In case of conflict, can the Provisions of Income Tax Act prevail over Accounting Standards ?

APPELLANT: DCIT Central Circle 2 (2), Bengaluru

RESPONDENT : M/s Cornerstone Property Investment (P) Ltd. 

FACTS OF THE CASE: 

Appeal has been filed by the revenue against the order to CIT(A) for the following two issues:

1. Whether on facts and in law, the CIT(A) was justified in holding that interest expenditure should be allowed even in the background that assessee had not offered any income from the project.
2. Whether on facts and in law, the CIT(A) was right in deleting the disallowance u/s 14A even in the background that AO had followed due procedure as per law.

Assessee, M/s Cornerstone Property Investment (P) Ltd. has borrowed money by issuing debentures for land and for making advances for purchase of land and repayment of loans borrowed earlier. Assessee holds land as an inventory and AO also agreed to the fact that the borrowed amount is used for the purpose of acquisition of land which is inventory. The AO has referred to AS – 2 and AS – 16 issued by The Institute of Chartered Accountants of India (ICAI) and concluded that interest cost is not allowable and it should be added with cost of inventory. Whereas, CIT(A) allowed claiming of interest as expenditure and also deleted entry of disallowance u/s 14A as against the AO.  

ITAT ORDER:

For the first matter, even as per the AO, the borrowed funds were used for acquisition of land which is inventory in the present case. Reliance was placed on tribunal order rendered in the case of DLF Limited vs. Addl. CIT (Supra), where the entire amount of interest is allowed. It was held that that provisions of Accounting Standards and Provisions of Act are two different set of regulations and while deciding this issue, it is well settled judicial precedent that if there is a contradiction between the two, the provisions of Act shall prevail.

Regarding the deletion of disallowance u/s 14A, learned counsel of respondent has argued that there is no exempt income and this is the decision of the learned CIT (A) that in the absence of exempt income, section 14A is not applicable. We find that income in respect of which disallowance is invoked is interest income, which is not an exempt income. Thus section 14A cannot be applied in the present case. ITAT declined to interfere in the order of CIT (A). 

CRUX:

It is a settled fact that where there is a conflict between the provisions of act and accounting standards, provisions of act shall prevail. Also, disallowance under section 14A can only be invoked when there is exempt income.