2014 (12) TMI 13 - HC - Income Tax

Valuation of finished goods at port - Whether the Tribunal was right in directing to work out the value of finished goods lying at port on the basis of average cost Held that - The Tribunal was rightly of the view that the AO is duty bound to examine as to whether the method of valuation as adopted by the assessee has been regularly followed or not and as to whether the correct profits and gains could be deduced from the accounts maintained by following the said method - the assessee has regularly followed the method of valuation of stock on the basis of average cost - there is no specific finding by the AO that the profits cannot be correctly deduced on the basis of the method of valuation followed by the assessee - The provisions of section 145 have not been specifically invoked - CIT(A) has rightly held that in the case of cotton yarn average weighted cost of closing stock may be taken and the valuation of closing stock should be worked out on the basis of weighted monthly cost - the method of valuation of closing stock of raw material has been accepted by the assessee the order of the Tribunal is upheld Decided against revenue. Admissibility of deduction u/s 80I on duty drawback Receipts attributable to conduct of any manufacturing activities of assessee or not Held that - Following the decision in M/s Liberty India Versus Commissioner of Income Tax 2009 (8) TMI 63 - SUPREME COURT - the duty draw back would not form part of net profit and no deduction u/s 80I of the Act was admissible Decided in favour of revenue.

Summary

Issues:
1. Valuation of finished goods at port based on average cost.
2. Admissibility of deduction under Section 80I on Duty Draw back.

Issue 1: Valuation of finished goods at port based on average cost
The appeal by the revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal (ITAT) directing the valuation of finished goods at port on the basis of average cost for the assessment year 1989-90. The respondent company, engaged in the manufacture, purchase, and export of cotton hosiery goods, had valued yarn and finished products at average cost instead of actual cost. The Assessing officer found an undervaluation of stock to reduce profits. The CIT(A) partially allowed the appeal, directing valuation based on actual cost for acrylic yarn and weighted monthly cost for cotton yarn. The ITAT dismissed the revenue's appeal on the stock valuation issue, upholding the valuation based on average cost. The High Court affirmed the ITAT's decision, noting that the method of valuation followed by the assessee was recognized and consistent, with no finding that profits could not be deduced correctly. The Court held that the CIT(A) rightly decided the valuation issue in favor of the assessee, as there was no error or perversity in the ITAT's finding.

Issue 2: Admissibility of deduction under Section 80I on Duty Draw back
Regarding the admissibility of deduction under Section 80I on Duty Draw back, the revenue contended that the Tribunal erred in allowing the deduction, citing the Apex court's judgment in Liberty India vs. CIT. The assessee acknowledged the conclusion of the Liberty India case but argued in favor of the average cost method for stock valuation. The High Court concurred with the revenue on this issue, holding that Duty Draw back should not form part of net profit for Section 80I deduction. As there was no dispute between the parties and in light of the Liberty India case, the Court decided the issue against the assessee and in favor of the revenue.

In conclusion, the High Court dismissed the revenue's appeal on the valuation of finished goods at port based on average cost, upholding the ITAT's decision. However, the Court ruled in favor of the revenue on the admissibility of the Section 80I deduction on Duty Draw back, aligning with the judgment in the Liberty India case.