2013 (3) TMI 332 - HC - Income Tax

Inclusion of Excise Duty in valuation of closing stock - Whether the Tribunal was right in directing inclusion when assessee as it is a small Scale Unit and is not liable to pay the Excise Duty on the first clearance upto Rs.100 lacs in the financial year? - Held that - As decided Chainrup Sampatram Versus Commissioner of Income Tax, (1953 (10) TMI 2 - SUPREME COURT) the closing stock has to be valued at the option of the assessee, at cost or market price, whichever is lower and it is wrong to assume that the valuation of the closing stock at the market rate has, for its object the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year s trading. It has been consistently laid down that the opening stock and closing stock should be maintained in the same manner either at the cost price or at the sale price. The assessee has not come out with the case that in the opening stock, the excise duty was not included. The explanation furnished by the assessee is that since in the subsequent assessment year, the turnover was less than one crore of rupees and as such, the goods were not liable to excise duty, therefore, in the closing stock of the relevant assessment year, the excise dutyhas not been added, is not legally tenable. The method of valuation of closing stock cannot be changed midway. Each year being self contained unit and taxes of a particular year being payable with reference to the income of that year, as computed in the terms of the Act. The method adopted by the assessee has been found to be such that the income cannot properly be deduced therefrom. Therefore, The Assessing Authority was right in adding the excise duty in the valuation of the closing stock - against assessee.

Summary

Issues: Valuation of closing stock including Excise Duty for a small scale unit

Valuation of Closing Stock:
The appellant, a small scale unit engaged in the business of manufacture and sale of Industrial Knives, filed an appeal challenging the addition of Excise Duty in the valuation of closing stock for Assessment Year 2001-02. The Assessing Officer had added Rs.1,84,664 for Excise Duty not shown in the closing stock of finished goods. The Commissioner of Income Tax (Appeals) allowed the appeal, but the Revenue contested it before the Tribunal. The Tribunal upheld the addition, stating that since excise duty was payable in the relevant year, it should be included in the closing stock. The appellant argued that being a small scale industry exempt from excise duty up to Rs.1.00 crore in sales, the excise duty was not required to be included in the closing stock valuation. However, the Tribunal found that the appellant failed to show that the closing stock was valued based on realizable value in previous or subsequent years.

Legal Principles and Precedents:
The High Court referred to the legal principle that closing stock should be valued at cost or market price, whichever is lower, as established by the Supreme Court in the case of Chainrup Sampatram v. CIT. The Court highlighted that the purpose of valuing closing stock is to balance the cost of unsold goods with the transactions on actual sales to determine the profit or loss realized. The appellant cited cases like Assistant Commissioner of Income Tax v. Narmada Chematur Petrochemicals Ltd. and Commissioner of Income Tax v. Dynavision Ltd. to argue against including excise duty in closing stock valuation. However, the Court noted that the appellant's argument was not applicable in this case, emphasizing the consistency required in maintaining opening and closing stock valuation.

Decision:
The High Court dismissed the appeal, upholding the Tribunal's decision to include Excise Duty in the valuation of closing stock. It stated that each year is a self-contained unit for tax purposes, and the method of valuation cannot be changed midway. The Court found that the method adopted by the appellant did not allow for proper income deduction, affirming the Assessing Authority's decision to add excise duty to the closing stock valuation. The appeal was dismissed without any order as to costs.