2017 (3) TMI 1464 - AT - Income Tax

Allocation of the administrative expenses on proportionate basis towards work in progress - whether expenses in question are directly relatable to the projects - Held that - The expenses out of the administrative expenses of ₹ 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.(1998 (1) TMI 107 - ITAT DELHI-D ) 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. 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.

Summary

Issues Involved:
1. Correctness of the method of valuation of work in progress (WIP) adopted by the Assessing Officer (AO).
2. Proportionate disallowance of indirect expenses by apportioning the same towards WIP.

Issue-Wise Detailed Analysis:

1. Correctness of the Method of Valuation of Work in Progress:
The assessee, engaged in the production of Television Commercials (TVC), filed a return of income declaring ?16,22,740 for the assessment year 2009-10. The AO observed that expenses incurred on specific projects were treated as WIP. The assessee allocated certain expenses directly related to these projects to WIP and claimed the remaining administrative expenses under the profit and loss account. The AO, however, proportionately allocated all indirect expenses towards WIP, leading to a disallowance of ?20,55,593.

The assessee contended that it followed the direct cost method for valuing WIP, a recognized method where only costs directly incurred on relevant projects are considered. The assessee further argued that there are no accounting principles mandating the inclusion of indirect expenses not directly related to any project in WIP valuation. The Income Tax Act does not specify any particular method for valuing closing stock, thus the method adopted by the assessee and recognized by the Institute of Chartered Accountants of India (ICAI) should be upheld.

2. Proportionate Disallowance of Indirect Expenses:
The learned Commissioner of Income-tax (Appeals) upheld the AO's decision, agreeing that administrative expenses like bank charges, communication expenses, and computer expenses, among others, were not fixed in nature and directly relatable to various projects. Only the Directors' remuneration was considered not relatable to any project. Consequently, the proportionate allocation of ?1,11,31,064 towards WIP was upheld.

The Tribunal examined the relevant provisions of the Income Tax Act, specifically section 145A, which mandates that the valuation of inventory should be in accordance with the method of accounting regularly employed by the assessee. The Tribunal referred to the case of Sutlej Cotton Mills Ltd. Vs. ACIT, where it was established that the direct cost method, excluding administrative overheads, interest, selling and distribution overheads, and depreciation, is a recognized method for valuing closing stock.

The Tribunal found that the learned Commissioner of Income-tax (Appeals) had accepted the direct cost method but incorrectly upheld the proportionate allocation of expenses. The Tribunal held that the expenses directly related to WIP should not be decided by apportioning the expenses in the ratio of WIP to total turnover. Instead, the AO should examine each expense on a case-by-case basis to determine if it is directly related to the projects.

Conclusion:
The Tribunal rejected the proportionate allocation of administrative expenses towards WIP and directed the AO to examine all administrative expenses, excluding Directors' remuneration, on a case-by-case basis to identify those directly related to the projects. The specific expenses directly related to the projects should be included in WIP. The grounds of the appeal were allowed for statistical purposes, and the matter was remanded to the AO for further examination with adequate opportunity for the assessee to be heard. The decision was pronounced in the open court on 14th February 2017.