- (1.) THIS case is of its own type. There is no precedent which governs it. It presents a fairly ticklish problem and has to be settled on first principles.
(2.) THE assessee is an Indian company with German collaboration. This company set up a factory for fabrication, manufacture and sale of hosiery needles. The West German collaborators are M/s. Gheodor Groz and Soehne and Ernst Beckert. The first accounting year of this company ended on 31st March, 1961. The present controversy relates to the assessment year 1962-63, the account year ending 31st March, 1962.
(3.) THE relevant facts are that the assessee-company entered into an agreement with the collaborators. Under this agreement, the collaborators had to supply the machinery and were to get shares in the company. In the invoice dated 4th April, 1961, for machinery costing Rs. 9,45,545 there is no mention of any other material. But, along with the machinery "working-in-material" was supplied, but its value was not indicated in the invoice. An objection was raised by the Customs authorities and a separate invoice was sent by the collaborators indicating the value for the purpose of customs duty. They also wrote to the Income-tax Officer stating that the materials had been supplied to the company free of cost. The material supplied consisted of raw materials and knitting needles in various stages of manufacture. This material, according to the collaborators, was supplied to facilitate expeditious starting of production by the company. This material was treated by the company as stock-in-trade. After it was processed it was sold like any other goods manufactured by the company and the sale-proceeds were credited to the sales account. The cost of the machinery received was debited to the capital account, but no book entries were made with regard to the materials at that time. On 30th September, 1961, the amounts representing the value of materials were debited and credited to gift accounts. On 31st March, 1962, the amount was credited to the capital reserve account debiting the gift accounts. It is, therefore, clear that this material was received free of cost and was taken by the assessee in its stock account. The total value of this material is Rs. 74,448.;