form of interest need to be allowed as a period cost. The reference filed by the department against the above decision of the Bangalore Tribunal has been rejected by the Karnataka High Court through its order dated 08-11-2000 in Civil Petition No. 832/2000/(IT). In the case of ACIT v. Lokhandwala Construction Industries Ltd. in ITA No. 8995/Bom/91 dated 10-12-1998, relating to assessment year 1988-89, the ITAT, Mumbai has held that the finance cost in the nature of interest in the case of a builder is a period cost and, therefore, need to be allowed as a deduction even though the corresponding income is recognized only on the completion f the project. The above view has been followed by the ITAT, Mumbai Bench ‘B1 in the case of the same assessee in ITA No. 8449/Bom/92 for assessment year 1989-90 to conclude that the method followed by the assessee was in conformity with the Accounting Standard-7 issued by the Institute of Chartered Accountants of India. The very same view has been taken by ITAT Mumbai Bench ‘E’ in JCIT v. K. Raheja Estate Pvt. Ltd. in ITA No. 4398/Mum/1999 for assessment year 1996-97 wherein the Tribunal has also relied on the decision of Bombay High Court in 260 ITR 569.
19. Therefore, we have to see that in spite of various possible dimensions and manifestations of the issue, the various Benches of the Tribunal has taken a consistent view that the claim made by the assessee for deduction of finance cost by way of interest is in conformity with the Accounting Standard -7 issued by the Institute of Chartered Accountants of India. The said Accounting Standard also does not prohibit the treatment of such expenditure as period cost where the expenditure is general in nature. In the circumstances, we are bound to follow the earlier judgments of the co-ordinate Benches as judicial propriety demands it. Therefore, following the various orders of the Tribunal on the subject, we hold that the ground raised by the revenue is liable to be dismissed.
20. In result, this appeal is dismissed.