2009 (12) TMI 43 - HC - Income Tax

Valuation of Closing Stock - The assessee claimed deduction of excise duty and custom duty payable from the value of closing stock. The Assessing Officer of the opinion that the excise duty payable on finished goods is not taken into account for the purpose of valuation of stock of finished goods. The Income tax Officer added back the excise duty payable on finished goods. The first appellate authority deleted the addition so made. The department preferred an appeal before the Income Tax Appellate Tribunal and the Income Tax Appellate Tribunal following the decision in the case of Commissioner of Income Tax vs. English Electric Co. Of India Limited reported in 2008 -TMI - 15290 - MADRAS High Court held that excise liability not to be included in valuation of closing stock. The Assessing Officer disallowed the investment allowance claim on the ground that by notification 50 - 233(e) dated 19.03.1990, the Government abolished the scheme of investment allowance with effect from 01.04.1990. held that - the imported goods are yet to be cleared from the customs and they still remain in the bonded warehouse and the manufactured goods are also very much available within the assessee s factory and it is not cleared by payment of excise duty. - excise liability not to be included in valuation of closing stock - that increase in the liability of the assessee during the previous year on account of the change in the rate of exchange is part of the actual cost of the machinery acquired from a foreign country and the assessee is entitled to investment allowance on the additional cost - answered in favour of the assessee

Summary

Issues:
1. Valuation of closing stock - Inclusion of excise duty and custom duty liability.
2. Entitlement to investment allowance on additional cost due to change in exchange rate.

Issue 1: Valuation of closing stock - Inclusion of excise duty and custom duty liability:

The case involved a dispute regarding the inclusion of excise duty and custom duty liability in the valuation of closing stock for the assessment year 1992-93. The Assessing Officer added back the excise duty payable on finished goods, while the first appellate authority deleted the addition. The Income Tax Appellate Tribunal held that excise liability should not be included in the valuation of closing stock, following the decision in Commissioner of Income Tax vs. English Electric Co. Of India Limited. The High Court analyzed the situation where imported materials were not cleared by the assessee and were kept in a bonded warehouse, and manufactured goods were not cleared from the factory. The Court referred to the English Electric case, emphasizing that excise duty liability arises at the point of manufacture and should be considered in the valuation of stock. The Court rejected the revenue's argument that customs duty should be included in the cost of imported raw materials, distinguishing the case based on the different factual circumstances. Ultimately, the Court ruled in favor of the assessee, stating that excise duty and custom duty liability should not be included in the valuation of closing stock.

Issue 2: Entitlement to investment allowance on additional cost due to change in exchange rate:

The second issue revolved around the entitlement to investment allowance on the additional cost incurred due to a change in the exchange rate. The Assessing Officer disallowed the investment allowance claim, citing the abolition of the investment allowance scheme. However, the first appellate authority directed the Assessing Officer to allow the claim after verifying the incremental cost. The Income Tax Appellate Tribunal rejected the revenue's appeal, leading to the case being brought before the High Court. The Court referred to the Southern Asbestos case and relevant statutory provisions, holding that the increase in liability due to a change in the exchange rate constitutes part of the actual cost of machinery acquired from a foreign country. The Court concluded that the assessee was entitled to investment allowance on the additional cost. Therefore, the High Court ruled in favor of the assessee on this issue as well.

In conclusion, the High Court dismissed the revenue's appeal, ruling in favor of the assessee on both issues. The judgment emphasized the principles established in previous cases regarding the valuation of closing stock and the entitlement to investment allowance, providing a detailed analysis and legal reasoning for each issue.