2018 (7) TMI 1416 - HC - Income Tax

Valuation of closing stock of sugar and molasses - Excise duty payable addition in the value of closing stock - Held that - The assessee was adopting the mercantile system of accounting. The true value of closing stock would include the amount of any tax duty, cess or having fully paid, payable or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation which is evident from the provisions of Section 145A - the provisions of Section 145A of the Act were introduced by the Finance Act No.2 of 1988 w.e.f. 01.04.1999 which are infact clarificatory in nature and, therefore, it would be applicable even for Assessment Years prior to Assessment Year 1999-2000. Thus, provisions of Section 145-A would be applicable for the Assessment Year in question. Excise duty becomes payable, the moment excisable goods are manufactured as the taxable event under Section 3 of the Central Excise Act is manufacturing or production of the excisable goods. It would be immaterial whether the assessee has paid the excise duty or not for the purposes of arriving at the correct valuation of the closing stock. Even if the excise duty has not been paid and the assessee has postponed its payment, the valuation of the goods will not get affected. Accounting system of the assessee would be of no consequence to arrive at the true and correct valuation of the closing stock. - Decided in favour of the Revenue

Summary

Issues Involved:
1. Inclusion of excise duty in the value of closing stock.
2. Applicability of Section 145-A of the Income Tax Act for earlier assessment years.
3. Correctness of the Tribunal's decision regarding excise duty and closing stock valuation.

Issue-wise Detailed Analysis:

1. Inclusion of Excise Duty in the Value of Closing Stock:
The primary issue was whether the excise duty payable should be included in the value of the closing stock. The respondent, a limited company engaged in the manufacture and sale of sugar, did not include the Central Excise Duty in the valuation of its closing stock. The Assessing Officer noticed this omission during the assessment proceedings and issued a notice under Section 154 of the Income Tax Act. Subsequently, the assessment was finalized with an addition of ?2,59,82,452 for excise duty not included in the closing stock value. The CIT (Appeals)-I, Agra, upheld the inclusion of excise duty as part of the cost of finished goods, directing the Assessing Officer to recompute the value of the closing stock accordingly. However, the Tribunal later ruled that excise duty payable on goods in a bonded warehouse should not be added to the closing stock value, referencing the Madras High Court decision in CIT vs. English Electric Co. of India Ltd.

2. Applicability of Section 145-A of the Income Tax Act for Earlier Assessment Years:
The CIT (Appeals)-I, Agra, held that Section 145-A of the Act, introduced from 01.04.1999, was clarificatory and applicable to earlier assessment years, including the assessment year in question (1997-1998). This section mandates the inclusion of any tax, duty, cess, or fee paid or payable in the valuation of closing stock. The Tribunal's decision did not align with this interpretation, leading to the Revenue's appeal.

3. Correctness of the Tribunal's Decision Regarding Excise Duty and Closing Stock Valuation:
The Tribunal's decision was challenged on the grounds that it failed to appreciate that excise duty becomes payable upon the manufacture of goods, irrespective of their sale or the ownership status. The Revenue argued that the taxable event for excise duty is the manufacture of excisable goods, as clarified in the Supreme Court's judgment in Commissioner of Central Excise, Mumbai vs. Fiat India Pvt. Ltd. The Revenue also cited the Supreme Court's judgment in Commissioner of Income Tax vs. British Paints India Ltd., emphasizing the duty of the Assessing Officer to determine the correct taxable income by including all relevant costs in the valuation of closing stock.

Judgment:
The High Court considered the submissions and concluded that the true value of closing stock must include any tax, duty, cess, or fee paid or payable by the assessee. The provisions of Section 145-A of the Act, being clarificatory in nature, were applicable to the assessment year in question. The court held that excise duty becomes payable upon the manufacture of goods, and its payment status does not affect the valuation of closing stock. Consequently, the High Court answered the questions in favor of the Revenue, set aside the Tribunal's order, and allowed the appeal.