2006 (7) TMI 240 - AT - Income Tax

Summary

Issues Involved:
1. Valuation of closing stock.
2. Inclusion of excise duty in the valuation of closing stock.
3. Powers of the Commissioner of Income Tax (CIT) under section 263 of the Income-tax Act, 1961.
4. Applicability of section 145A of the Income-tax Act, 1961.
5. Interpretation and application of relevant case laws and statutory provisions.

Issue-wise Detailed Analysis:

1. Valuation of Closing Stock:

The CIT noticed that the Assessing Officer (AO) did not examine the issue of valuation of closing stock and passed an order without including excise duty paid by the assessee on the finished stock of biris, which was deemed erroneous and prejudicial to the interest of revenue. The CIT's order was based on the observation that the excise duty component is a direct manufacturing expense and must be included in the valuation of closing stock.

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

The assessee argued that excise duty was not included in the valuation of closing stock for goods lying in the bounded premises as the duty had not been actually incurred. The assessee relied on the decision of ITAT, Allahabad Bench, which stated that excise duty on finished goods lying in the bounded premises is not required to be added while valuing the closing stock. The CIT, however, did not accept this argument, citing the decision of the Supreme Court in McDowell & Co. Ltd. v. CTO and ITAT, Bombay Bench in Godfrey Philips India Ltd. v. ITO, holding that excise duty is payable at the point of manufacture completion.

3. Powers of the Commissioner of Income Tax (CIT) under Section 263 of the Income-tax Act, 1961:

The CIT exercised powers under section 263, setting aside the AO's assessment order on the limited issue of valuation of stock to be framed afresh as per law. The CIT's directive was to include excise duty payable on the finished goods lying in the bounded premises in the valuation of the closing stock. The CIT's power to set aside the assessment for carrying out an inquiry was supported by various judicial decisions, including Mannulal Matadeen v. CIT, Addl. CIT v. Mukur Corpn., and others.

4. Applicability of Section 145A of the Income-tax Act, 1961:

The assessee contended that section 145A requires the inclusion of excise duty actually paid or incurred in the valuation of closing stock, not the duty payable or liable to be paid. The assessee had included the excise duty actually paid while valuing the closing stock, and this position was accepted by the AO during reassessment.

5. Interpretation and Application of Relevant Case Laws and Statutory Provisions:

The CIT's reliance on the Supreme Court decision in British Paints India Ltd. was challenged by the assessee, stating that the case dealt with overhead charges, not excise duty. Similarly, the decision in McDowell & Co. Ltd. was based on a different context involving commercial tax and turnover. The assessee also referred to section 4 and rule 49 of the Central Excise Act, which state that excise duty is chargeable only on the removal of goods from the factory or approved place of storage. The Tribunal concluded that excise duty is not payable on goods kept in a bounded warehouse until removed, and thus, it should not be included in the valuation of closing stock.

Conclusion:

The Tribunal held that the CIT was not justified in setting aside the AO's order, as there was no error in the AO's assessment regarding the non-inclusion of excise duty for goods in the bounded warehouse. The Tribunal cancelled the CIT's order, allowing the assessee's appeal.