Income Tax Appellate Tribunal

Deputy Commissioner of Income Tax, Circle-7(1)(1) Vs. Thermo King India Pvt. Ltd.

MANU/IL/0306/2020

04.09.2020

Direct Taxation

Interest can be capitalized only in respect of capital assets purchased out of borrowed funds

The revenue has filed present appeal challenging the decision rendered by Learned CIT(A) in respect of disallowance of interest expenditure made by the Assessing Officer (A.O.) in assessment year 2008-09. The assessee is engaged in the business of trading in Refrigeration units (including Freezers and Chillers). During the course of assessment proceeding, the A.O. noticed that the assessee has shown closing stock of inventory at Rs. 12.02 crores. He also noticed that, the assessee has claimed interest expenditure of Rs. 1.71 crores on the loan taken from Inger Soll Rand (I) Ltd. The A.O. noticed that the assessee did not have surplus funds equal to the inventory held by it. Accordingly, he took the view that the assessee has used the loan funds for purchasing the inventory. In view of the same, the A.O. took the view that the interest expenditure should have been considered by the assessee while valuing inventory as at the year end, i.e., the assessee should have capitalized part of interest expenses in the value of inventory.

The A.O. has so taken the view by observing that, the interest attributable to bring the inventory to its present location and condition should be included in the cost of inventory. Accordingly, he computed the interest attributable to the inventory by adopting prime lending rate of 12.75% determined by the State Bank of India and accordingly computed a sum of Rs. 1,53,37,415, as the interest attributable to the inventory and disallowed the same. The Learned CIT(A) deleted the disallowance and hence, the revenue has filed present appeal.

The Learned Authorised Representative (AR) submitted that, the principle enunciated by the A.O. would be applicable only to capital assets, as per the proviso to Section 36(1)(iii) of the Income Tax Act 1961. He submitted that, the assessee has used borrowed funds in the normal business activities of trading in refrigeration items. Hence, the question of capitalising the interest expenditure does not arise.

Reliance is also placed reliance on the decision rendered by coordinate bench of ITAT in the case of DCIT Vs. JSR Constructions Pvt. Ltd. and submitted that the co-ordinate bench has, after considering Accounting Standard -2 relating to valuation of inventories, has held that the question of including interest expenditure for current assets does not arise. The Learned A.R. also submitted that the newly introduced ICDS though applicable in the subsequent year also supports the methodology adopted by the assessee. Present Tribunal finds merit in the contentions of the Learned AR.

There is no dispute with regard to the fact that, the inventories held by the assessee are current assets and hence, the requirement of capitalising the interest does not arise, as per the proviso to Section 36(1)(iii) of the Act mandates capitalization of interest only in respect of capital assets purchased out of borrowed funds. The method of valuation adopted by the assessee also gets support from Accounting Standard - 2 issued by ICAI. The Learned A.R. also submitted that, the newly introduced ICDS though applicable in the subsequent year also supports the methodology adopted by the assessee. Under these set of facts and in view of the fact that, the decision rendered by the Learned CIT(A) is in consonance with the decision rendered by the coordinate bench in the case of JSR Constructions, there is no infirmity in the decision rendered by Learned CIT(A) on this issue. The appeal filed by the revenue is dismissed.

Relevant

The Deputy Commissioner of Income Tax vs. JSR Constructions Pvt. Ltd. MANU/IL/0106/2016

Tags : Interest Disallowance Legality

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