2012 (10) TMI 1184 - HC - Income Tax

Excise duty paid need not be included in the valuation of the closing stock and non-inclusion would be a revenue neutral and would have no impact upon the tax payable - Held that - In case of an assessee, where common order is passed in respect of more than one assessment year, which involves common issues even if in one of the assessment years the tax effect is more than ₹ 10 lakhs, irrespective of the fact that in respect of other assessment years which is part of the common order, the tax effect is less than ₹ 10 lakhs, the revenue is entitled to file appeal even in respect such assessment years where the tax effect is less than ₹ 10 lakhs. However, in case where there is no common order and an order is passed only in respect of an assessment, year and the tax effect therein is less than ₹ 10 lakhs, the revenue cannot file the appeal.

Issues Involved:
1. Inclusion of excise duty in the valuation of closing stock for the assessment years 1999 to 2005.
2. Interpretation and application of Section 145A of the Income Tax Act.
3. Determination of the correct method of accounting for excise duty in closing stock.
4. Applicability of Circular No. 3/2011 regarding tax effect and filing of appeals.

Detailed Analysis:

1. Inclusion of Excise Duty in the Valuation of Closing Stock:
The primary issue in the appeals pertains to whether the excise duty paid should be included in the valuation of the closing stock for the assessment years 1999 to 2005. The respondent/assessee did not include the excise duty in the valuation of the closing stock in their accounts and returns filed. The assessee contended that non-inclusion of excise duty would be revenue-neutral and would not impact the tax payable. However, the appellant argued that Section 145A of the Income Tax Act mandates the inclusion of excise duty in the valuation of closing stock.

2. Interpretation and Application of Section 145A of the Income Tax Act:
Section 145A, introduced by the Finance Act effective from 1.4.1999, prescribes the method of accounting for the valuation of purchase, sale of goods, and inventory for determining the income chargeable under "Profits and gains of business or profession." It mandates that the valuation must include the amount of any tax, duty, cess, or fee actually paid or incurred by the assessee. The provision aims to ensure that the true value of the stock is reflected, which includes all costs incurred to bring the goods to their location and condition as of the valuation date.

3. Determination of the Correct Method of Accounting for Excise Duty:
The appellant relied on the Supreme Court's decision in CIT v. British Paints India Ltd., which emphasized the correct determination of profits and gains by including the value of stock-in-trade at the beginning and end of the year. The court observed that excluding costs other than raw materials in stock valuation could distort the true state of the business. Section 145A makes it mandatory to include excise duty in the closing stock valuation to reflect the correct taxable income. The Bombay High Court in CIT v. Loknete Balasahab Desai S.S.K. Ltd. and the Delhi High Court in CIT v. Mahavir Aluminium Ltd. supported this interpretation, emphasizing that excise duty should be included in both opening and closing stock valuations.

4. Applicability of Circular No. 3/2011 Regarding Tax Effect and Filing of Appeals:
The appellant referred to Circular No. 3/2011, which outlines the monetary limits for filing appeals based on the tax effect. The circular states that appeals should only be filed if the tax effect exceeds a specified limit. However, in cases where a common order involves multiple assessment years with varying tax effects, the revenue can file appeals for all years if the tax effect exceeds the limit in any one year. The court found this discriminatory, stating that the assessee should benefit from the exemption if the tax effect is less than Rs. 10 lakhs, regardless of whether the order is solitary or common. The court held that the revenue cannot file appeals if the tax effect is below the threshold, except in ITA No. 750/07, where the tax effect exceeded Rs. 10 lakhs.

Conclusion:
The court concluded that the inclusion of excise duty in the valuation of closing stock is mandatory under Section 145A of the Income Tax Act. The assessee must comply with this provision to reflect the true value of the stock and determine the correct taxable income. The court also addressed the applicability of Circular No. 3/2011, emphasizing that the revenue cannot file appeals if the tax effect is below Rs. 10 lakhs, except in cases where a common order involves multiple years with varying tax effects. The appeals were disposed of with liberty for the revenue to seek revival if the Supreme Court rules in their favor regarding the prospective effect of the circular.

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