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Dear Sri VIKRAM, I request your valuable opinion on the following One of our client is having jewellery manufacturing

unit. While manufacturing jewellery, copper, alloy and stones are mixed to gold & jewellery is manufactured. While manufacturing jewellery, there is some loss of gold also, it is termed as manufacturing loss. Some time manufactured jewellery is outdated and when it is not easily saleable, it is melted again and in such process, we again get bullion which is net of alloy, copper and stone. This loss is termed as melting loss. Example of quantity, cost and other details of work in progress and finished goods are as follows. Particulars Opening stock of W.I.P Bullion Added Alloy & copper added Stones Other Manufacturing Exp Total Melting Loss Manufacturing Loss Net jewellery manufactured Transferred to Finished goods Closing stock of W.I.P Finished Goods: Particulars Opening Stock Jewellery Manufactured Total Sales Closing Stock 9,000 2,000 Quantity 1,000 10,000 Value 31,50,000.00 Average rate 3,150 Quantity 10,000 2,000 150 100 12,250 200 400 11,650 10,000 1,650 Value 3,00,00,000.00 65,00,000.00 1,00,000.00 1,00,000.00 2,00,000.00 3,69,00,000.00 Average rate 3000.00

There are two methods of valuation 1st Method: Work in Progress: Particulars Opening stock of W.I.P Bullion Added Alloy & copper added Stones Other Manufacturing Exp Total Melting Loss Manufacturing Loss Net jewellery manufactured Transferred to Finished goods Closing stock of W.I.P Finished Goods: Particulars Opening Stock Jewellery Manufactured Total Sales Closing Stock 2nd Method: Work in Progress: Particulars Opening stock of W.I.P Bullion Added Alloy & copper added Stones Other Manufacturing Exp Total Melting Loss Manufacturing Loss Net jewellery manufactured Transferred to Finished goods Closing stock of W.I.P Quantity 10,000 2,000 150 100 12,250 200 400 11,650 10,000 1,650 Value 3,00,00,000.00 65,00,000.00 1,00,000.00 1,00,000.00 2,00,000.00 3,69,00,000.00 3,69,00,000.00 3,16,73,800.00 52,26,177.00 Average rate 3,000.00 3,250.00 Quantity 1,000 10,000 11,000 9,000 2,000 Value 31,50,000.00 3,01,22,500.00 3,32,72,500.00 60,49,540.00 Average rate 3,150.00 3,012.25 3,024.77 3,024.77 Quantity 10,000 2,000 150 100 12,250 200 400 11,650 10,000 1,650 Value 3,00,00,000.00 65,00,000.00 1,00,000.00 1,00,000.00 2,00,000.00 3,69,00,000.00 3,50,92,712.50 3,01,22,500.00 49,70,212.50 Average rate 3,000.00 3,250.00

3,012.25 3,012.25 3,012.25 3,012.25

3.012.25 3,167.38 3,167.38 3,167.38

Finished Goods: Particulars Opening Stock Jewellery Manufactured Total Sales Closing Stock Quantity 1,000 10,000 11,000 9,000 2,000 Value 31,50,000.00 3,16,73,800.00 3,48,23,800.00 63,31,600.00 Average rate 3,150.00 3,167.38 3,165.80 3,165.80

I request your valued opinion, which method is correct for income tax purposes and also as per accounting standard, as the client is a company. I request you to consider following arguments also 1. Client is losing gold in the process but overall cost remains the same. Hence whether per unit cost will go up.

2. Profit on sale is calculated on sale which is equal to sales minus cost. Hence per unit cost should be increased to cover overall cost and profit is calculated on overall cost and overall sale only. I also request you to quote and provide any case law relevant to my query.