Section 36(1)(iii) – Interest on funds borrowed for acquisition of land held as inventory is allowable u/s 36(1)(iii) – The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations. It is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail – There is no restriction in the provisions of section 36(1)(iii) that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16

The facts as observed by the A.O. in the assessment order were that the assessee held land as inventory. It utilised the proceeds from the issue of debentures for acquiring lands and for making advances for purchase of lands and repayment of loans borrowed earlier. The A.O. also observed that in the earlier year, too, the borrowed funds were utilised for purchase of lands. The total interest expenditure of Rs. 16,39,35,373 being interest on ICDs, interest on NCDs and other ancillary borrowings was directly attributable to purchase of lands. There was no dispute about the use of borrowed funds for which the entire interest expenditure of Rs. 16,39,35,373 was incurred.

Of this total interest expenditure, the assessee claimed deduction for only a part, i.e., Rs. 6,81,01,384, which was disallowed by the A.O.

The CIT(A) deleted the amount of interest disallowed by the A.O. relying on various judgments.

Aggrieved, the Revenue preferred an appeal to the Tribunal where the assessee contended that the facts of the present case are squarely covered by the order of the Tribunal rendered in the case of DLF Ltd. vs. Addl. CIT [IT Appeal No. 2677 (Delhi) of 2011, order dated 11th March, 2016].

HELD

Inventory is a qualifying asset as it is held for more than 12 months and therefore interest attributable to it is required to be capitalised in the books of accounts as per AS 16. The Tribunal rejected the argument of the authorised representative of the assessee that AS 16 does not apply to inventory. It held that the provisions of Accounting Standards are the provisions which are applicable for the maintenance of the accounts of the company and interest is allowable according to section 36(1)(iii). The provisions of Accounting Standards and the provisions of the Act are two different sets of regulations and it is well settled that if there is a contradiction between the two, the provisions of the Act shall prevail. Since in the present case the interest is paid not for the purpose of acquisition of any capital asset but for inventory, the Tribunal did not find any restriction in provisions contained in section 36(1)(iii) which provide that the interest can be disallowed if incurred for the purpose of inventory as provided in AS 16. The Tribunal noted that there is not even an allegation that the interest is not paid on capital borrowed for the purpose of business. The Tribunal noted the observations in the case of DLF Ltd. (Supra) and also the ratio of various benches of the Tribunal where deduction of interest has been allowed u/s 36(1)(iii) even where the assessee has followed project completion method.

The Tribunal, following the decision of the Bombay High Court and also of various co-ordinate benches of the Tribunal, declined to interfere with the order of the CIT(A).