2010 (4) TMI 1198 - HC - Income Tax

Court rules excise duty should be excluded from closing stock valuation as it distorts true business state.

Assistant Commissioner of Income-tax Versus Narmada Chematur Petrochemicals Ltd.

Assistant Commissioner of Income-tax Versus Narmada Chematur Petrochemicals Ltd. - TMI Issues Involved:1. 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.Analysis of Judgment:1. Tribunal's Exclusion of Excise Duty in Valuation of Closing Stock:The High Court admitted the appeal by formulating the substantial question of law: 'Whether on the facts and in the circumstances of the case, 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 periodRs.'The assessment year in question was 1997-98. The respondent assessee, in their annual report, noted that they had not accounted for the liability for excise duty on finished goods, stating it would become due upon the sale and clearance from the factory premises.The Assessing Officer (AO) issued a show-cause notice questioning why the excise duty of Rs. 20,17,000 on finished goods should not be included in the inventory value. The assessee argued that adding the duty would necessitate a corresponding liability provision, ultimately having no impact on profitability.The AO held that since the goods were manufactured and ready for dispatch, the excise duty liability had accrued and should be part of the closing stock valuation, referencing the Supreme Court judgment in CIT v. British Paints India Ltd. and ICAI accounting practices. The AO added the excise duty amount to the returned income of the assessee.2. CIT(A) and Tribunal's Decisions:The CIT(A) allowed the appeal, following the Madras High Court judgment in CIT v. English Electric Co. of India Ltd. The Revenue's appeal to the Tribunal failed, with the Tribunal referring to section 145A of the Act and concluding that tax, duty, cess, or fee prior to assessment year 1999-2000 could not be added to the closing stock valuation. The Tribunal also cited decisions in ITO v. Food Specialities Ltd. and CIT v. Dynavision Ltd.3. Revenue's Arguments:The Revenue argued that excise duty liability arises upon the manufacture of goods, and thus must be included in the closing stock valuation to reflect the correct taxable income. They emphasized the Supreme Court's stance in British Paints India Ltd. that excluding such costs results in a distorted picture of the business's true state.4. Respondent Assessee's Arguments:The respondent assessees contended that excise duty liability does not arise until the removal of goods from the factory, referencing section 4 of the Excise Act. They argued that no liability is incurred until the transaction value is determined, citing the judgment in Asstt. Collector of CE v. National Tobacco Co. of India Ltd.5. Court's Analysis and Conclusion:The Court examined the provisions of sections 3 and 4 of the Excise Act, noting that excise duty is levied on the manufacture of goods but is not a manufacturing cost. The duty becomes payable only upon removal of goods from the factory, and thus cannot be included in the closing stock valuation.The Court held that the Tribunal was justified in excluding excise duty from the closing stock valuation, as the duty is a post-manufacturing cost. The Court emphasized that the purpose of valuing closing stock is to balance the cost of unsold goods, not to include unrealized profits or anticipated costs.The Court also noted that section 145A of the Act, introduced with effect from 1-4-1999, could not be applied retrospectively to the assessment year 1997-98. Even if applicable, the section requires that tax, duty, etc., should be actually paid or due and payable under the law.In conclusion, the Court dismissed the appeal, affirming that the Tribunal was correct in excluding excise duty from the closing stock valuation.