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3. Ground No. 2 by the assessee relates to rejection of method of valuation of closing stock and making addition of Rs. 10,17,767 on account undervaluation of closing stock. AO observed from the details of closing stock that the cost price of goods to be exported had been shown at Rs. 86,78,925. He also observed that FOB value of the said goods had been shown at Rs. 76,61,158. He further observed that while working out value of closing stock, FOB value of the goods lying at port was taken into account and that method of valuation of closing stock was the market price or cost price, whichever was low. AO observed that the goods exported carry certain benefits and incentive like cash compensatory payment, import licences entitlements, international price difference, etc., and the same became payable as soon as the goods are exported. He observed that the goods were lying at port and were in possession and ownership of the assessee. AO held that since the aforesaid benefits accrued to the assessee on export of goods on the basis of FOB value, FOB value did not represent correct value of the closing stock. He also observed that the assessee was declaring the aforesaid incentive on mercantile basis and including the same in its income. He, therefore, asked the assessee to explain as to why the difference between cost price and FOB value amounting to Rs. 10,26,767 be not added to the valuation of closing stock. The assessee, vide letter dt. 14th January, 1991 submitted that the system of valuation of goods in transit for export was same as in the last year, i.e., lower of the cost price or FOB value. The assessee emphasised that the goods to be exported were jointly under the trade-mark of foreign buyers and the assessee could not sell those goods in India and that if such goods were sold, they would fetch only the scrap value. The assessee pointed out that any variation in closing stock would not affect the tax liability since any addition made in the year under consideration would be set off against income of next year because the rate of taxation in the case of companies was maximum in both the years. The assessee also submitted that export incentives would become due after goods leave Indian shore. AO, however, did not accept the plea of the assessee and ultimately made an addition of Rs. 10,17,767. AO also relied on the case CIT vs. British Paint India Ltd. (1991) 188 ITR 44 (SC).

3.2. Learned counsel submitted that the method of accounting for valuation of closing stock adopted in this year was the same as followed in the earlier years. He also submitted that the assessee was valuing the goods at cost price or FOB price, whichever is less. He further submitted that FOB value represented the market value at which the assessee was exporting goods. The other arguments advanced by the learned counsel were the same as noted by the tax authorities. Learned counsel also referred to the application dt. 9th December, 1991, filed before the Settlement Commission, wherein the issue of valuation of closing stock for asst. yr. 1988-89 under consideration was mentioned and market value of goods had been shown at Rs. 76,61,158. He next referred to the order dt. 1st August, 1988 of the Settlement Commission for asst. yrs. 1984-85 to 1987-88, the applications in relation to which were admitted. He submitted that the method adopted by the assessee has been admitted by the Settlement Commission for the last four years. He next referred to the computation of total income for asst. yrs. 1984-85 to 1987-88 and submitted that no addition has been made by the Settlement Commission on this count. He referred to the decision of Hon'ble Madras High Court in the case of K. Mohammed Adam Sahib vs. CIT (1965) 56 ITR 360 (Mad), wherein it was held that in case of goods saleable only in foreign markets the assessee had right to value goods at 'nil' if there is no foreign market for the goods. He referred to the decision of the Tribunal (Calcutta Bench) in the case of Jay Shree Tea & Industries Ltd. vs. ITO (1984) 19 TTJ (Cal) 253 : (1983) 6 ITD 621 (Cal), wherein it was held that while valuing closing stock of fetilizer at market rate, the assessee was not required to include subsidy announced by Governments price support to which the assessee was entitled and which was actually received during the next year and was taxed in that year.

3.3. Learned Departmental Representative relied heavily on orders of tax authorities. He also submitted that FOB value was not correctly taken by the assessee and that the goods had a ready market in India. He further submitted that the decision in (1965) 56 ITR 360 (Mad) (supra), relied upon by learned counsel, is on different facts as in the said case the foreign market price was 'nil' as there was no demand.

3.4. We have carefully considered the rival submissions and have perused orders of the tax authorities and the other papers, to which our attention was invited during the course of hearing. We have also gone through the case law relied upon by learned counsel. It is observed that the assessee had shown value of closing stock in respect of the goods lying for export at port at FOB value, which is claimed to be the market value of goods for foreign buyers. The tax authorities have taken the cost price of the goods shown on the basis that the market price would be higher if export incentives are taken into account, to which the assessee would be entitled in due course. It is also observed that the assessee had already approached the Settlement Commission on the issue for asst. yrs. 1984-85 to 1987-88 and it has admitted the applications for those years and have not made any addition on this account, obviously they have agreed with the contention of the assessee in adopting FOB value for the purpose of valuation of closing stock. We also feel that contention of learned counsel do get support from the decision in (1984) 19 TTJ (Cal) 253 : (1983) 6 ITD 621 (supra) which is on similar facts, though relates to the amount of subsidy received in next year. In this case also, the assessee would have been entitled to export incentive only after export of goods. Thus, on the facts and circumstances of the case, we delete the addition of Rs. 10,17,767.