2010 (8) TMI 263 - HC - Income Tax

Excise duty excluded from closing stock valuation since liability arises only on removal, not at year-end valuation

HC held that excise duty need not be included in valuation of closing stock because liability to pay arises only on removal of goods, when value is ... Valuation - Excise duty - method of accounting regularly employed so as to go in the profit and loss account at the end of the accounting period - Liability only at time of removal of goods - applicability of the commercial accounting practice and operation of section 145 - Whether the Tribunal was right in law to exclude the excise duty at the time of valuation of closing stock of finished goods at the end of the accounting period ? HELD THAT:- Mere production or manufacture by itself would not be sufficient. Though there might be levy under section 3 of the Excise Act, yet neither the rate nor the value would be determinable till the point of time of removal of the excisable goods from the factory premises and hence the scheme itself indicates that so far as an assessee is concerned, he incurs liability to pay excise duty only upon both the events taking place, namely, manufacture of excisable goods and removal of excisable goods. This position has to necessarily be adopted considering that the duty of central excise is levied and collected on an ad valorem basis. In other words, unless and until the value is known, the levy and the collection would not be correct and valid. To read the provisions of section 3 of the Excise Act to be a complete provision for the purposes of charging duty of central excise would not be a fully correct proposition of law. Under a taxing statute when a charge is fastened, the purpose is to collect tax. A levy is for the purposes of imposing a tax or a duty, by whatever name called, and for the purposes of collection of such impost. A State cannot be interested in a levy which does not result in inflow of revenue to the Exchequer. The position in law is, therefore, that for the purposes of levy and collection of duty of central excise, the provisions of the Excise Act read with the rules thereunder evolve a self-contained scheme upon a conjoint reading of sections 3 and 4 of the Excise Act with rules 9 and 9A of the Central Excise Rules. Then, for the purposes of the Act, namely, the Income-tax Act, the position in law cannot be different. An interpretation of a particular statute should not ordinarily be in conflict with another statute unless and until specifically provided so by the other statute. The Act does not provide for any contrary interpretation, i.e., what is contrary to the position prevailing under the excise law. Excise duty is admittedly an indirect levy. The 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. The emphasis is on the phrase 'chargeable income'. As already noted, if the duty of central excise is not due and pay-able, it cannot be termed to be a cost in relation to the raw materials. Such duty also cannot be termed to be a cost qua the finished goods appearing in the closing stock because admittedly, on the said day (presumption being that such goods are excisable goods) no excise duty is due and pay-able at the said stage and for the purposes of the Excise Act, the levy is not complete unless and until sections 3 and 4 of the Excise Act operate together. If for the purpose of the said statute, which is the only statute under which duty of central excise can be levied and collected, the charge is not fastened in law, it cannot be stated that for the purpose of computing chargeable income such a charge gets fastened qua the finished goods appearing as part of closing stock. At the cost of repetition, it is required to be stated that the normal rule of interpretation should be to harmoniously read different statutes so as to ensure that there is no conflict in relation to the same transaction. This is subject to the exception that a specific provision appears in one of the statutes to indicate to the contrary. It is not possible to find any such specific provision either under the Excise Act or the Income-tax Act. Hence, without there being any dispute as regards the general propositions laid down in the judgment of British Paints India Ltd. [1990 (12) TMI 2 - SUPREME COURT] suffice it to state that in the facts of the present case, even on application of the said general principles, the addition sought to be made by the Revenue cannot be sustained. The position in law is well settled that making of an entry or absence of an entry cannot determine rights and liabilities of parties. In other words, if the law does not lead to incurring of a liability, or does not lead to a corresponding right to insist for discharging such a liability any accounting practice (even if suggested by the Institute of Chartered Accountants of India) cannot lay down anything to the contrary. Accordingly, it is held that the Tribunal was justified in law in excluding the excise duty at the time of valuation of the closing stock of finished goods at the end of the accounting period in the light of what is stated hereinbefore. The appeal is accordingly dismissed Issues Involved:1. Whether the Income-tax Appellate Tribunal was right in law to exclude the excise duty at the time of valuation of closing stock of finished goods at the end of the accounting periodRs.Detailed Analysis:1. Facts and Background:The assessment year in question is 1997-98, with the relevant accounting period ending on March 31, 1997. The respondent-assessee declared a total loss of Rs. 14,51,91,613 and did not account for the liability for excise duty on finished goods, stating that it would become due when the goods are sold and cleared from the factory premises. The Assessing Officer disagreed and issued a show-cause notice to include the excise duty of Rs. 20,17,000 in the inventory value of finished goods.2. Assessing Officer's Stand:The Assessing Officer held that excise duty liability had already accrued as the goods were manufactured and ready for dispatch, and thus, it should be included in the closing stock value. He referenced the Supreme Court judgment in CIT v. British Paints India Ltd. and accounting practices of the Institute of Chartered Accountants of India, stating that excise duty is part of manufacturing expenses and integral for inventory valuation. The officer also mentioned that no deduction under section 43B of the Income-tax Act could be allowed as no provision was made nor excise duty paid.3. Commissioner (Appeals) and Tribunal's Decisions:The Commissioner (Appeals) allowed the assessee's appeal, following the Madras High Court judgment in CIT v. English Electric Co. of India Ltd. The Tribunal upheld this decision, referring to section 145A of the Act and judgments of the Special Bench of the Tribunal and the Madras High Court, stating that excise duty prior to the assessment year 1999-2000 cannot be added to the closing stock valuation.4. Revenue's Argument:The Revenue argued that excise duty liability arises upon production or manufacture of goods and should be included in the closing stock value to reflect the correct taxable income. They relied on the Supreme Court judgment in CIT v. British Paints India Ltd. and other cases, asserting that the Assessing Officer must determine the correct taxable income.5. Respondent-Assessee's Argument:The respondent-assessees argued that excise duty liability is incurred only upon removal of goods from the factory, as per section 4 of the Central Excise Act. They cited the Supreme Court judgment in Assistant Collector of Central Excise, Calcutta v. National Tobacco Co. of India Ltd., distinguishing between 'levy' and 'collection.'6. Legal Interpretation and Court's Analysis:The court analyzed sections 3 and 4 of the Central Excise Act, concluding that excise duty liability is incurred only upon removal of goods from the factory, not merely on manufacture. The court emphasized that the purpose of valuing closing stock is to balance the cost of goods entered on the other side of the account, and excise duty is a post-manufacturing cost, not a manufacturing expense.7. Accounting Standards and Section 145 of the Income-tax Act:The court noted that section 145(1) of the Income-tax Act requires profits to be computed according to the method of accounting regularly employed by the assessee. The Assessing Officer did not take recourse to section 145(3) for a best judgment assessment. The court found that the assessee's method did not distort the true profits and gains of the business.8. Judgment:The court held that the Tribunal was justified in excluding excise duty at the time of valuation of closing stock of finished goods, as the duty was not due and payable at that stage. The court emphasized that adding excise duty to the closing stock would result in a revenue-neutral situation over time and would not reflect the correct cost or market value.Conclusion:The appeal was dismissed, and the Tribunal's decision to exclude excise duty from the closing stock valuation was upheld, with no order as to costs.