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TMI Blog2017 (3) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee company was engaged in the business of production of Television Commercials (TVC) known as advertisement films (ad films). For the year under consideration, the assessee filed return of income on 29/09/2009, declaring income of Rs. 16,22,740/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act (for short "the Act") was issued and complied with. The Assessing Officer observed that expenses incurred in relation to following projects were treated by the assessee as work in progress: Clinic plus Rs.25,25,472/- Dell Rs.94,25,377.10/- Sri Lanka Tourism Rs.48,68,434/- Total Rs.1,68,19,283.10/- 2.1 The assessee incurred administrative expenses of Rs. 1,47,52,677.71/-, out of which expenses of Rs. 8,63,602/- on travelling and expenses of Rs. 27,58,011/- on professional fees was considered by the assessee is relatable to the specific project for work in progress and accordingly allocated to work in progress. The balance expenses of Rs. 1,11,31,064/- was claimed as expenditure under the profit and loss account. The Assessing Officer asked the assessee as why the indirect expenses of Rs. 1,11,31,064/- might not be prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the direct cost method, which is one of the recognized method of valuation of closing stock according to which only costs which are directly incurred on relevant projects should be taken for the purpose of calculation of work in progress. He submitted that the nature of most of the administrative expenses are recurring and fixed and had not directly relatable to any project undertaken by the company. He further submitted that there are no accounting principles which prescribed inclusion of indirect expenses, which are not directly relatable to work in progress/closing stock to be taken for the purpose of valuation. He further submitted that the Income Tax Act has not specified any particular method of valuation of closing stock and therefore the method adopted by the assessee and recognized by the Institute of chartered accountant of India (ICAI) should be upheld. 4. On the other hand, the learned Sr. Departmental Representative relied on the order of the lower authorities. 5. We have heard the rival submission and perused the relevant material on record including the order of the lower authorities. 6. The administrative expenses for the year under consideration which have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting regularly employed by the assessee; and (ii) 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 of this section*, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment; (b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received." (emphasis supplied) 8. Thus, we find that as per the provisions of the Act, in this case the valuation of work in progress at the end of the year has to be valued by the assessee in accordance with the method of accounting regularly employed by the assessee. 9. Further, in the case of Sutlej Cotton Mills Ltd. Vs. ACIT (supra) the Tribunal after going through the cases of CIT v. British Paints (I) Ltd (1991) 188 ITR 44 (SC) and ITO Vs. Modi Rubber Ltd. (1992) 43 ITD 396 (Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is directly relatable to the production of goods, the same has to be accounted for and we would hold that the inclusion of the amount in this respect has been rightly done. As regards insurance, the assessee has explained that this relates to the comprehensive insurance which is not relatable to goods alone. In this respect we would hold that part of the expenses which are relatable to the goods are also to be taken into consideration while arriving at the direct cost. This would however not be so in regard to depreciation. For this, we find support in the order of the Tribunal in the case of Modi Rubber (supra) where it has been held that while asking for direct cost method, the fixed cost are to be excluded in determining the cost. It is further held that fixed cost is defined as the ones which by its very nature remain relatively unaffected in a definite period of time by variation in the volume of production. After observing so, it has been held that the depreciation is not to be taken into consideration. This would apply to the rent which does not vary with valuation in production. Respectfully following the aforesaid decision, we would hold that the same is to be exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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