2014 (9) TMI 323 - HC - Income Tax

Addition of closing stock of finished goods - Whether the Tribunal was right in holding that no addition could be made in excess in the value of closing stock of finished goods made originally by the AO Held that - Revenue did not contend that MODVAT credit or duty in respect of the inputs has not been included in the value of the closing stock - the AO while making the addition did not go into these factors and issues both the CIT(A) and Tribunal had rightly held that as per the assessee, the excise duty was payable at the time of removal of goods and not at the time of manufacture and the on the last date of the accounting year, the goods were lying in the bonded warehouse and the duty would be payable only at the time of unbonding - the duty had not been included and did not form part of the cost as it was not claimed in the profit and loss account - There is nothing on record to show that the Revenue in the appeal preferred before the Tribunal had raised the contention that the excise duty had, in fact, become payable and had been incurred in terms of the Excise Act or the applicable rules decided against revenue.

Summary

Issues:
1. Valuation of closing stock - inclusion of excise duty
2. Interpretation of Section 145A of the Income Tax Act, 1961

Issue 1: Valuation of closing stock - inclusion of excise duty

The primary issue in this case revolved around the inclusion of excise duty in the valuation of closing stock of finished goods. The Assessing Officer had added a significant amount to the income of the assessee company due to the non-inclusion of excise duty in the closing stock, citing the decision in CIT Vs. British Paints Ltd. The respondent-assessee contended that excise duty had not been claimed as an expenditure in the profit and loss account and had not been included in the valuation of stock. The legal position required the excise duty to be treated as an expenditure in the profit and loss account to balance with the increase in the valuation of closing stock. The Commissioner of Income Tax (Appeals) and the Tribunal both ruled in favor of the respondent-assessee, emphasizing that excise duty was payable at the time of removal of goods, not at the time of manufacture, and had not been incurred or paid. The Tribunal's decision was upheld, stating that the excise duty had not become payable or incurred as per the Excise Act or applicable rules, leading to the dismissal of the appeal by the Revenue.

Issue 2: Interpretation of Section 145A of the Income Tax Act, 1961

The judgment also delved into the interpretation of Section 145A of the Income Tax Act, 1961, which mandates the adjustment of the valuation of purchase, sale, and inventory to include the amount of tax, duty, cess, or fee actually paid or incurred by the assessee. The section clarifies that the liability must be determined based on the tax, duty, cess, or fee payable to bring the goods to the place of their location and condition at the valuation date. The judgment referenced various cases and circulars to explain the application and implications of Section 145A. It highlighted that the excise duty liability crystallizes upon the clearance of goods, not at the time of manufacture, as per the Excise Act and relevant rules. The judgment emphasized the necessity of actual payment or incurring of tax, duty, cess, or fee for inclusion in the valuation under Section 145A. The Tribunal's decision aligned with this interpretation, leading to the resolution of the substantial question of law in favor of the respondent-assessee and against the appellant-Revenue.

In conclusion, the judgment clarified the legal principles concerning the valuation of closing stock and the interpretation of Section 145A of the Income Tax Act, 1961. It underscored the importance of actual incurring or payment of taxes, duties, cess, or fees for inclusion in the valuation, ultimately ruling in favor of the respondent-assessee based on the specific circumstances and legal provisions involved in the case.