2010 (10) TMI 758 - AT - Income Tax

Addition - Valuation of closing stock - Applicability of As-1 or As-7 - The assessee company was in the business of Market Research, and it is not the case of department that the work in progress as shown by the assessee was incurred in relation to construction activities - Therefore, Accounting Standard-2 is applicable in the present case and not the Accounting Standard-7, dealing with accounting of construction contracts - The assessee had filed its opening and closing WIP based on direct cost - The interest was not included in the valuation of WIP - Since, the valuation had been done as per Accounting Standard-2, the same was required to be accepted in view of the provisions of section 145(2), wherein Accounting Standard-2 has been notified to be followed - Decided in favour of assessee. Bad debts - After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable - It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. There is no dispute about the amount having been actually written off - Decided in favour of assessee. Interest on work in progress - This issue has already been considered in assessment year 2004-05 vide ITA No.7257/Mum/2008 and for the reasons contained therein, dismiss this ground of appeal - Decided in favour of assessee.

Summary

Issues:
1. Valuation of work in progress and inclusion of interest component.
2. Disallowance of bad debts and interest on work in progress.

Issue 1: Valuation of work in progress and inclusion of interest component

In the case, the assessee-company, engaged in Market Research, declared a loss in the relevant assessment year. The Assessing Officer disallowed a proportionate interest amount on work in progress based on the rate of interest on loans. However, the CIT(Appeals) deleted the addition, citing that the valuation of work in progress was done in compliance with Accounting Standard-2 issued by the Institute of Chartered Accountants of India. The appellant argued that interest should not be included in the valuation of inventories, as per para 12 of the Accounting Standard, which states that interest costs are not considered part of bringing inventories to their present location and condition. The ITAT noted that since the valuation was done as per Accounting Standard-2, the same should be accepted as per section 145(2), which mandates following notified accounting standards. Consequently, the ITAT confirmed the order of the CIT(Appeals).

Issue 2: Disallowance of bad debts and interest on work in progress

Regarding the disallowances made in the assessment, the CIT(Appeals) had deleted both the disallowance of bad debts and interest on work in progress. The Assessing Officer disallowed the bad debts claimed by the assessee, stating that the burden of proof lies with the assessee to establish the debts as bad debts. However, the CIT(Appeals) relied on a Supreme Court decision stating that after April 1, 1989, it is not necessary for the assessee to prove the debt is irrecoverable if it is written off in the accounts. As the amount was indeed written off, the ITAT upheld the CIT(Appeals) decision. On the issue of interest on work in progress, the ITAT referred to a previous decision and dismissed the appeal based on the reasons provided therein.

In conclusion, the ITAT dismissed the department's appeals for the assessment years 2004-05 and 2005-06, upholding the decisions of the CIT(Appeals) regarding the valuation of work in progress, bad debts, and interest disallowances.