TMI Blog1995 (11) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Upper Ganges Sugar Mills Ltd. in ITA No. 1446 (Cal) of 1982 dt. 21st Jan., 1984. Para. 6 of this order is relevant and is extracted below: "From the above discussion it would be clear that the valuation of closing stock at cost is not a wrong method of valuation. Moreover, valuation at cost can be made either by including all the direct expenses only or also by including overheads. Both are recognised systems of valuation. The assessee has also been following on particular system uniformly and the rules referred to by the ITO do not compel the assessee to make the valuation by that particular method only after including the overheads. Those provisions in the rules are only for the purpose of exhibiting certain figures in the balance sheet and the schedules. Taking the above mentioned reasons and facts into consideration, we are 'wholly' in agreement with the CIT(A) that the addition of Rs. 20,68,443 was not correct and has been correctly deleted by the CIT(A). The ground taken by the Revenue is rejected." 3. Against the order of the Tribunal deleting the addition made towards the valuation of closing stock for the asst. yrs. 1977-78 and 1978-79, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto consideration not only the cost of the raw materials, but also the entire wages which include manufacturing and non-manufacturing wages, stores, power, fuel and repairs which also include both manufacturing and non-manufacturing, in the valuation of the stock of sugar. Certain mistakes in the annexures enclosed with the notice under s. 263 were also pointed out. On these submissions it was prayed that the proposed revision be dropped. 7. The CIT considered the reply but did not accept the same. According to him, the judgment of the Supreme Court was fully applicable. He discussed each and every objection raised by the assessee and overruled the same. Ultimately he came to the following conclusion: "In view of the foregoing discussion, I am of the opinion that the assessee-company, by not including the overheads of salaries, staff welfare expenses, insurance, rates taxes and depreciation has reduced its taxable profits for the assessment year under consideration, leading to underassessment. The assessment order, so passed by the AO, is both erroneous and prejudicial to the interest of the Revenue, and it is held so accordingly the assessment order is, therefore, set asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before the Revenue authorities that it had been consistently valuing the goods in process and finished products exclusively at the cost of raw materials and totally excluding overhead expenditure. The assessee justified this practice by saying that the paints had limited storage life and if they are not disposed of quickly they will lose their market value. The assessee sought to rely on the judgment of the House of Lords in Duple Motor Bodies Ltd. vs. IRC (1961) 1 WLR 739 (HL). The Supreme Court noticed the facts in this case and this appears at p. 51 of 188 ITR 44 (SC). In the case before the House of Lords, the assessee valued the work-in-progress on the direct cost method which included the cost of raw materials and labour expended on the work. The IT authorities sought to value the work-in-progress at the "on cost method". Under this method various items of overhead expenditure are also taken into account in addition to the direct cost. The House of Lords held that since the assessee has consistently adopted the direct cost method and since the method is more accurate than on cost method under which there is great uncertainty, the direct cost method should be preferred and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method is not one of the recognised methods of valuation of stock, but it is that the assessee before the Supreme Court did not follow the direct cost method or any other recognised method of valuation. 10. The ratio of the judgment of the Supreme Court has been clearly brought out, if we may say so with respect, in para. 8 of the order of the Madras Bench of Tribunal in E.I.D. Parry (India) Ltd. vs. Dy. CIT (1993) 46 ITD 387 (Mad). The relevant paragraph appears at pp. 394-395 of the report. 11. The items of overhead expenditure which according to the CIT have not been taken into account while valuing the closing stock, if added to the value, would result in the "on cost" method being thrust upon the assessee which cannot be justifiably done. The IT authorities are empowered, in fact they are duty bound, to reject the method of accounting, which includes the method of valuation of stock, adopted by the assessee if the method is not a recognised method or is one which is not consistently followed by the assessee or is one which does not enable the true profits and gains of the business to be computed. We have already seen that the direct cost method which has been followed b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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