2003 (11) TMI 38 - HC - Income Tax

Whether, Tribunal is right in law in upholding the order of the Commissioner of Income-tax (Appeals) directing the exclusion of the excise duty from the closing stock valuation? - Liability for payment of excise duty is incurred only when the process of manufacture is complete. Such liabilities are shown in the excise duty account maintained by the assessee. The inclusion of excise duty in the valuation of closing stock was permissible only if the liability for that amount in the excise duty account was given a deduction - The substantial question of law that as framed is answered in affirmative in favour of the assessee and against the Revenue.

Summary

Issues:
Whether excise duty should be excluded from the closing stock valuation for income tax purposes.

Analysis:
The judgment deals with the issue of whether excise duty should be excluded from the closing stock valuation for income tax purposes. The assessee, a private limited company involved in manufacturing and selling television sets, had consistently excluded excise duty from stock valuation over the years. The Assessing Officer acknowledged this consistent practice and did not allege any attempt to evade taxes or misrepresent profits. The court noted that it is well-established that excise duty does not need to be included in the cost price while valuing closing stock. The introduction of section 43B of the Income-tax Act further supported the assessee's accounting method.

The court referred to the case of CIT v. English Electric Co. of India Ltd., where it was established that excise duty liability arises only upon completion of the manufacturing process. The judgment emphasized that excise duty should be included in closing stock valuation only if the liability in the excise duty account is deducted. Including the duty element without deduction would lead to anomalous results. Therefore, the court held that excise duty liability should not be part of the closing stock valuation as it is not a component of manufacturing cost but is relevant for determining net profit.

Based on the legal principles outlined in the English Electric case, the court ruled in favor of the assessee and against the Revenue, answering the substantial question of law in favor of excluding excise duty from the closing stock valuation for income tax purposes. This judgment reaffirms the importance of consistent accounting practices, bona fide changes in methods, and adherence to legal principles in determining stock valuation for tax purposes.