2013 (11) TMI 939 - AT - Income Tax

Method of accounting u/s 145A - account for purchase, sale and stock - inclusive of duty or exclusive of duty - Deduction u/s 43B - Held that - the assessee values its inventories as well as its revenue at inclusive of duties, also excluding the credits (as e.g. modvat) in relation thereto. As such, the total actual cost, as incurred, and revenue, as accrued, stands factored into the valuation of the trading parameters, as required by section 145A. However, the assessee, on being questioned in its respect, states of following exclusive method, i.e., just the opposite, claiming that the same nevertheless would have no impact on the quantum of trading income. Why did the assessee state so when its accounts state otherwise, and which in any case, being the mandate of law, has to be observed, if only in the computation of income under the Act? Further, even otherwise; it claiming the difference in method of valuation as of no moment, i.e., of both the inclusive and exclusive methods leading to the same result and, thus, inconsequential, it could demonstrate the same by working out the valuation on both - net and gross - basis. The assessee, however, and inexplicably, does not do so. The fallacy in the A.O. s working, as it would appear to us, is that while he includes the incidence of duty on the opening and closing stock of goods, he does not do so qua purchases and sales. It is only where the cost is incurred that the same would stand to form part of the operating statement, and qualify for being recognised as a part of cost of goods unsold as at the year-end, i.e., the closing stock by definition. It is this adding of the tax/duty cost to the value of the closing stock without making a corresponding allowance for the same in the trading account that would lead to a distorted picture and a profit figure inconsistent with the actual profit earned/accrued. Section 145A does not purport to yield a notional, but only actual profit, by prescribing inclusion of all cost elements, including tax and duty, where and to the extent attracted/ incurred, in the valuation process. This is, thus, akin to an accounting policy, statutorily prescribed, for uniform application by all assessees. - matter remanded back for re-computation. Deduction u/s 43B - Held that - if section 43B is considered to have an overriding effect, it would again be to no moment. This is as where the duty is paid during the relevant year (or by the due date of furnishing the return of income) the mandate of section 43B is satisfied; the same tax/duty would stand to be allowed. And where not paid by that date, it cannot be said to have been incurred due to the overriding effect of section 43B (r.w.s 43(2)). That being the case, neither would it stand to be reckoned as cost nor, consequently, liable for inclusion in the valuation of the purchases, irrespective of the method of accounting being followed. - matter remanded back for verification of facts. - Decided in favor of assessee.

Summary

Issues Involved:
1. Valuation of closing stock under Section 145A of the Income Tax Act, 1961.
2. Inclusion of custom/excise duty in the valuation of closing stock.
3. Assessee's claim of goods lying in bonded warehouses.
4. Applicability of Section 43B to the duty component of the cost.

Detailed Analysis:

1. Valuation of Closing Stock under Section 145A:
The primary issue in both appeals was the method of valuing the closing stock of inventories. The assessee valued its closing stock net of any custom or excise duty, contrary to Section 145A, which mandates that inventories be valued inclusive of any tax, duty, cess, or fee. The Assessing Officer (A.O.) made additions to the income for the assessment years 2006-07 and 2007-08 based on this discrepancy.

2. Inclusion of Custom/Excise Duty in Valuation:
The A.O. did not accept the assessee's method of excluding duties from the valuation of inventories and made additions accordingly. The assessee argued that this method should not affect its income. However, Section 145A, being a non obstante clause, requires that all such duties be included in the valuation. The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the assessee's appeal, directing the A.O. to apply Section 145A uniformly to opening stock, purchases, and sales, supported by the decision in CIT v. Mahalaxmi Glass Works (P.) Ltd.

3. Assessee's Claim of Goods in Bonded Warehouses:
The assessee claimed that part of the closing stock was lying in bonded warehouses, pending clearance, and thus no duty was incurred. This claim was not substantiated with evidence during the assessment proceedings. The CIT(A) called for a remand report, and the A.O. reported that the assessee failed to provide the necessary details. The Tribunal found the assessee's claim untenable, noting inconsistencies and the lack of evidence in the balance sheets. The Tribunal emphasized that the duty could only be part of the cost if it was actually incurred, which was not demonstrated by the assessee.

4. Applicability of Section 43B:
The Tribunal clarified that Section 43B would apply only if the duty or tax was recovered or recoverable from the customer and included in the sales. Since the duty was considered part of the purchase cost under Section 145A, it was not subject to disallowance under Section 43B. The Tribunal found no conflict between Sections 145A and 43B, as the latter ensures that deductions for statutory payments are allowed only upon actual payment. The Tribunal directed the A.O. to verify the valuation of closing stock in terms of Section 145A and ensure the correct application of Section 43B.

Conclusion:
The Tribunal allowed the assessee's appeals for statistical purposes, directing the A.O. to re-examine the valuation of closing stock, considering the principles of Section 145A and the applicability of Section 43B. The Tribunal emphasized the need for consistency in the valuation method and the importance of substantiating claims with proper evidence. The decision in the case of Amforge Industries Ltd. was deemed not relevant to the present case.