Valuation of closing stock and inclusion of excise duty excise not includable until liability arises on removal; exclusion affirmed.

Valuation of closing stock cannot include excise duty because liability to pay central excise arises only on manufacture combined with removal of goods; until removal the duty is not due and payable and therefore not a cost of raw materials or finished goods. The Excise Act read with its rules creates a self-contained levy scheme operating on an ad valorem basis, requiring value ascertainment at removal; Income-tax interpretation must harmonise with excise law. Commercial accounting practice or professional guidance cannot supplant the statutory incidence of excise; accordingly exclusion of excise duty from closing stock valuation was correct.

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Issues: Whether the Tribunal was correct in law to exclude excise duty while valuing the closing stock of finished goods at the end of the accounting period.

Analysis: The valuation principle for closing stock permits valuation at cost or market price, whichever is lower, and exists to balance unsold stock against costs recorded on the other side of the accounts. Sections 3 and 4 of the Central Excise Act operate together as a self-contained code for levy and collection; section 3 alone does not make excise duty payable by the manufacturer until the value and time of removal are determinable under section 4 and applicable rules. The taxable event for collection is the point when removal/payment obligations crystallise (time/place of removal and transaction value); until then no corresponding enforceable right vests in excise authorities. Accounting entries or ICAI practice cannot create a legal liability where the statutory scheme does not fasten one. Section 145 of the Income-tax Act permits computation according to the method of accounting regularly employed, and section 145(3) permits best judgment assessments when accounts are not reliable, which was not invoked by the assessing authority here. Section 145A (inserted later with retrospective notes) applies only where tax/duty is actually paid or liability is due and payable under law; it cannot be invoked for the assessment year in question. Applying these principles, inclusion of excise duty in closing stock is not mandated where, as on the relevant date, excise liability had not legally accrued.

Conclusion: The Tribunal was justified in excluding excise duty from the valuation of closing stock; the exclusion operates in favour of the assessee.

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