Hon'ble Judges/Coram:
N.V. Vasudevan, Vice President and B.R. Baskaran

ORDER

B.R. Baskaran, Member (A)

1. The revenue has filed this appeal challenging the decision rendered by Ld. CIT(A) Mysore in respect of disallowance of interest expenditure made by the A.O. in assessment year 2008-09.

2. We heard the parties and perused the record. 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 M/s. 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.

3. The Ld. CIT(A) deleted the disallowance and hence the revenue has filed this appeal before us.

4. We notice that the Ld. CIT(A) has deleted disallowance with the following observations:

"5.8 Ground no. 13 and 14 pertains to disallowance of interest expenses of Rs. 1,53,37,415/- by attributing it to inventory. In brief, during the assessment proceedings, it was observed by the Assessing Officer that the appellant had claimed interest expense amounting to Rs. 1,71,25,525/-. The Assessing Officer noted that the appellant did not have interest free funds for the purpose of stocking its inventory. Further, the Assessing Officer held that the appellant was not able to prove that non-interest bearing funds were utilized for the purpose of inventory and therefore, held that interest attributable in bringing inventory to its present location and condition should form part of cost of inventory. Accordingly, the Assessing Officer made an addition of Rs. 1,53,37,415/-, computed at a rate of 12.75 percent being the average prime lending rate of SBI as on 31 March 2008. During the appellate proceedings, the appellant has made detailed submission. At the outset, the appellant submits that issue relating to the attribution of interest accrued on loan to the cost of inventory has already been decided in favour of the appellant by the Commissioner of Income Tax (Appeals) -7, Bangalore for the AY 2010-11, AY 2011-12 and AY 2012-13. The appellant also argues that it had borrowed loan for the purpose of working capital requirements. Section 36(1)(iii) of the Act, provides that amount of interest paid in respect of capital borrowed for the purpose of business and profession shall be allowed as deduction while computing the income from business or profession, with the only exception being where it is utilized for acquisition of a capital asset, which then has to be capitalized till the asset is put to use. In the present case, the loan is utilized for the purpose of working capital. The appellant also has relied on section 145A of the Act to contend that valuation of inventory needs to be done as per the method of accounting regularly employed by the assessee. The Appellant being a Company, is mandated to follow AS 2 issued by the ICAI for valuation of inventories. AS 2 provides for valuing the inventory at cost or net realizable value whichever is lower. It also defi........