Court rules excise duty not part of closing stock. Payment to director as 'profits in lieu of salary'. Revenue wins.

The court held that excise duty paid on goods in the company's depot at year-end need not be included in the closing stock of finished goods. Regarding a payment to the executive director, it was deemed 'profits in lieu of salary' under section 40A(5) of the Income-tax Act, 1961, as it was considered a special bonus for exceptional services. The court agreed with the Tribunal's decision, ruling in favor of the Revenue and against the assessee. The reference was disposed of with no order as to costs.

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Issues:
1. Inclusion of excise duty in the closing stock of finished goods.
2. Treatment of payment to executive director as 'profits in lieu of salary' under section 40A(5) of the Income-tax Act, 1961.

Analysis:

Issue 1: Inclusion of excise duty in the closing stock of finished goods
The first question raised was whether excise duty paid on goods lying at the company's depot at the end of the year should be included in the value of the closing stock of finished goods. The counsel for the assessee did not press this question as it had become academic. Therefore, Question No. 1 was returned unanswered.

Issue 2: Treatment of payment to executive director as 'profits in lieu of salary'
The second question revolved around whether a payment of Rs. 1,00,000 made to the executive director of the company should be considered as 'profits in lieu of salary' under section 40A(5) of the Income-tax Act, 1961. The company argued that the payment was for exceptional services rendered by the director and not in the nature of salary. However, the Income-tax Officer, Commissioner of Income-tax (Appeals), and the Income-tax Appellate Tribunal all held that the payment constituted 'profits in lieu of salary.' The Tribunal specifically noted that the amount was a special bonus for exceptional services. The court, after considering the submissions and the relevant provisions of the Act, agreed with the Tribunal's finding. The payment fell within the definition of 'profits in lieu of salary' as per clause (3) of section 17 of the Act. Therefore, Question No. 2 was answered in the affirmative, in favor of the Revenue and against the assessee.

In conclusion, the reference was disposed of accordingly, with no order as to costs.

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