2001 (2) TMI 312 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of excise duty liability in respect of closing stock of finished goods.
2. Accrual of excise duty liability.
3. Valuation of closing stock and inclusion of excise duty.
4. Application of section 43B of the Income Tax Act.

Detailed Analysis:

1. Deduction of Excise Duty Liability in Respect of Closing Stock of Finished Goods:
The main issue contested relates to the deduction of excise duty liability for closing stock of finished goods. The assessee, engaged in manufacturing cutting tools, did not include excise duty in the valuation of closing stock but made a provision for it and claimed it as a deduction under section 37 read with section 43B. The Assessing Officer (AO) disallowed the claim, arguing that excise duty liability accrues only upon the removal of goods from the factory premises, not on their manufacture. The CIT(A) upheld this view, leading to the appeal before the Tribunal.

2. Accrual of Excise Duty Liability:
The assessee argued that under section 3 of the Central Excise and Salt Act, 1944, the taxable event is the manufacture or production of goods, and liability accrues at that point, even though collection is postponed to the date of removal as per Rule 9 of the Central Excise Rules, 1944. The AO, however, contended that liability arises only upon removal of goods, supported by various Supreme Court decisions. The Tribunal, after considering the submissions and relevant case law, held that the levy of excise duty is on the manufacture or production of goods, and liability accrues at that point, though its collection is postponed to the date of removal. The Tribunal relied on the Supreme Court's decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, which established that liability accrues at the point of the taxable event, even if it is discharged later.

3. Valuation of Closing Stock and Inclusion of Excise Duty:
The AO argued that if the provision for excise duty is considered an expenditure, it should be included in the cost of finished goods for valuing the closing stock. The Tribunal, however, held that excise duty is a post-manufacturing expense and should not be added to the cost of closing stock. The Supreme Court's judgment in Saraswati Industrial Syndicate Ltd. v. Union of India was cited to support this view, affirming that the assessee is entitled to value the closing stock at cost or market value, whichever is lower, without including excise duty liability.

4. Application of Section 43B of the Income Tax Act:
The Tribunal noted that since the excise duty was actually paid before the date of filing the return, the claim of the assessee was not affected by the provisions of section 43B. The Tribunal concluded that the assessee, following the mercantile method of accounting and having made the necessary provision in the books, was entitled to the deduction of excise duty liability from the profits of the year under consideration.

Conclusion:
The Tribunal set aside the order of the CIT(A) on the main issue and deleted the addition confirmed by him. The claim of the assessee for deduction of excise duty liability in respect of closing stock of finished goods was allowed, recognizing that the liability accrues at the point of manufacture and can be deducted even if paid later, provided it meets the conditions under section 43B. Other minor issues raised in the appeal were not elaborated upon as they were covered in favor of either the assessee or the department.