2019 (5) TMI 1185 - AT - Income Tax

Addition on account of valuation of closing stock - method of valuation prescribed u/s 145A - matching principal of accountancy - assessee did not add the excise duty on closing stock of its finished goods, contending that the liability accrued, was not due on its stock of finished goods, as on 31/3/2014 - AO added the liability, holding that the assessee had not followed the method of valuation prescribed by section 145A - CIT- A deleted the addition - HELD THAT - The statutory auditors/independent auditors of the company have not qualified their report in respect of the valuation of stock of finished goods, as well as of the raw material, and they have also not qualified their opinion in respect of either the accounting policy adopted by the company in relation to the valuation of stock, or the accounting of the sales and the purchases made by the assessee company. The method prescribed by the Accounting Standard is called the exclusive method and the method prescribed in section 145A of the Act is called the inclusive method . Hence, although the method of valuation of stock followed by the assessee company is not in conformity with the prescription u/s 145A, the deviations will have no effect on the profit loss account of the relevant financial year. No excisable item of the closing stack of the assessee was removed from the factory premises till the end of the accounting year. Thus, following the net method of valuation of closing stock, excise duty has rightly been excluded from the value of closing stock of finished goods at the end of the accounting period. The assessee has consistently followed the method of accounting adopted by it. The method of valuation of closing stock is at cost or net realizable value, whichever is lower. In valuing the stock, the excise duty, etc., are not added to the purchases, sales or valuation of inventories. In view of the above, finding that the ld. CIT(A) has correctly deleted the addition wrongly made, the impugned order is confirmed and the grievance sought to be raised by the Department is rejected, being shorn of merit.

Issues Involved:
1. Deletion of addition made on account of valuation of closing stock.
2. Compliance with Section 145A of the Income-tax Act, 1961.
3. Inclusion of excise duty in the valuation of closing stock.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Valuation of Closing Stock:

The Revenue appealed against the deletion of an addition of ?2,92,11,000/- made by the Assessing Officer (AO) on account of valuation of closing stock. The AO contended that the excise duty liability accrued but not due on the stock of finished goods as of 31-03-2014 should be included in the closing stock valuation as per Section 145A of the Income-tax Act, 1961. The AO argued that the assessee's method of accounting did not disclose the true income as it did not include taxes and duties in the purchase, sales, or closing stock valuation.

2. Compliance with Section 145A of the Income-tax Act, 1961:

The AO held that the assessee failed to re-cast its accounts as required under Section 145A, which mandates the inclusion of excise duty in the closing stock valuation. The AO cited the Supreme Court judgment in CIT Vs. British India Paints Ltd. to support the stance that the method of accounting, even if consistently followed, should disclose true and proper income. The AO added the excise duty liability to the income of the assessee, as it was not paid before the due date of filing the return as required under Section 43B of the Act.

3. Inclusion of Excise Duty in the Valuation of Closing Stock:

The CIT(A) deleted the addition, observing that the excise duty liability on finished goods lying in stock had accrued but had not become due as the goods were not cleared from the factory as of 31.03.2014. The CIT(A) noted that the excise duty liability is only deductible if paid on or before the due date of filing the return under Section 43B. The CIT(A) relied on the decision of the ITAT, Lucknow Bench, which held that the excise duty liability on goods lying in stock does not crystallize until the goods are cleared from the factory.

Legal Precedents and Principles:

The judgment referenced several Supreme Court decisions, including 'CCE vs. Vazir Sultan Tobacco Co.' and 'Commissioner of Central Excise vs. Polyset Corporation,' which clarified that the excise duty liability is determined at the time of removal of goods from the factory, not at the time of manufacture. The Supreme Court in 'Wallace Flour Mills Co. Ltd. Vs. CCE' reiterated that the taxable event is the manufacture of goods, but the duty is collected at the time of removal for administrative convenience.

Section 145A and Accounting Standards:

Section 145A requires that the valuation of purchase, sale, and inventory should include the amount of tax, duty, cess, or fee incurred to bring the goods to their location and condition as of the date of valuation. The CIT(A) noted that the excise duty liability had not crystallized and was shown as a contingent liability in the Notes to Accounts. The assessee followed the 'exclusive method' of accounting, which is in line with the Accounting Standard on valuation of inventories (AS-2) issued by the Institute of Chartered Accountants of India.

Conclusion:

The ITAT upheld the CIT(A)'s decision, confirming that the addition made by the AO was incorrect. The ITAT noted that the assessee consistently followed its method of accounting, and the excise duty liability had not crystallized as the goods were not cleared from the factory. The ITAT dismissed the Revenue's appeal, finding no merit in the arguments presented. The appeal was dismissed, and the order was pronounced in the open Court on 15/03/2019.

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