INCOME COMPUTATION

& DISCLOSURE
STANDARD IX
Borrowing Cost
BORROWINGS

FUNDS?
Borrowing Cost

Ind
ASAS
ICDS16IX
23
Borrowing Cost

 Borrowing Cost is defined as Interest and Other Costs incurred in connection with
borrowing of funds

and
Includes: Excludes:

 Commitment Charges  Actual or imputed cost of Owner’s

-Fee charged equity & preference share capital
 Amortised amount by lender toorborrower
of Discount
-To compensate the lender
Premiums
-For its commitment to lend.
 Amortised amount of Ancillary Cost

 Associated
Finance Chargeswith unused
in respect of credit
assets lines or undisbursed loan.
acquired under Finance Lease
Eg: CC Facility: Rs. 50 Crores
Disbursed: Rs. 20 Crores- Interest
Undisbursed: Rs. 30 Crores- Commitment Charges
Imputed Cost: Cost incurred by virtue of using an asset instead of investing it, or
Cost arising from undertaking an alternative course of action.

It is an invisible cost and doesn’t appear in the Financial Statement.

Recognition:

 Borrowing cost directly attributable to acquisition, construction or production of a

Qualifying Asset to be Capitalised.

Qualifying Asset:
 Land, Building, Machinery, Plant or Furniture being tangible asset
 Know-how, Patents, Copyrights, Trademarks, License or Commercial rights of similar
nature being intangible asset
 Inventories that require a period of 12 months or more to bring them to a saleable
condition.

12 months or more criteria for its acquisition, construction or production for other than
inventories applicable only in the case of General Borrowing.
 Type of Borrowings

Specific Borrowing General Borrowing

Assets - Borrowing Assets - Borrowing

Assets - Borrowing Assets - Borrowing
Building - 10% Debenture (1) Asset 1 (1) 10% Debenture
Building - 10% Debenture (1) Asset 1 (1) 10% Debenture
Plant - 12% Term Loan (2) Asset 2 (2) 12% Term Loan
Plant - 12% Term Loan (2) Asset 2 (2) 12% Term Loan
(3) Asset 3 (3) 15% FI Loan
(3) Asset 3 (3) 15% FI Loan
(4) WC
(4) WC
Provisions of ICDS IX
 Borrowing Cost eligible for capitalization
-Specific Borrowing: actual borrowing cost incurred
-General Borrowing: amount to be determined as per WACC
 Commencement of capitalization
-Specific Borrowing: from the date on which funds were borrowed
-General Borrowing: from the date on which funds were utilized
 Cessation of capitalization
-Tangible/Intangible Asset: when the asset is first put to use
-Inventory: when substantially all activities necessary to prepare it for
intended sale are complete
Comparison of ICDS IX with AS 16
 Commencement of Capitalization
AS-16 ICDS

The date of fulfilment of 3 conditions: Specific borrowings: Date on which

a)
 The date of fulfilment of 3 conditions: a) Specific borrowings: Date on which
funds were borrowed
1. Incurrence of capex, funds were borrowed
1. Incurrence of capex,
b) General borrowings: Date on which
2. Incurrence of borrowing cost, and b) General borrowings: Date on which
2. Incurrence of borrowing cost, and funds were utilised
3. Preparatory activities are in progress
funds were utilised
3. Preparatory activities are in progress

Capitalization period starts early under ICDS as compared to AS 16

 Method of Capitalization-(SB)
AS-16 ICDS

 Actual borrowing cost incurred on the  Actual borrowing cost incurred during
 Actual borrowing cost incurred on the  Actual borrowing cost incurred during
borrowing during the period less any the period on the funds borrowed
borrowing during the period less any the period on the funds borrowed
income from temporary investment of
income from temporary investment of
those borrowings
those borrowings

Income from temporary deployment of unutilized funds from specific loans shall
be taxable as Income from Other Sources under ICDS
 Suspension of Capitalization
AS-16 ICDS

 During extended periods in which  ICDS IX does not contain any

 During extended periods in which
active development of the asset is
active development of the asset is
interrupted
interrupted
 ICDS IX does not contain any
provision for suspension of
provision for suspension of
capitalization of borrowing cost
capitalization of borrowing cost

Borrowing cost incurred during the periods in which active development of the
asset is interrupted also to be capitalized under ICDS
 Cessation of Capitalization
AS-16
 When substantially all activities
 When substantially all activities
necessary to prepare the qualifying
necessary to prepare the qualifying
asset for its intended use or sale are
asset for its intended use or sale are
complete
complete
ICDS
Qualifying Asset- when such asset is
 Qualifying Asset- when such asset is
first put to use
first put to use
 Inventory- when substantially all
 Inventory- when substantially all
activities necessary to prepare it for its
activities necessary to prepare it for its
intended sale are complete
intended sale are complete
Potential Issues
 Proviso to Section 36(1)(iii) refers only to “acquisition” of asset whereas ICDS refers
to “acquisition, construction, or production” of qualifying asset
 “Inventories” as per ICDS II v/s “Inventories” as per the Act
36(1) The deduction provided for shall be allowed in respect of matters dealt with therein, in computing the income
 u/s
Income
28
fromoftemporary
(iii) the amount interest paidinvestment of borrowed
in respect of capital funds
borrowed for the purpose of the business or profession.
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension
of-Tuticorin Alkali
existing business Chemicals
or profession (SC)capitalized in the books or not) for any period from the date on which the
(whether
capital was borrowed for acquisition of asset till the date on which such asset was first put to use, shall not be allowed as
deduction.
Tuticorin
eg: Date Alkali Chemicals
of Borrowing: & ...
1st Apr, 2021 vs Commissioner Of Income Tax. on 8 March, 1997
For the purpose of setting up of the 2021
Date of asset put to use: 1 July,
st
factories, the company had taken term loans from various banks and financial institutions. That
Borrowing cost incurred: Rs. 2 crores
part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with
Purpose: For extension of existing business or profession
banks. Such investments were specifically permitted by the memorandum and articles of association of the company.
Expense to be disallowed
For the accounting year ending on 30th June, 1981, (asst. yr. 1982-83), the assessee received a total amount of interest of Rs.
2,92,440. In its return of income filed on 22nd June, 1982, the company disclosed the said sum of Rs. 2,92,440 as "Income from
other sources". It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against business loss, the
company claimed the benefit of carry forward of net loss of Rs. 29,360.
The company later on realised its mistake and on 26th December, 1984, it filed a revised return showing business loss of Rs.
3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-
production expenses will have to be capitalised, and that, therefore, the interest income of Rs. 2,92,440 should go to reduce the
pre-production expenses (including interest and finance charges), which would ultimately be capitalised. In other words, according
to the assessee, the interest income of Rs. 2,92,440 was not exigible to tax.
The ITO rejected the assessees claim that the interest income was not exigible to tax. The view of the ITO was upheld by the
CIT(A). The companys further appeal to the Tribunal was dismissed.
Case Study
• TATA Steel is engaged in business of
manufacturing steel Loan on 1 April
• It desires to replace its P&M at its factory
with a total cost of Rs. 10 Crores
• It borrows funds from SBI for this
purpose on 1 April @ 12% p.a. interest
• Full payment is made to the Hindalco on
1 July Payment on 1 July
• For the period from 1 April to 30 June,
funds invested in short term deposits @
8% interest
• The P&M is supplied by Hindalco to the
factory of TATA on 1 August
• The P&M is installed on 31st August

Sale on 1 August

Installation on 31 August
 Case Study
Tax treatment pre ICDS & pre Tax treatment post ICDS and
amendment to 36(1)(iii) amendment to 36(1)(iii)

TATA Steel can claim full deduction for All fixed assets considered as ‘qualifying
 TATA Steelu/scan
interest claim full deduction for
36(1)(iii)
 Allassets’
fixed warranting
assets considered as ‘qualifying
capitalization of interest,
interest u/s 36(1)(iii) assets’ warranting
irrespective of capitalization
whether or not of interest,
it is for
 Interest not required to be capitalized in irrespective of whether or not it is for
 Interest not required to be capitalized in ‘extension of existing business’
absence of ‘extension of existing business’ ‘extension of existing business’
absence of ‘extension of existing business’  Therefore, Tata Steel required to capitalize
 Interest on short term deposits taxable as  Therefore, Tata Steel required to capitalize
 Interest on short term deposits taxable as interest from the date of specific borrowing
‘Income from Other Sources’ interest
‘Income from Other Sources’ (i.e. 1from
April)thetilldate
theofasset
specific
is putborrowing
to use, i.e.
(i.e.
(31 August), irrespective of theuse,
1 April) till the asset is put to i.e. of
date
(31utilization
August),being
irrespective
on 1 July.of the date of
utilization being on 1 July.
 Interest on short term deposits taxable as
 Interest on short term deposits taxable as
‘Income from Other Sources’
‘Income from Other Sources’
Disclosure Requirements
 The accounting policy adopted for borrowing costs; and
 The amount of borrowing costs capitalized during the previous year.
Thank You

Atul Varun