2016 (7) TMI 31 - HC - Income Tax

Revision u/s 263 - treatment to be given in the opening stock of the subsequent accounting year when the deduction is made under Section 43B - Held that - There is no dispute on the point that the amount of import duty and excise duty are allowable deduction. What is dispute on behalf of the respondent is that the amount of customs and excise duty on the value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending on December 31,1983), though actually paid in the year 1983, because the assessment of the closing stock of the year 1983 will be in the subsequent previous year which would be in 1984 and the relevant assessment year would be 1985-86. It is true that at the time of making the assessment for the assessment year 1985-86, the respondent will have to be careful in seeing that the petitioner does not claim further deduction for the sum for which deduction is already given. In this case, it is not the contention of the respondent that any sum payable under clause(a) of section 43B of the Act was at any time claimed by way of deduction in any previous year prior to 1983. In fact, the raw material were imported and the goods were manufactured in the year 1983, and they were cleared also in the year 1983. Therefore, their liability accrued in the year 1983, and they also paid the sum in the year 1983. In that view of the matter, the Explanation to section 43B of the Act is also not attracted in the present case. The first limb of argument that Section 145A was not on the statute book at the relevant point of time and therefore this Court may take a different view by not holding that the matter is covered by the decision of the Apex Court in case of Berger Paints 2004 (2) TMI 4 - SUPREME Court may require consideration of the effect of Section 43B vis- -vis Section 145A and to find out as to whether by insertion of Section 145A on the statute book, the effect of the allowable deduction under Section 43B is diluted or nullified or not. The language of Section 43B begins with the word Notwithstanding anything contained in any other provisions of this Act meaning thereby a non- abstente clause to have an overriding effect over any other provisions of the Act. The resultant situation would be that the deduction so claimed and made permissible by the Tribunal in the impugned order is covered by the above referred decision of Gujarat High Court in case of Lakhanpal case read with the further decision of the Apex Court in case of Berger Paints Ltd. (1986 (3) TMI 42 - GUJARAT High Court). Hence, on the aspects of allowable deduction, the matter was already covered by in any case the decision of the Apex Court in case of Berger Paints India Ltd. (supra). The said legal position was prevailing at the time when the assessing officer allowed the deduction. Hence, it could not be said that the view taken by the assessing officer was erroneous in law. In any case, the treatment is to be given in the opening stock of the subsequent accounting year when the deduction is made under Section 43B of the Act, hence it could also not be said as prejudicial to the interest of Revenue. Under the circumstances, we find that the view taken by the Tribunal holding that the Commissioner was not justified in passing the order under Section 263 of the Act cannot be said as illegal but, can rather be said to be in conformity with the law laid down by the Apex Court in case of Berger Paints India Ltd., (supra). - Decided in favour of assessee

Issues Involved:
1. Whether the Tribunal was correct in holding that the Commissioner was not justified in passing the order under Section 263 of the Act on the ground that the order of assessment was not erroneous and prejudicial to the interest of the revenue.
2. Whether the Tribunal was correct in holding that the excise duty included in the valuation of closing stock of unsold finished goods as per the provisions of Section 145A of the Act shall be reduced from the income computed under the head ‘profits and gains of business or profession’ without noticing the fact that such excise duty was debited to the profit and loss account and claimed as an expenditure.

Issue-wise Detailed Analysis:

Issue 1: Justification of the Commissioner's Order under Section 263

The Tribunal held that the Commissioner was not justified in passing the order under Section 263 of the Act, as the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Assessing Officer (AO) had adopted one of the permissible views in allowing the deduction of excise duty. The Tribunal noted that for Section 263 to be invoked, the twin conditions of the order being erroneous and prejudicial to the interest of revenue must be satisfied. The Tribunal found that the AO's view was permissible in law, and hence, the order could not be considered erroneous.

The Tribunal referenced the Special Bench decision in DCIT v. Glaxo Smithkline Consumer Healthcare Ltd., which clarified that the expression "a deduction otherwise allowable" under Section 43B includes statutory liabilities related to the business, such as duties and taxes. The Tribunal also cited the Mumbai Tribunal in Hawkins Cookers Ltd. v. ITO, which held that adjustments in the closing stock should also be reflected in the opening stock to avoid double taxation. The Tribunal concluded that the AO's view was permissible and the CIT's direction to add ?82,35,034/- under Section 43B was unjustified.

Issue 2: Adjustment of Excise Duty in Closing Stock under Section 145A

The Tribunal held that the excise duty included in the valuation of the closing stock should be adjusted in the income computation under the head ‘profits and gains of business or profession’. The Tribunal relied on the Bombay High Court decision in CIT v. Mahalaxmi Glass, which established that adjustments in the closing stock must be mirrored in the opening stock to maintain consistency in accounting.

The Tribunal observed that the assessee had paid the excise duty before the due date, making it allowable under Section 43B. The Tribunal emphasized that the AO's adjustment was permissible and consistent with legal precedents, including the Supreme Court decision in Berger Paints India Ltd. v. CIT, which upheld the deduction of excise duty paid in the accounting year irrespective of its inclusion in the closing stock valuation.

Legal Provisions and Precedents:

Section 43B mandates that certain deductions, including taxes and duties, are allowable only upon actual payment, overriding other provisions of the Act. The Tribunal noted that the non-obstante clause in Section 43B gives it overriding effect over other provisions, including Section 145A.

Section 145A requires the inclusion of taxes and duties in the valuation of inventory. However, the Tribunal held that Section 43B’s non-obstante clause ensures that deductions are allowable upon actual payment, irrespective of Section 145A’s adjustments.

Relevant Case Laws:
- Lakhanpal National Ltd. v. ITO: Held that deductions for taxes and duties paid are permissible under Section 43B, even if included in the closing stock valuation.
- Berger Paints India Ltd. v. CIT: Affirmed that the entire amount of excise duty/customs duty paid is deductible in the year of payment, irrespective of its inclusion in the closing stock.
- CIT v. Mahalaxmi Glass: Established that adjustments in closing stock must be reflected in the opening stock to avoid double taxation.

Conclusion:

The High Court upheld the Tribunal's decision, affirming that the AO's view was legally permissible and not erroneous. The Tribunal's decision to allow the deduction under Section 43B and adjust the excise duty in the closing stock was consistent with established legal principles and precedents. The appeal was disposed of in favor of the assessee, with no order as to costs.

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