Indirect travelling cost excluded from work-in-progress valuation under AS-2; bona fide accounting change upheld subject to verification.

Indirect travelling cost was excluded from inventory valuation under AS-2 because only direct costs form part of work-in-progress, while indirect costs and administrative overheads that do not bring inventory to its present location and condition are not includible. The assessee's change in valuation method was accepted as bona fide and more rational, especially since it was consistently followed in later years and accepted by the Revenue. The Tribunal's relief to the assessee was therefore upheld, subject to verification by the Assessing Officer that the disputed addition related only to indirect cost.

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Issues: Whether indirect travelling cost was liable to be included in the valuation of work-in-progress and added to the assessee's income.

Analysis: The assessee changed its method of valuing work-in-progress by adopting the accounting treatment prescribed by AS-2. The Court accepted that the change was bona fide, based on a more rational method, and had been consistently followed in subsequent years and accepted by the Revenue. It also noted that AS-2 permits inclusion of direct costs in inventory valuation but excludes indirect costs, including administrative overheads that do not contribute to bringing inventories to their present location and condition. On the facts, the Revenue could not dispute that indirect travelling cost was not includible, though the Assessing Officer had not verified whether the addition covered only indirect cost.

Conclusion: Indirect travelling cost was not to be included in the cost of inventory under AS-2, and the Tribunal's relief to the assessee was upheld, subject to verification by the Assessing Officer.

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