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2010 (8) TMI 263 - HC - Income TaxAccounting closing stock Valuation Excise duty Liability only at time of removal of goods Not includible in valuation of closing stock of finished goods at end of accounting period
Issues Involved:
1. Whether the Income-tax Appellate Tribunal was right in law to exclude the excise duty at the time of valuation of closing stock of finished goods at the end of the accounting period? Detailed Analysis: 1. Facts and Background: The assessment year in question is 1997-98, with the relevant accounting period ending on March 31, 1997. The respondent-assessee declared a total loss of Rs. 14,51,91,613 and did not account for the liability for excise duty on finished goods, stating that it would become due when the goods are sold and cleared from the factory premises. The Assessing Officer disagreed and issued a show-cause notice to include the excise duty of Rs. 20,17,000 in the inventory value of finished goods. 2. Assessing Officer's Stand: The Assessing Officer held that excise duty liability had already accrued as the goods were manufactured and ready for dispatch, and thus, it should be included in the closing stock value. He referenced the Supreme Court judgment in CIT v. British Paints India Ltd. and accounting practices of the Institute of Chartered Accountants of India, stating that excise duty is part of manufacturing expenses and integral for inventory valuation. The officer also mentioned that no deduction under section 43B of the Income-tax Act could be allowed as no provision was made nor excise duty paid. 3. Commissioner (Appeals) and Tribunal's Decisions: The Commissioner (Appeals) allowed the assessee's appeal, following the Madras High Court judgment in CIT v. English Electric Co. of India Ltd. The Tribunal upheld this decision, referring to section 145A of the Act and judgments of the Special Bench of the Tribunal and the Madras High Court, stating that excise duty prior to the assessment year 1999-2000 cannot be added to the closing stock valuation. 4. Revenue's Argument: The Revenue argued that excise duty liability arises upon production or manufacture of goods and should be included in the closing stock value to reflect the correct taxable income. They relied on the Supreme Court judgment in CIT v. British Paints India Ltd. and other cases, asserting that the Assessing Officer must determine the correct taxable income. 5. Respondent-Assessee's Argument: The respondent-assessees argued that excise duty liability is incurred only upon removal of goods from the factory, as per section 4 of the Central Excise Act. They cited the Supreme Court judgment in Assistant Collector of Central Excise, Calcutta v. National Tobacco Co. of India Ltd., distinguishing between "levy" and "collection." 6. Legal Interpretation and Court's Analysis: The court analyzed sections 3 and 4 of the Central Excise Act, concluding that excise duty liability is incurred only upon removal of goods from the factory, not merely on manufacture. The court emphasized that the purpose of valuing closing stock is to balance the cost of goods entered on the other side of the account, and excise duty is a post-manufacturing cost, not a manufacturing expense. 7. Accounting Standards and Section 145 of the Income-tax Act: The court noted that section 145(1) of the Income-tax Act requires profits to be computed according to the method of accounting regularly employed by the assessee. The Assessing Officer did not take recourse to section 145(3) for a best judgment assessment. The court found that the assessee's method did not distort the true profits and gains of the business. 8. Judgment: The court held that the Tribunal was justified in excluding excise duty at the time of valuation of closing stock of finished goods, as the duty was not due and payable at that stage. The court emphasized that adding excise duty to the closing stock would result in a revenue-neutral situation over time and would not reflect the correct cost or market value. Conclusion: The appeal was dismissed, and the Tribunal's decision to exclude excise duty from the closing stock valuation was upheld, with no order as to costs.
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