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| The Tax Publishers2020 TaxPub(DT) 3641 (Bang-Trib) INCOME TAX ACT, 1961
Section 36(1)(iii)
Where AO alleged that assessee did not had surplus profit equal to inventory and held that loan taken by assessee was for purpose of purchasing inventory and consequently made addition by computing interest attributable to inventory, action of AO was unjustified because inventories held by assessee were current assets and therefore, requirement of capitalizing interest did not arise as, proviso to section 36(1)(iii) mandates capitalization of interest only in respect of capital assets purchased out of borrowed funds.
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Business deduction under section 36(1)(iii) - Assessee not having surplus profits equal to inventory held - Allegation that loan acquired by assessee was used for purchase of inventory - Capitalization of interest attributable to inventory whether justified
Assessee was engaged in business of trading in refrigeration units (including freezers and chillers). Assessee showed closing stock of inventory and claimed interest expenditure on the loan taken from certain party. AO alleged that assessee did not have surplus funds equal to inventory held by assessee and therefore, held that assessee used loan funds for purchasing inventory. AO capitalized part of interest expenses in value of inventory by observing that interest attributable to bring the inventory to its location and condition should be included in cost of inventory. Held: There was no dispute with regard to fact that inventories held by assessee were current assets and therefore, requirement of capitalizing interest did not arise. Proviso to section 36(1)(iii) mandates capitalization of interest only in respect of capital assets purchased out of borrowed funds. Method of valuation adopted by assessee was also supported from Accounting Standard -- 2 issued by ICAI. Newly introduced ICDS though applicable in subsequent year also supported methodology adopted by assessee.
Followed:Dy. CIT v. JSR Constructions Pvt. Ltd. & Vice-Versa (2016) 71 Taxmann.com 184 (Bang) : 2016 TaxPub(DT) 3414 (Bang-Trib).
REFERRED :
FAVOUR : In assessee's favour.
A.Y. : 2008-09
IN THE ITAT, BANGALORE BENCH
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