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TMI Blog2010 (8) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... various statutory accounts including the audited balance-sheet and profit and loss account accompanying the annual report of the asses-see-company. A note was made in schedule 23 of the annual report stating that the company has not accounted for the liability for excise duty on finished goods as the same would become due as and when the goods are sold and cleared from factory premises. 4. The Assessing Officer did not accept the stand of the assessee and issued show-cause notice calling upon the assessee to explain why the entire amount of excise duty of Rs. 20,17,000 pertaining to finished goods as on March 31, 1997, should not be included in the value of inventory of finished goods. The assessee tendered explanation under letter dated December 30, 1999 and, vide paragraph 4 of the said letter, stated thus : "Excise duty payable on finished goods lying in stock as on March 31, 1997, works out to Rs. 20,17,000 and the said duty is payable only when goods are cleared for dispatch and sale. If duty is added on finished goods stock, there would be corresponding excise liability for payments of the same amount of Rs. 20,17,000 for which provision has to be made and debited to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ialities Limited [1994] 206 ITR (AT) 119 and also the decision of the Madras High Court in the case of CIT v. Dynavision Ltd. [2004] 267 ITR 600. 8. On behalf of the Revenue, learned counsel Shri K. M. Parikh submitted that both the judgments of the Madras High Court referred to by the Commissioner (Appeals) and the Tribunal have laid down that liability for payment of excise duty is incurred only when the process of manufacture is complete and hence, the amount of excise duty payable has to be added to the value of the closing stock for arriving at the correct valuation for income-tax purposes. Referring to the judgment of the apex court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44, it was submitted that as laid down by the apex court, the Assessing Officer was duty bound to determine what was the correct taxable income and for this purpose, emphatically relied upon the following paragraph from the judgment (page 56) : "Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-progress and finished products, is likely to result in a distorted picture of the true sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and parcel of the cost of goods manufactured without which the value put on the closing stock would not reflect the correct taxable income. Referring to the apex court decision in the case of Moriroku Ut India (P) Limited v. State of Uttar Pradesh [2008] 4 SCC 548, it was submitted that the entire scheme of the Excise Act had been considered and paragraphs 18, 19 and 23 of the said judgment made it clear that the levy was on the taxable event of manu-facture and was calculated on the value of manufactured goods. Therefore, according to the counsel, the provision of section 4 of the Excise Act is limited in application, i.e., only for the purposes of assessment as the said provision lays down the measure for levy of excise duty and cannot either shift the taxable event or accrual of liability. Reliance was also placed on the following judgments in support of the submissions made : (1) S. K. Pattanaik (Dead) through LRs. v. State of Orissa [2000] 1 SCC 413 ; (2) McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) ; and (3) Berger Paints India Ltd. v. CIT [2004] 266 ITR 99 (SC). 12. Reliance was also placed by way of reiteration on the apex court decision in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. During the course of hearing, a question arose as to from where did the Assessing Officer derive the figure of Rs. 20,17,000. Paragraph 3.1 of the order of the Commissioner (Appeals) makes it clear that the excise duty payable on the finished goods lying in the closing stock at the end of the relevant accounting period had been paid in subsequent year before the due date of filing of the return of income and that is how the amount was available considering the fact that the assessment had been framed on February 28, 2000 while the show-cause notice was issued in December, 1999, much after close of the accounting year. 16. As per the settled legal position and accepted principles of accounting, closing stock has to be valued, at the option of the assessee, at cost or mar-ket price, whichever is lower. The appellant-Revenue has apparently lost sight of the purpose of the exercise of valuing closing stock. This has been succinctly explained by the apex court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 in the following words (page 485) : "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter or practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised." 17. This principle has been reiterated by the apex court in the case of CIT v. Hindustan Zinc Ltd. [2007] 291 ITR 391. 18. Keeping in mind the aforesaid principle, the controversy at hand is required to be examined. Duty of central excise is levied on the goods manufactured, i.e., excisable goods manufactured by an assessee. It is not a cost of goods purchased. It is not a part of manufacturing cost. It can be termed as post-manufacturing cost. Therefore, unless and until it is entered on one side, as an item of cost, it cannot be taken as a component of the value of the closing stock on the other side, 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, as laid down by the apex court in the case of Chainrup Sampatram [1953] 24 ITR 481. 19. Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value ; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed . . . (3) For the purposes of this section,- . . . (c) `place of removal' means- (i) a factory or any other place or premises of production or manufacture of the excisable goods ; (ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without pay-ment of duty ; (iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory ;from where such goods are removed ; (cc) `time of removal', in respect of the excisable goods removed from the place of removal referred to in sub-clause (iii) of clause (c), shall be deemed to be the time at which such goods are cleared from the factory ; (d) `transaction value' means the price actually paid or payable for the goods, when sold, and includes in addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be correct and valid. 22. Following the judgments of this High Court in this regard may be use-fully referred to. 23. In the case of Alembic Chemical Works Co. Ltd. v. Union of India [1976] 17 GLR 452, this High Court was called upon to decide whether the stock of manufactured excisable goods was liable to excise duty in force at the date of the removal of such goods from the factory when the exemption was withdrawn. There was no dispute that the goods had been manufac-tured before March 1, 1970, and the stock of such goods was removed from the factory after March 1, 1970 resulting in recovery of duty of central excise as the exemption in question had been withdrawn by notification dated March 1, 1970. The High Court, after referring to various Supreme Court judgments, stated : ". . . that excise duty was primarily a duty on the manufacturer or producer in respect of the commodity manufactured or goods pro-duced within the country. It is an indirect duty which the manufac-turer or producer passes on to the ultimate consumer, that is, its ultimate incidence would always be on the consumer. Therefore, sub-ject always to the legislative competence of the taxing aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by `value' and how it is to be computed several unanswerable questions will arise. Value to whom ? Manufacturer, wholesaler, retailer or consumer ? Wholesale value or retail value ? Value at which place ? At which time ? Valuation as made by whom ? How ? Then the levy would become a dead letter-an impotent paper levy. It cannot be made workable unless section 4 is read conjointly as con-stituting another part of a complete code made up of sections 3 and 4. It will otherwise be a part of a zig-zag puzzle ; unless all the parts are put together it will not be in a piece and the picture of the levy will not emerge. There is therefore no escape from the conclusion that though separate numbers are given in fact the two sections are two incomplete parts of the whole charging section composed of sections 3 and 4 read in a conjoint manner as two supplementary parts of a complete code. Once this view is taken there remains no difficulty. The extent of the duty in the sense of the burden of duty is not jus-ticiable. It is not for the court to say how heavy the burden should be-it being within the power sphere of the Legislature. Since neither the Constitution nor the Act prescribes any uppe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Board of Revenue in its ruling of 1957 where the effect of the sealing of the wagons by the Railway after loading and the issuance of railway receipts was considered. The Board ruled that such goods would not be considered as lying in the stock in the factory premises. When we add to it the fact in this case that duty was paid on the goods and gate pass was also issued, there remains little to argue except to say that the wagons being in the new siding must be treated as still in the factory. Here the difficulty in the way of the Union of India is that the excise authorities themselves refused to recognise this portion as part of the factory. If the goods were put in the wagons after payment of duty, and the wagons were sealed and shunted out of the factory proper on a gate pass, not only under the ruling of the Board but also on the application of the Rules as explained here these goods became free of the enhanced duty. The recovery was accordingly erroneous. The duty collected must, there-fore, be refunded and we order accordingly. The appellant's costs must be paid by the respondent." 27. Thus, though section 3 of the Excise Act talks of levy and collection, the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer does not effectively pay from his own pocket. The duty of central excise is collected by a manufacturer from the purchaser, whether wholesaler or retailer. Hence, at the time and place of removal of excisable goods the duty is recovered by the manufacturer from the purchaser and simultaneously paid to the Revenue. The point of time of removal of excisable goods is the point of time when the liability to pay central excise duty is incurred resulting in corresponding right under law in the Excise Department to take steps to effect recovery if the liability is not discharged. Till that point of time the liability to pay duty of central excise cannot be stated to have been incurred in law as the same is not due and payable. Reference : Wallace Flour Mills Co. Ltd. v. CCE [1990] 186 ITR 440 (SC). 30. Under the Customs Act, 1962 also there are similar provisions delineating identical scheme of levy and collection. In the case of Kiran Spinning Mills v. Collector of Customs [2000] 10 SCC 228 the apex court has laid down thus after referring to section 3 of the Customs Tariff Act, 1975 (page 230) : "Section 3 sub-section (6) makes the provisions of the Customs Act appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion "accrual" as appearing in paragraph 6(b) of Part A of Accounting Standard I does not indicate anything to the contrary, i.e., contrary to the settled legal position. So far as Part B relatable to Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies is concerned, admittedly, the same would not apply as it is nobody's case that this would fall within any of the three categories, namely, either disclosure of a prior period or extraordinary items, or change in the accounting policies. 33. Under section 145(3) of the Act, it is provided that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) of section 145 of the Act, or the accounting standards as notified under sub-section (2) of section 145 of the Act, have not been regularly followed, the Assessing Officer may make an assessment in the manner provided under section 144 of the Act. Therefore, where the Assessing Officer records that he is not satisfied about the correctness or completeness of the accounts of the assessee or that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has adopted, it is possible for the Income-tax Officer to make the necessary additions or deductions so as to arrive at the correct value of the stock for the purpose of deter-mining the chargeable income. The correctness of the accounts main-tained by the assessee is not in question ; nor is the system adopted by the assessee, except in so far as the stock is valued without taking into account the production expenditure. The question, therefore, is whether or not the Assessing Officer is justified in holding that the stock-in-trade of the assessee has necessarily to be valued, for the purpose of computing the income, at 100 per cent. of the cost, and not at 84.49 per cent. as the assessee had admittedly done." 36. Thereafter, the court goes on to reiterate and enunciate the basic prin-ciples as to the applicability of the commercial accounting practice and operation of section 145 of the Act. The question to be asked is whether the system of accounting followed by the assessee excludes, for the valuation of the stock-in-trade, any cost other than the cost of raw materials so as to result in a distorted picture of true state of business for the purpose of com-puting the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by this court in the case of Voltamp Transformers Ltd. v. CIT [2008] 217 CTR (Guj) 254 ; [2010] 327 ITR 360, 366. "9. The question, therefore, which arises is `whether it is permis-sible to change the method of accounting under the guise of substi-tuting the value of closing stock'. The answer has to be in the negative. In the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC), the apex court itself has stated that the Assessing Officer is entitled to disturb the value put on the closing stock wherein the cost price adopted was not reflecting all the expenses which would go to make up the cost. In other words, there is no departure from the basic principle that it is the option of the assessee to adopt a particular method of valuation of closing stock, namely, the cost or market price, whichever is lower, as per the settled principles of commercial accounting. 10. The taxing authority is entitled to disturb such valuation by modifying the cost or the market value, whichever is adopted by the assessee, by reflecting the correct cost or the nearest market value on the basis of facts and evidence on record after recording a clear-cut finding that the value a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise one may consider the Notes on Clauses and the Memorandum Explaining the Provisions in Finance (No. 2) Bill, 1998, which read as under (relevant extract) ([1998] 231 ITR (St.) 175, 201) : Notes on clauses : "Clause 45 seeks to insert a new section 145A in the Income-tax Act relating to method of computation of opening and closing stock. It is proposed that while computing the value of the inventory as on the first and last day of the previous year, the computation accord-ing to the method of accounting regularly employed by the assessee shall be adjusted to include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. This amendment is proposed as valuation of inventory after this adjust-ment will present the correct value. This amendment will take effect retrospectively from April 1, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years." Memorandum explaining the provisions ([1998] 231 ITR (St.) 228, 251) : "Computation of value of inventory The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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