2010 (8) TMI 263 - HC - Income Tax

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; ... Valuation of closing stock of finished goods - excise duty as post-manufacturing cost (not part of manufacturing cost) - sections 3 and 4 of the Central Excise Act read conjointly as the charging code - excise liability crystallises on removal/point of removal - method of accounting regularly employed / mercantile system of accounting - section 145A - inclusion only if tax/duty paid or liability incurredValuation of closing stock of finished goods - excise duty as post-manufacturing cost (not part of manufacturing cost) - sections 3 and 4 of the Central Excise Act read conjointly as the charging code - excise liability crystallises on removal/point of removal - method of accounting regularly employed / mercantile system of accounting - Whether excise duty must be included in the valuation of closing stock of finished goods as at the end of the accounting period - HELD THAT: - The court held that excise duty is not a component of manufacturing cost and cannot be treated as part of the value of closing stock unless, as a matter of law, the excise liability has crystallised. Sections 3 and 4 of the Central Excise Act must be read together: section 3 indicates levy but section 4 (and the rules thereunder) determine valuation and the point of collection. Under the scheme the liability to pay excise arises on removal (or when duty is payable under the rules), and until the value and rate can be determined at that point the duty is not 'due and payable' in law. Consequently, where the assessee, following the mercantile system, has not treated excise as a cost or claimed a provision, and where the duty was not due and payable as at the cut-off date, the Assessing Officer was not entitled to add excise duty to the closing stock valuation. The court distinguished and limited reliance on British Paints to its factual context and emphasised that an assessing officer may disturb a valuation only if the adopted method does not reflect chargeable income; that was not shown here. The court further noted that accounting practice cannot override the legal incidence and timing of liability under the Excise Act. [Paras 21, 22, 26, 27, 33]Tribunal rightly excluded excise duty from valuation of closing stock of finished goods as at the accounting date; the addition by Revenue cannot be sustainedSection 145A - inclusion only if tax/duty paid or liability incurred - retrospective insertion of section 145A not operative for assessment year 1997-98 - Whether section 145A (inserted with effect from April 1, 1999) applies to the assessment year 1997-98 or otherwise mandates inclusion of excise duty in closing stock valuation for the year in question - HELD THAT: - The court observed that section 145A was inserted by the Finance (No. 2) Act, 1998 with effect from April 1, 1999 and therefore cannot be invoked in relation to assessment year 1997-98. Even on the text and the legislative notes, the provision contemplates inclusion only where the tax/duty has been paid or a liability has been incurred and is due and payable under the law in force; thus, had section 145A been applicable it would still require that the duty be actually paid or legally due. Accordingly, section 145A does not advance Revenue's case for the period in issue. [Paras 30, 39]Section 145A is not applicable to assessment year 1997-98; in any event it requires duty to be paid or liability incurred before inclusion in inventory valuationFinal Conclusion: The High Court dismissed the Revenue's appeal, holding that for the accounting period ended March 31, 1997 (Assessment Year 1997-98) excise duty was not to be included in the valuation of closing stock of finished goods because the excise liability had not crystallised in law; section 145A (effective from April 1, 1999) does not assist Revenue for this assessment year and, even on its terms, requires duty paid or liability incurred. 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.