TMI Blog1993 (1) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the market but used by it for its own consumption for making the various products in which it deals in. He submitted that right from the earlier assessment years and even in the subsequent assessment years, the assessee has been consistently valuing the stock of raw material in hand at the invoice price not including the element of import duty paid thereon. This method of valuation came to be accepted by the Department all along and it was for the first time that the revenue had sought to disturb this accepted practice and thereafter, the revenue had also disturbed the same and included the element of import duty on the raw materials. 4. The CIT(A) for the assessment year under appeal had upheld the order of the Assessing Officer but the CIT(A) for the subsequent assessment years had upheld the method valued by the assessee ie. valuing of the raw materials at the invoice value without including any element import duty. He submitted that in so far as the finished goods are concerned, they are valued at the raw material invoice value plus import duty thereon plus incidental expenses which had brought the materials into its condition as a finished products. He su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o placed reliance on the Supreme Court decision in CIT v. McMillan Co. [1958] 33 ITR 182. 6. It was also pointed out to the parties that the issue of consideration of various duty for valuation of the closing stock was the subject matter of difference of opinion between the two Members, and the same came to be resolved by the Third Member which was in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom.). It was also brought to the notice of the parties that the Madras High Court in CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 had considered the aspect that when the closing stock valuation as underwent modification due to proper method of valuation, the Madras High Court had held that the valuation of the opening stock does not require any alteration. The comments of the parties in regard to the above were called for by the Bench. 7. Shri G.C. Sharma, the learned Sr. Advocate again insisted that the various raw materials are not stock-in-trade i.e., they are not sold as such and therefore they could not be valued on the same basis as the finished goods are. In so far as the Madras High Court decision is concerned, he submitted that the Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total cost or direct cost which is prevailing is an accepted method of valuation and is also the accounting standard laid down by the Institute of Chartered Accountants of India. The very basis of pronouncing or laying the standard of the valuation is that the raw materials, work-in-progress and finished goods should be valued at a price which has brought the raw material, work in progress and finished goods to its present location and condition. It is an accepted fact by both the parties that the raw materials which are imported have come into possession of the assessee only after payment of import duty, indicating that the expenses which had gone directly to bring the raw material into its present location and condition includes the invoice value, freight and other incidental expenses from the Ports or Air Ports etc. plus the custom duty on such items. If the element of import duty as suggested by the assessee is excluded from the value of the raw materials on hand then in one year, the profit would be lower while in the other year, the profit would be higher, it would be as a consequent of not including the element of custom duty. In other words, the effort of the assessee is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimately goes into the finished goods which is why it is included or grouped under stock-in-trade by commercial business circles. As already pointed out above, since the basis for valuation is inclusion of all direct costs at least which go into bringing the material into its present location and condition, there is no alternative but to include the element of import duty in the valuation of raw materials. At this juncture, we may also point out that in the case of K.G. Khosla Co. (P.) Ltd.'s case the opening stock did include element of custom duty but the closing stock valuation omitted the same and the plea of the assessee was that there being numerous items allocation of the element of import duty was a difficult proposition. The Delhi High Court considering the question as to whether there was any material on which the Tribunal could hold that the closing stock necessarily include the custom duty and incidental charges, have held that there was sufficient material for the Tribunal to hold that the closing stock must necessarily be valued by including the custom duty and the incidental charges. This decision of the Hon'ble Delhi High Court supports the conclusion arrived a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of custom duty and such incidental charges to the extent of raw materials that are still on hand. Since the aspect of quantum and the custom duty included in the closing stock is not challenged as requiring verification or excessive or wrong, we do not express any opinion in so far as the quantum of custom duty is concerned, as it is apparent that the assessee has no objection to those because if had any objection, it could have raised the same in appeal which it did not do. The assessee also had contested the inclusion of the import duty because it would tantamount to disturbing the amount of deduction allowable under section 43B of the IT Act, 1961. It was accepted by both these parties, during the course of hearing that they would have no objection if the Assessing Officer is directed to value the closing stock of raw materials in accordance with the conclusion of the Special Bench which is confronted with the identical proposition of whether inclusion of the element of duties etc. in the closing stock which are otherwise allowable under section 43B of the Act was proper or not. The Assessing Officer is also directed to consider the decision of the Special Bench as above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them by itself which has not been done in the instant case. Therefore, considering any part of the salvage value was improper. He submitted that the loss that was suffered due to fire of the premises which was gutted should be allowed as such in its entirety, i.e., on materials, finished goods, work-in-progress, furniture and fittings, electrical fittings and fall in the value of the building due to fire and also the repairs on the building incurred by the assessee. 18. The Departmental Representative placed on the Madras High Court decision in the case of CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191 and also in the Rajasthan High Court decision in CIT v. S. Zoraster Co. [1982] 133 ITR 559 for the proposition that expenditure that are incurred on extensive repairs to building are capital in nature. 19. We have given our very careful consideration to the rival submissions. The claim of the assessee as loss on fire in stock at Rs. 7,72,286 net building repairs at Rs. 3,17,769, Rs. 44,563 on account of furniture and electrical fittings burnt out written off in its entirety and finally claim of reduction in the written down value to the extent of 2/3rd. 20. In regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Rama Sugar Mills Ltd.'s case had clearly held that repairs which are in the nature of current repairs would be of revenue in nature. In that case, the old boiler was replaced by a new boiler and the question was whether the replacement which in fact had in effect of improving the productive capacity could be treated as revenue expenditure etc. The learned Judge did not agree on the character of the expenses being revenue or capital. The majority of the decisions, however, are indicative of the fact that where any part of the machine which is replaced, the cost of replacement is immaterial and what is necessary to be considered is whether it results in having a new machine or replacement of a part of the machine. Wherever it results in replacement of a part of machine, the conclusion was that it was allowed as revenue expenditure. Therefore, the expenses incurred over and above, the compensation received from the insurance company on the damages to the building i.e., Rs. 3,17,769 has to be necessarily allowed as a revenue expenditure. Similarly, the loss on account of stock furniture, electrical fittings have to be allowed in full. However, in so far as the claim of reduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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