2005 (7) TMI 92 - HC - Income Tax

Valuation Of Stock - Whether the Tribunal was justified in holding that the value of work-in-progress was to be taken at the cost of raw material consumed and no part of direct labour, overheads was allocable to it - HELD THAT - We do not find any error in the order of the Tribunal. It is settled principle of law that the stock can be valued at the cost or at market rate. Admittedly, the assessee had been manufacturing the goods, which were tailor-made for specific requirements of its customers and unless the whole of the machinery is complete, work-in-progress by itself has no other utility. The assessee has valued the work-in-progress on the basis of raw material consumed at cost price. This method has been adopted since last several years and also in subsequent years. No objection has been raised by the Revenue in the previous years to such valuation. It was found that assessee-company was a progressive company and shown out profits on progressive scale from year to year and cannot escape from the clutches of the Revenue. The closing stock of this year is the opening stock of the subsequent year and, hence, a consistent method adopted for valuation by the assessee should not be disturbed. Therefore, the same method adopted in the year under consideration for valuing the stock, as has been adopted in the previous years, cannot be said to be unjustified. Thus, we answer the question referred to us in affirmative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues: Valuation of work-in-progress for income tax assessment year 1986-87

Analysis:
1. The Income-tax Appellate Tribunal referred a question of law regarding the valuation of work-in-progress under section 256(2) of the Income-tax Act, 1961.
2. The case involved a company engaged in manufacturing electronic equipment tailored to customer requirements.
3. The assessee valued work-in-progress at the cost of raw materials used, excluding overhead expenses.
4. The Assessing Officer added a sum to the valuation, contending the real value was understated.
5. The Commissioner of Income-tax (Appeals) upheld the addition but reduced the amount, considering a portion of overhead expenses.
6. The Tribunal, on appeal, deleted the addition, emphasizing the unique nature of the goods being tailor-made and the method consistently followed by the assessee for valuation.
7. The Tribunal highlighted that the work-in-progress had no market value until completion and approval by the customer.
8. The Tribunal cited legal precedents supporting the assessee's right to use a consistent accounting method unless it misrepresents income.
9. The High Court affirmed the Tribunal's decision, noting the specific nature of the goods, the progressive nature of the company, and the consistency in valuation methods over the years.
10. The High Court ruled in favor of the assessee, stating that the method of valuation adopted by the assessee was justified and should not be disturbed.

This detailed analysis covers the issues related to the valuation of work-in-progress for the income tax assessment year 1986-87, providing a comprehensive understanding of the legal judgment and its implications.