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TMI Blog1987 (4) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ,90,731 towards excise duty. At the end of the accounting year the assessee had a closing stock valued at Rs. 4,36,41,459. In this valuation was included customs duty amounting to Rs. 1,24,31,024 in respect of imported components included in the closing stock. On that basis the Trading and Profit and Loss Account prepared by the assessee showed a net profit of Rs. 57,45,485 and the assessee filed a return showing an income of Rs. 27,34,500. 4. Section 43B of the Income-tax Act, 1961 was brought on the statute book by the Finance Act, 1983 w.e.f.1-4-1984. The relevant portion is as below: "43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 024 and Rs. 22,74,844 in respect of customs duty and excise duty respectively describing them as deductions under section 43B. The Commissioner of Income-tax took note of the assessment order and prejudicial to the revenue. The learned Commissioner observed that the assessee had been following a consistent method of stock valuation under which the element of excise and custom duties was included in the value of the closing stock and that section 43B did not permit the revision of the value of closing stock by deducting therefrom the element of the aforesaid duties. According to him, when the actual amounts paid by the assessee had already been debited in the Trading and Profit Loss Account, the whole of the said amounts stood allowed and the business profits were assessable under section 28 and were to be computed under section 145 in accordance with the method of accounting regularly employed by the assessee according to which the valuation of closing stock included the aforesaid duties proportionate to the extent of goods forming part of the closing stock. In his view, therefore, the deduction of the aforesaid amounts was erroneous and, therefore, he passed the order as aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not actually discharge. In the memorandum explaining the purposes behind the enactment of section 43, it was stated as under: "Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of contribution to any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him." The argument of the learned counsel for the assessee was that when a part of the excise duty or customs duty paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh system of accounting. The assessee debited the cost of acquiring distribution rights of certain films but did not take into account the value of those rights as closing stock. The income-tax Officer added the value of closing stock for determining the assessee's income and this was upheld by the Hon'ble Supreme Court. The Hon'ble Supreme Court observed,' Whatever method of book keeping is adopted in the case of a trading venture, for computing the true profits of the year, the stock-in-trade must be taken into account. If the value of the stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and at the end of the year.' In the case before us the assessee had valued its closing stock according to ordinary principles of commercial accounting and practice and also according to its sown system of accounting coming from several years past. We find nothing either in the plain words of section 43B or in the explanatory memorandum to justify the view that with the enactment of section 43B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear from the following observations: "At the time of hearing, Mr. J. P. Shah, the learned advocate appearing for the petitioner, submits that any sum payable by an assessee by way of tax or duty under any law for the time being in force is allowable and as per the mercantile method of accounting, it would be allowable at the time when it becomes due and/or the assessee would be liable to pay the same and not on the actual payment of tax or duty, but as per the newly added provision of section 43B of the Act, it would be allowable only in computing the income referred to in section 28 of the previous year in which the sum is actually paid by the assessee irrespective of the previous year in which the liability to pay such tax was incurred by the assessee according to the method of accounting regularly employed. He, therefore, submits that the customs duty being paid in the year 1983 on the raw material imported during the year, though the raw material is consumed in the year 1984, the assessee would be entitled to get an allowable deduction for the assessment year 1984-85 (accounting year ending on December 31, 1983) in computing the taxable income of the petitioner-assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et of Mr. Shelat's argument is that the expenditure on paying import and excise duty in respect of the closing stock does not pertain to the goods sold in the year. This argument runs counter to the mercantile method of accounting as well as to the specific language of section 43B of the Act. It is not disputed that the said goods in the closing stock were either imported or manufactured in the accounting year 1983 and as per the principles of the mercantile method of accounting, the expenditure incurred by way of import duty as well as excise duty would be a permissible deduction in the year 1983, and particularly when the payment thereof is made under section 43B of the Act. Under the circumstances, we do not find any merit in any of the contentions raised by Mr. Shelat, and for the same reasons we accept the contentions raised by Mr. J. P. Shah appearing for the petitioner assessee." The above observations will show that somehow the Hon'ble High Court got the impression that the ITO wanted to disallow that portion of the customs and excise duties which pertain to the goods in the closing stock and the Hon'ble High Court held that in view of section 43B, this could not be done ..... X X X X Extracts X X X X X X X X Extracts X X X X
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