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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SH. S.K. YADAV & SH. O.P. KANT
Per O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 09/08/2012 of learned Commissioner of Income-tax (Appeals) - XVIII, New Delhi, for assessment year 2009-10, raising following grounds:
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred in law in upholding the correctness of method of valuation of work in progress as adopted by the Assessing Officer in which all indirect expenses have also been proportionately allocated towards the work progress.
2. On facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred in law in upholding the proportionate disallowance out of indirect expenses by apportioning the same towards the work in progress.
The facts in brief of the case are that 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 proportionately apportioned towards the work in progress. 2.2 The assessee submitted that all expenses relatable to specific project including indirect expenses have been included in the work in progress. The assessee further submitted that there is no accounting principle which permits to determine work in progress including indirect expenses which are not directly relatable to any project. The Assessing Officer did not accept the contention of the assessee and disallowed indirect expenses of Rs.1,11,31,064/- in proportion of the work in progress (Rs.1,68,19,283/-) to the combined amount (Rs.9,10,76,686/-) of Turnover (Rs.7,42,87,403/-) and work in progress (Rs.1,68,19,283/-). The disallowance of Rs. 20, 55, 593/- is computed as under: Proportionate expenses = 1,11,31,064 *(1,68,19,283/9,10,76,686) = Rs. 20, 55, 593/- 2.3 Before the learned Commissioner of Income-tax (Appeals), the assessee submitted that it has followed the direct cost method for valuing the project which remained under work in progress at the end of the year and all expenses which were incurred on those projects were moved under the head work in progress and shown as current assets. The assessee company cited the decision of the Tribunal, Delhi bench in the case of Sutlej Cotten Mills Ltd Vs. Assistant Commissioner Income Tax in and 988/Del/1993. The learned Commissioner of Income Tax (Appeals) agreed with the view of the Tribunal in the case cited by the assessee, but as far as facts of the assessee are concerned, held that expenses under the head administrative expenses like bank charges, communication expenses, computer expenses etc. were not fixed in nature and directly relatable to various projects being handled by the company. The learned Commissioner of Income-tax (Appeals) further held that only Directors’ remuneration was not relatable to any project. Accordingly, all expenses of Rs.1,11,31,064/- other than the Directors’ remuneration, allocated by the Assessing Officer on proportionate basis towards work in progress was upheld by the learned Commissioner of Income-tax (Appeals). Aggrieved with the finding of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
Before us, the learned counsel of the assessee submitted that the assessee has valued the work in progress as per 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.
On the other hand, the learned Sr. Departmental Representative relied on the order of the lower authorities.
We have heard the rival submission and perused the relevant material on record including the order of the lower authorities.
The administrative expenses for the year under consideration which have been apportioned towards the work in progress on proportionate basis by the Assessing Officer, a detail of which was submitted before us by the assessee, is extracted as under:
SCHEDULE OF ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED 31.03.2009 PARTICULARS AS ON 31.3.2009 Status marked by the Assessee
12,515.00 Advertisement Expenses 4,159.00 Bad Debts 23,593.14 Bank Charges & Interest 215,119.00 Business Promotion 107,530.00 Communication Expneses 240,014.00 Computer Expenses 1,399,964.00 Cans Expenses 240,000.00 Car Hiring Charges 228,414.00 Conveyance Directors Remuneration 4,000,000.00 Allowed by CIT(A) 20,000.00 Discount 11,264.00 Donation 36,850.00 Electricity & Water Expenses Car Running & Maint. Expenses 284,119.00 92,979.00 House Keeping Expenses 103,468.00 Internet & Cable Expenses 71,056.00 MemeberShip Fee & Subscription 166,717.00 Miscellaneous Expenses 20,575.00 Miscellaneous Wages 2,706.00 News Papers & Periodicals 318,183.00 Office Expenses Penalty On Service Tax 2,000.00 Postage & Courier 103,256.50 409,990.00 Printing & Stationery Professional Fees 2,758,011.00, Considered as relatable to specific Project for WIP by the Assessee. Hence deducted^ by AO. 179,991.00 Rates & Taxes 1,014,000.00 Rent 145,693.00 Repair & Maintenance 1,290,358.00 Salary & Allowances 242,209.00 Security Service Charges 63,387.00 Staff Welfare Short & Excess 30,955.07 Tent Hire Charges 50,000.00 Travelling Expenses 863,602.00 Considered as relatable to specific Project for WIP by the Assessee. Hence deducted by AO.
Total 14,752,677.71
Before adjudicating on the issue in dispute, we may like to refer the relevant provision of the Act regarding the valuation of inventory; section 145A of the Act is extracted as under:
“Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,— (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be— (i) in accordance with the 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)
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.
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-Trib.), identified the costs relatable to the finished goods for valuation at year end. The relevant part of the decision is reproduced as under:
“8. We have carefully considered the rival submissions. We have also gone through the decision rendered in the case of British Paints (I) Ltd. (supra) as well that of Modi Rubber Ltd. (supra). It is not disputed that the assessee has been following consistent method of valuation of closing stock of finished goods at cost. This is stated to be the direct cost method which is well-recognised as per principles of accounting. As mentioned above, on going through the order of Modi Rubber, we find that the learned members of the Tribunal had referred to the components of the direct cost to be as under : (a) Direct material cost : (i) Raw material consumed; and (ii) Stores, spares and oil consumed (b) Direct labour cost : Salary, wages, bonus, ex gratia, etc. to staff and workers. (c) Production overheads : (i) Power and fuel consumed; (ii) Repairs and maintenance to plant and machinery; and (iii) Repairs and maintenance to factory building. Following items had not been included : (i) Administrative overheads and interest; (ii) Selling and distribution overheads; and (iii) Depreciation. As regards Direct material cost, there is no dispute in as much as, as per the chart given to us, which is not disputed by the learned Departmental Representative. The assessee has accounted for cost of raw material consumed, and stores and spares consumed. Coming to the direct labour cost, the assessee has only accounted for the wages and salaries of technical staff and not taking into consideration the contribution to provident fund, employees welfare expenses, bonus and other benefits relating to workers and staff whose wages and salaries have been taken into consideration. As these go along with the wages and salaries accounted for, according to us, these have to be included while considering the direct cost method. (sic) As regards production over head, we find that the assessee has accounted for power and fuel consumption but not repairs and maintenance to machinery and factory building. In this context, we note that in the case of Modi Rubber Ltd. (supra), the aforesaid concern had accounted for the expenses relating to repair and maintenance to machinery as well factory building. As this expenditure 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 excluded while working out the cost of the finished goods. The AO is directed to modify the working of the valuation of closing stock of finished goods in the light of the observations as contained above.”
The learned Commissioner of Income-tax (Appeals) has in principle agreed with the ratio of the above decision, however, according to him except the Director’s remuneration, the expenses in dispute were not fixed in nature and directly relatable to various projects being handled by the assessee company. The learned counsel of the assessee Commissioner of Income-tax (Appeals).
Since the learned Commissioner of Income-tax (Appeals) has already accepted the direct cost method of valuation of work in progress, the first issue before us for consideration is whether expenses in question are directly relatable to the projects. The next issue is whether, the computation of such expenses directly relatable to projects upheld by the learned CIT(A) through proportionate allocation, is correct. 12. In our opinion, the expenses out of the administrative expenses of Rs.1,11,31,064/- which are related directly to the work in progress in respect of three projects, cannot be decided by apportioning the expenses in the ratio of work in progress to total turnover including work in progress. The Assessing Officer is required to examine the expenses case to case basis, in the light of the decision of the Tribunal in the case of Sutlej Cotton Mills Ltd.(supra) to ascertain whether same are related directly to the three projects in reference. The expenses on Director’s remuneration have already been held by the learned Commissioner of Income-tax (Appeals) as not relatable to any of the projects and already excluded for the purpose of valuation of work in progress and that finding has not been challenged by the Revenue before us. 13. In view of above, we reject the allocation of the administrative expenses on proportionate basis towards work in progress and restore the matter to the file of Assessing Officer with the direction to examine all expenses under administrative expenses, other than Director’s remuneration on case to case basis, to find out whether same are directly related to any of the three projects in reference and then includes the specific expenses which are directly related to the projects to the work in progress. Nevertheless to mention that the assessee shall be afforded sufficient opportunity of hearing.
With the above directions, the grounds of the appeal are allowed for statistical purpose. The decision is pronounced in the open court on 14th February, 2017.