TaxTMI 
TaxTMI 
2010 (8) TMI 263
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....me declaring a total loss of Rs. 14,51,91,613, had filed various statutory accounts including the audited balance-sheet and profit and loss account accompanying the annual report of the asses-see-company. A note was made in schedule 23 of the annual report stating that the company has not accounted for the liability for excise duty on finished goods as the same would become due as and when the goods are sold and cleared from factory premises. 3. The Assessing Officer did not accept the stand of the assessee and issued show-cause notice calling upon the assessee to explain why the entire amount of excise duty of Rs. 20,17,000 pertaining to finished goods as on March 31, 1997, should not be included in the value of inventory of finished goods. The assessee tendered explanation under letter dated December 30, 1999 and, vide paragraph 4 of the said letter, stated thus : "Excise duty payable on finished goods lying in stock as on March 31, 1997, works out to Rs. 20,17,000 and the said duty is payable only when goods are cleared for dispatch and sale. If duty is added on finished goods stock, there would be corresponding excise liability for payments of the same....
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....decision of Special Bench of the Tribunal sitting at Delhi in the case of ITO v. Food Specialities Limited [1994] 206 ITR (AT) 119 and also the decision of the Madras High Court in the case of CIT v. Dynavision Ltd. [2004] 267 ITR 600. 7. On behalf of the Revenue, learned counsel Shri K. M. Parikh submitted that both the judgments of the Madras High Court referred to by the Commissioner (Appeals) and the Tribunal have laid down that liability for payment of excise duty is incurred only when the process of manufacture is complete and hence, the amount of excise duty payable has to be added to the value of the closing stock for arriving at the correct valuation for income-tax purposes. Referring to the judgment of the apex court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44, it was submitted that as laid down by the apex court, the Assessing Officer was duty bound to determine what was the correct taxable income and for this purpose, emphatically relied upon the following paragraph from the judgment (page 56) : "Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials....
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....peared and submitted that excise duty was relatable directly to manufacture of goods and was therefore, to be treated as part and parcel of the cost of goods manufactured without which the value put on the closing stock would not reflect the correct taxable income. Referring to the apex court decision in the case of Moriroku Ut India (P) Limited v. State of Uttar Pradesh [2008] 4 SCC 548, it was submitted that the entire scheme of the Excise Act had been considered and paragraphs 18, 19 and 23 of the said judgment made it clear that the levy was on the taxable event of manufacture and was calculated on the value of manufactured goods. Therefore, according to the counsel, the provision of section 4 of the Excise Act is limited in application, i.e., only for the purposes of assessment as the said provision lays down the measure for levy of excise duty and cannot either shift the taxable event or accrual of liability. Reliance was also placed on the following judgments in support of the submissions made : (1) S. K. Pattanaik (Dead) through LRs. v. State of Orissa [2000] 1 SCC 413 ; (2) McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) ; and (3) Ber....
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....n explanation in relation to the figure quoted that the assessee has tendered the explanation. In the circumstances, no deduction for the liability had been claimed by the assessee. During the course of hearing, a question arose as to from where did the Assessing Officer derive the figure of Rs. 20,17,000. Paragraph 3.1 of the order of the Commissioner (Appeals) makes it clear that the excise duty payable on the finished goods lying in the closing stock at the end of the relevant accounting period had been paid in subsequent year before the due date of filing of the return of income and that is how the amount was available considering the fact that the assessment had been framed on February 28, 2000 while the show-cause notice was issued in December, 1999, much after close of the accounting year. 13. As per the settled legal position and accepted principles of accounting, closing stock has to be valued, at the option of the assessee, at cost or market price, whichever is lower. The appellant-Revenue has apparently lost sight of the purpose of the exercise of valuing closing stock. This has been succinctly explained by the apex court in the case of Chainrup Sampatram v. CI....
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....ormity with the ordinary principles of commercial accounting, unless of course, such principles have been super-seded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter or practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised." This principle has been reiterated by the apex court in the case of CIT v. Hindustan Zinc Ltd. [2007] 291 ITR 391. 14. Keeping in mind the aforesaid principle, the controversy at hand is required to be examined. Duty of central excise is levied on the goods manufactured, i.e., excisable goods manufactured by an assessee. It is not a cost of goods purchased. It is not a part of manufacturing cost. It can be termed as post-manufacturing cost. Therefore, unless and until it is entered on one side, as an item of cost, it cannot be taken as a component of the value of the closing stock on the other side, the true purpose of crediting the....
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....arging of duty of excise.-(1) Where under this Act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall- (a) in a case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value ; (b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed 2. *** (3) For the purposes of this section,- (a) *** (b) *** (c) "place of removal" means - (i) a factory or any other place or premises of production or manufacture of the excisable goods ; (ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without ^1pay-ment of duty ; ^2[(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory ;from where such goods are removed ; ....
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....urs 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. 18. Following the judgments of this High Court in this regard may be usefully referred to. 18.1. In the case of Alembic Chemical Works Co. Ltd. v. Union of India [1976] 17 GLR 452, this High Court was called upon to decide whether the stock of manufactured excisable goods was liable to excise duty in force at the date of the removal of such goods from the factory when the exemption was withdrawn. There was no dispute that the goods had been manufactured before March 1, 1970, and the stock of such goods was removed from the factory after March 1, 1970 resulting in recovery of duty of central excise as the exemption in question had been withdrawn by notification dated March 1, 1970. The High Court, after referring to various Supreme Court judgments, stated : ". . . that....
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....not read as supplementary and complementary? If section 4 were not there, the result would be that under section 3 goods are made excisable at the rates set forth in the First Schedule to the Act which, inter alia, provides for ad valorem rates. The rate by its very nature is linked to the value, that being the very concept of ad valorem. And unless there is a provision which spells out what is meant by `value' and how it is to be computed several unanswerable questions will arise. Value to whom ? Manufacturer, wholesaler, retailer or consumer ? Wholesale value or retail value ? Value at which place ? At which time ? Valuation as made by whom ? How ? Then the levy would become a dead letteran impotent paper levy. It cannot be made workable unless section 4 is read conjointly as constituting another part of a complete code made up of sections 3 and 4. It will otherwise be a part of a zig-zag puzzle ; unless all the parts are put together it will not be in a piece and the picture of the levy will not emerge. There is therefore no escape from the conclusion that though separate numbers are given in fact the two sections are two incomplete parts of the whole charging section compos....
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.... time thus becomes the removal from the factory or warehouse but if the pay-ment of duty is made before the removal then the critical time is the payment of duty. In the present case, the payment of duty was synchronous with the clearance of the goods because the gate pass can only be issued when the goods have actually been cleared for removal. The above construction of the Rules agrees with the construction placed by the Board of Revenue in its ruling of 1957 where the effect of the sealing of the wagons by the Railway after loading and the issuance of railway receipts was considered. The Board ruled that such goods would not be considered as lying in the stock in the factory premises. When we add to it the fact in this case that duty was paid on the goods and gate pass was also issued, there remains little to argue except to say that the wagons being in the new siding must be treated as still in the factory. Here the difficulty in the way of the Union of India is that the excise authorities themselves refused to recognise this portion as part of the factory. If the goods were put in the wagons after payment of duty, and the wagons were sealed and shunted out of the factory prope....
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....ses 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. 22. 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. Reference : Wall....
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....fied by the Central Government as provided in section 145(2) of the Act. There can be no dispute with the said proposition. However, when one considers the accounting standards notified under section 145(2) of the Act as appearing in Notification No. 9949 [F. No. 132/7/95-TPL], dated January 25, 1996, a plain reading makes it clear that there is no such prescription as the Revenue wants the court to read. The definition of the expression "accrual" as appearing in paragraph 6(b) of Part A of Accounting Standard I does not indicate anything to the contrary, i.e., contrary to the settled legal position. So far as Part B relatable to Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies is concerned, admittedly, the same would not apply as it is nobody's case that this would fall within any of the three categories, namely, either disclosure of a prior period or extraordinary items, or change in the accounting policies. 25. Under section 145(3) of the Act, it is provided that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the meth....
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....the controversy brought before the court. It has been recorded by the apex court (page 50) : "The facts are not in dispute. It is the assessee's case that the stock-in-trade has been valued at 84.49 per cent. representing the actual cost of the raw materials. The overhead charges representing 15.51 per cent. of the total cost have been admittedly excluded from the assessee's valuation of the stock. But, by the very method of accounting which the assessee has adopted, it is possible for the Income-tax Officer to make the necessary additions or deductions so as to arrive at the correct value of the stock for the purpose of deter-mining the chargeable income. The correctness of the accounts maintained by the assessee is not in question ; nor is the system adopted by the assessee, except in so far as the stock is valued without taking into account the production expenditure. The question, therefore, is whether or not the Assessing Officer is justified in holding that the stock-in-trade of the assessee has necessarily to be valued, for the purpose of computing the income, at 100 per cent. of the cost, and not at 84.49 per cent. as the assessee had admittedly done....
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....y of central excise if added to enhance the value of closing stock would result in enhanced opening stock on the first day of the next accounting period, namely, April 1, 1997. So next year's profits get depressed accordingly. Over a period of time the whole exercise results in evening out, in other words, revenue neutral. At the same time while disturbing the value of the closing stock the assessing authority cannot change the method of accounting regularly employed as laid down by this court in the case of Voltamp Transformers Ltd. v. CIT [2008] 217 CTR (Guj) 254 ; [2010] 327 ITR 360, 366. "9. The question, therefore, which arises is `whether it is permissible to change the method of accounting under the guise of substituting the value of closing stock'. The answer has to be in the negative. In the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC), the apex court itself has stated that the Assessing Officer is entitled to disturb the value put on the closing stock wherein the cost price adopted was not reflecting all the expenses which would go to make up the cost. In other words, there is no departure from the basic principle that it is the ....
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....or any other provision of the Act. As was pointed out by Lord Russell in the case of B. S. C. Footwear Ltd. [1970] 77 ITR 857 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession." 39. On behalf of the appellant-Revenue reliance has also been placed on the provisions of section 145A of the Act which has been inserted by the Finance (No. 2) Act, 1998, with effect from April 1, 1999. The assessment year being 1997-98 the said provision cannot be invoked. However even otherwise one may consider the Notes on Clauses and the Memorandum Explaining the Provisions in Finance (No. 2) Bill, 1998, which read as under (relevant extract) ([1998] 231 ITR (St.) 175, 201) : NOTES ON CLAUSES : "Clause 45 seeks to insert a new section 145A in the Income-tax Act relating to method of computation of opening and closing stock. It is proposed that while computing the value of the inventory as on the first and last day of the previous year, the computation according to the method of accounting regularly employed by the assessee shall be adjusted to include the amount of any tax, duty, cess or fees paid or liabilit....