2012 (9) TMI 265 - SC - Income Tax

Undervaluation of closing stock - non inclusion of excise duty into computation - Held that - As per Section 3 of the Central Excise Act, 1944 the levy of excise duty is on the manufacture of the finished product the same is quantified and collected on the value (i.e. selling price) and that the valuation of unsold stock at the close of the accounting period determines the trading results of that period and cannot be regarded as source of profits. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods - addition to the income on the ground of undervaluation of the closing stock was wrong - in favour of assessee.

Summary

Issues Involved:
Assessment of closing stock undervaluation for a private limited company engaged in the manufacture and sale of television sets for the Assessment Year 1987-88.

Analysis:
The Supreme Court examined the issue of alleged undervaluation of closing stock by the department for a private limited company involved in the manufacture and sale of television sets. The Assessing Officer (AO) added a sum of Rs. 16,39,000 to the assessee's income based on the exclusion of excise duty from the closing stock valuation. The key question revolved around whether the closing stock was undervalued by the stated amount.

The Court noted that the assessee consistently followed the valuation method of "cost or market price whichever is lower" for the closing stock. It was highlighted that the AO revalued the closing stock without adjusting the opening stock, as admitted before the Commissioner of Income Tax (CIT-A). Additionally, the levy of excise duty under the Central Excise Act, 1944, is based on the value or selling price, not the manufacture of the finished product.

Referring to precedents like the case of Chainrup Sampatram vs. CIT and CIT vs. Hindustan Zinc Ltd., the Court emphasized that valuing unsold stock at the end of the accounting period is crucial for determining trading results and does not constitute a source of profits. The purpose of crediting the value of unsold stock is to balance the cost of goods purchased, reflecting the actual profit or loss realized from trading activities during the year.

In conclusion, the Court held that the addition of Rs. 16,39,000 to the assessee's income due to alleged undervaluation of closing stock was incorrect. The order of the CIT(A) upholding the assessee's position was affirmed, leading to the dismissal of the civil appeal filed by the department with no costs imposed.