TMI Blog2001 (5) TMI 945X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80HHC. 2. Briefly the facts are that the assessee is a public limited company and it filed its return of income for the assessment year 1995-96 on 30th Nov. 1995 declaring an income of ₹ 7,88,39,962. The assessee derives income from manufacture of worsted woollen fabrics, woolen felt and it also has a chemical division named as Platewel Processes Chemicals. 3. During the course of assessment proceedings, the Assessing Officer required the assessee-company to submit complete details in respect of valuation of various types of finished goods and came to the conclusion that the assessee has not properly valued the closing stock. During the course of assessment proceedings, it was explained by the assessee-company that it has been valuing its closing stock by Direct Costing Method and the same method was being followed this year. In the notes forming part of the company s published accounts at p 37 while dealing with the question of valuation of inventories it was indicated as under: (i)Materials in process is valued at cost. Cost is arrived at considering direct material, direct labour and direct factory overheads upto the stage of manufacture. (ii)Finishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as under: Description Total as per P L a/c Pertaining to Platewel Division (Chemicals Dvn.) Balance Rs. Rs. Rs. Depreciation 3,67,92,309 2,55,142 3,65,37,167 Machinery 2,24,08,230 2,24,08,230 Repairs Building 44,85,278 1,65,379 43,19,899 Repairs Other repairs 9,49,052 1,20,779 8,28,273 Technical fees 71,01,302 71,01,302 Employees emoluments: Total: 6,95,82,272 Less: Considered by the Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts and also in the P L a/c. It was pleaded by the assessee before the CIT(Appeals) that the Assessing Officer has misinterpreted the ratio of Supreme Court decision in the case of British Paints India Ltd. case (supra) and further that the Assessing Officer has not correctly appreciated that the case of the assessee was squarely covered by the decision of the Hon ble Madras High Court in the case of CIT v. Carborandum Universals Ltd. [1984] 39 CTR (Mad.) 272: [1984] 149 ITR 759 (Mad.). The CIT(Appeals) however upheld the action of the Assessing Officer for the reasons given in the impugned order and he agreed with the findings of the Assessing Officer that in terms of the decision of the Supreme Court in the case of British Paints India Ltd. case (supra) all costs whether direct or indirect have to be taken into consideration for the purpose of valuation of closing stock. The CIT(Appeals) accordingly upheld the addition of ₹ 68,89,089. 5. The assessee is aggrieved and has challenged the action of the CIT(Appeals) by taking a specific ground No. 1. Before us, Shri J.P. Shah, the learned representative of the assessee submitted that the CIT(Appeal) has failed to appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method whereby the cost of inventories is determined so as to include the appropriate share of both variable and fixed costs, the letter being allocated on the basis of normal level of production. 6.7 Variable Costs are those costs of production which vary directly, or nearly directly, with the volume of production. 6.8 Fixed Costs are those costs of production which by their very nature remain relatively unaffected in a defined period of time by variations in the volume of production. It was submitted that as far as the assessee-company is concerned, it has been regularly following the Direct Costing Method which is recognised by the Institute of Chartered Accountants of India as per the Accounting Standard AS-2 referred to supra. It was submitted that in terms of section 227(4A) of the Companies Act, 1956 the auditors of the company have certified that the method of valuation of closing stock employed by the assessee is fair and proper in accordance with the normally accepted accounting principles . It was further submitted that the Income-tax Act, 1961 does not contain any prescription in the matter of valuation of stock of finished goods by an assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intenance expenses, being an item of fixed overheads, it cannot be considered under the Direct Costing Method and accordingly the assessee itself has taken into consideration consumption of machinery spares amounting to ₹ 1,96,46,978 (which varies in sympathy with the level of production activity of the assessee-company) into consideration for the purpose of valuation of stock of finished goods (iii)Building repairs, being an item of fixed overheads, there can be no question of considering the same under Direct Costing . (iv)Other repairs being an item of fixed overheads, there can be no question for considering the same under Direct Costing . (v)As regards technical fees, the assessee-company has entered into an agreement dated 14th Nov. 1989 with the Albany International, Canada. Inc., and the technical fees payable thereunder being a fixed annual payment not at all dependent upon the level of production or, for that matter, whether there is or there is not any production, is an item of fixed overheads and therefore it cannot be considered for the purpose of valuing the closing stock under Direct Costing Method . (vi)Similarly total amount debited to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not the case of the assessee that the method of valuation of stocks adopted by it was a recognised method because in that case the assessee s method of valuation of stocks took into account only the cost of raw materials and excluded every other costs and as such it could not have been suggested/argued by the assessee that it was a recognised method and in fact the finding of the Assessing Officer in that case was that the method adopted by the assessee was not a recognised method. Accordingly it was pleaded that if the true ratio of the decision of the Supreme Court in the case of British Paints Ltd. (supra) is applied to the case of the assessee, it has to accounting known as Direct Costing which categorically envisages that certain production overheads, even if connected with the production, are not to be considered for the purpose of valuation of stocks if they are fixed in nature as different from being variable in nature and further that some of the items being part of the general administration or finance charges and that too being fixed in nature, there can be no question for considering them under the Direct Costing Method . Accordingly it was pleaded that for all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract the relevant portion of Accounting Standard AS-2-Valuation of Inventories issued by the Institute of Chartered Accountants of India : 6.2 Historical Cost represents an appropriate combination of the- (a)Cost of purchase; (b)Cost of conversion; and (c)other costs incurred in the normal course of business in bringing the inventories upto their present location and condition. 6.3. Cost of purchase consists of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase. 6.4. Cost of conversion consists of (i)costs which are specifically attributable to units of production i.e., direct labour, direct expenses and sub-contracted work; and (ii)production overheads, ascertained in accordance with either the direct costing or absorption costing method. Production overheads exclude expenses which relate to general administration, finance, selling and distribution. 6.5. Direct Costing is the method whereby the cost of inventories is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substituted by a new section by the Finance Act, 1995 w.e.f. 1st April, 1997 as under : Method of Accountings : (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may, make an assessment in the manner provided in section 144. The relevant portion of the Finance Minister s speech rendered while moving the Finance Bill, 1995 reads as under : 73. I propose to amend the provisions of the Income-tax Act to provide that the taxable income may be computed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent years. It is pertinent to note that even as of today, the Government has not issued any standard direction on the subject of valuation of closing stock pursuant to the provisions of sub-section (2) of section 145 and yet the Finance (No. 2) Act, 1998 has inserted a new section 145A for the specific purpose of making some provision, though limited in scope, on the subject of valuation of stocks. That section reads as under and has been made effective from 1st April, 1999 : 145A. Method of accounting in certain cases.-Notwithstanding anything to the contrary contained in section 145 (as it stood immediately before the 1st day of April, 1995) the valuation of purchase and sale of goods and inventory for the purpose of determining the income chargeable under the head Profits and gains of business or profession shall be- (a)in accordance with the method of accounting regularly employed by the assessee; and (b)further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation : For the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment which are not directly related to the production were rightly not considered by the company under the Direct Costing Method although they could have been considered if valuation is to be done on the basis of Absorption Cost Method . Similarly various other items of expenditure which are not directly related to the production on quantum basis, were not considered for the purpose of valuation of closing stock under the Direct Costing Method . In this connection, it will be relevant to refer to the observations of the Madras High Court in the case of CIT v. Carborandum Universal Ltd. (supra) which has been relied upon by the assessee-company in its submissions before the Assessing Officer as well as the CIT(A), wherein it has been clearly held that the Direct Costing is a recognised method of valuing the stocks and it also shows that where the valuation is done under this method, specific items viz. depreciation, rent, rates, taxes, repairs and maintenance, insurance, salaries and perquisites of supervising and ancillary staff, travelling expenses and technical fees are not to be considered for the purpose of valuation. The relevant portion of the judgment at pp 761 to 763 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut it would be adopted consistently in future from year to year and that the new basis adopted is based upon accepted principles of commercial practice. As noted earlier, the Revenue s SLP against the above decision of the Madras High Court in the case of Carborandum Universal Ltd. (supra) has since been dismissed by the Hon ble Supreme Court as reported in 188 ITR (St.). We may point out that although the Assessing Officer has made the addition of ₹ 68,89,089 by application of the proviso to section 145(1), yet (i ) he has not found fault with the books of account as such and these have been accepted, and (ii ) it is not the case of the Assessing Officer that the assessee-company is not following regular method of accounting including the method of valuation of stock and the addition has been made only on account of the fact that according to the Assessing Officer certain items of costs which are in the nature of indirect costs ought also to have been considered by the assessee for the purpose of valuation of its closing stock. The Hon ble Supreme Court in the case of P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) which been referred with approval by the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od was a recognised method and if so whether the company was justified in not considering the items of costs in dispute under that method and has wrongly invoked the proviso to section 145(1). The Assessing Officer as well as the CIT(A) have proceeded on the assumption that certain items of costs which had not been considered by the company for the purpose of valuation of stocks, ought to have been considered and there is no particular basis for their saying so except that they thought that these items of costs are related to the production and therefore, ought to have been considered. The Assessing Officer as well as the CIT(A) have failed to appreciate that there was a recognised method of valuation of stock, Direct Costing Method which categorically envisages that certain production overheads, even if connected with the production, are not to be considered for the purpose of valuation of stock if they are fixed in nature as distinguishable from those expenditure which are variable in nature and also the fact that some of the items being part of general administration overheads or finance charges and that too being fixed in nature, there should be no question of considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en Mills (supra). Therefore, respectfully following the aforesaid decision of the jurisdictional High Court, we will adjudicate this issue in favour of the Revenue and against the assessee by holding that the foreign travel expenditure incurred by the company in connection with the purchase of new machinery is an expenditure of capital nature and were rightly capitalised by the Assessing Officer under section 43(1) to find out the actual cost of those machineries. 10. Coming to ground of appeal No. 3, the dispute is as to whether the excise duty paid by the assessee is to be considered as a part of the turnover for the purpose of working out the deduction under section 80HHC. 10.1 The learned representative of the assessee submitted that the issue is squarely covered in favour of the assessee and against the Revenue as per the decision of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT [1997] 57 TTJ (Pune) 718 : [1997] 60 ITD 629 (Pune). The learned Departmental Representative on the other hand relied on the orders of the Assessing Officer as well as the CIT(A) and submitted that in view of the decision of the Supreme Court in the case of Chowringhee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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