High Court Of Gujarat
Assistant Commissioner Of Income Tax vs. Narmada Chematur Petrochemicals Ltd.
Section 145, 145A
Asst. Year 1997-98
D.A. Mehta & Ms. H.N. Devani, JJ.
Tax Appeal No. 852 of 2007
6th/7th/8th April, 2010
Counsel Appeared :
K.M. Parikh, for the Appellant : S.N. Soparkar with Mrs. Swati Soparkar, for the Respondent; Udai Joshi, Amicus Curaie
JUDGMENT
D.A. MEHTA, J. :
Vide order dt. 28th Sept., 2007, the appeal was admitted by the High Court by formulating following 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 period ?”
The order of admission was common in relation to various tax appeals as enumerated in the order.
2. The assessment year in question is 1997-98, the relevant accounting period being year ended on 31st March, 1997. Respondent assessee, along with the return of total income declaring total loss of Rs. 14,51,91,613, had filed various statutory accounts including the audited balance sheet and P&L a/c accompanying the annual report of assessee company. A note was made in Sch. 23 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 AO 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 31st March, 1997 should not be included in the value of inventory of finished goods. The assessee tendered explanation under letter dt. 30th Dec., 1999 and vide para No. 4 of the said letter stated thus :
“Excise duty payable on finished goods lying in stock as on 31st March, 1997 works out to Rs. 20,17,000 and said duty is payable only when goods are cleared for despatch and sale. If duty is added on finished goods stock, there would be corresponding excise liability for payments of the same amount of Rs. 20,17,000 for which provision has to be made and debited to P&L a/c. Hence, there will not be any ultimate impact on profitability.”
4. The AO held that the goods have been manufactured, are ready for despatch, and hence the liability of excise duty relating to closing stock of finished goods has already accrued and therefore, the same should have been shown as part of closing stock since the assessee was following mercantile system of accounting. According to the AO, excise duty would be part and parcel of the cost of the finished goods. Referring to the judgment of the Supreme Court in the case of CIT vs. Britsh Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) as well as accounting practices of the ICAI, it was held that excise duty would be part of manufacturing expenses and hence integral element for valuation of inventory of finished goods. Reference has also been made to Instruction No. 1389 of March, 1981 issued by CBDT. The AO further held that as no provision has been made nor has the excise duty been paid, no deduction under s. 43B of the IT Act, 1961 (‘the Act’) can be allowed but the entire amount was required to be added for the purposes of valuation of finished goods and thus resulting in addition of identical amount to the returned income of the assessee.
5. The assessee carried the matter in appeal before CIT(A) who vide order dt. 1st Nov., 2002 allowed the appeal following judgment of Madras High Court in CIT vs. English Electric Co. of India Ltd. (2000) 161 CTR (Mad) 235 : (2000) 243 ITR 512 (Mad).
6. Revenue carried the matter in appeal before Tribunal but failed. Tribunal while passing the impugned order dt. 27th Oct., 2006 has referred to newly inserted provision of s. 145A in the Act by the Finance (No. 2) Act, 1998, w.e.f. 1st April, 1999 and then stated that the proposal to introduce this section with retrospective effect was not approved by the legislature and hence, according to Tribunal, any tax, duty, cess or fee prior to asst. yr. 1999-2000 cannot be added to the valuation of closing stock. Thereafter, Tribunal has further recorded that even otherwise, the issue stands covered against the Revenue by a decision of Special Bench of Tribunal sitting at Delhi in the case of ITO vs. Food Specialities Ltd. [reported at (1994) 48 TTJ (Del)(SB) 621—Ed.] and also the decision of Madras High Court in the case of CIT vs. Dynavision Ltd. (2004) 192 CTR (Mad) 476 : (2004) 267 ITR 600 (Mad).
7. On behalf of Revenue, learned counsel Shri K.M. Parikh submitted that both the judgments of Madras High Court referred to by CIT(A) 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 correct valuation for income-tax purposes. Referring to the judgment of the apex Court in the case of CIT vs. Britsh Paints India Ltd. (supra), it was submitted that as laid down by the apex Court, the AO was duty-bound to determine what was the correct taxable income and for this purpose, emphatically relied upon the following para from the judgment : “Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-progress and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced therefrom. It is, therefore, not only the right but the duty of the AO to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income.”
7.1 Referring to provisions of s. 3 of the Central Excise Act, 1944 (the Excise Act) it was submitted that as provided therein, excise duty liability arose immediately upon production or manufacture of goods and such duty on excise was payable at the rates set out in First Schedule to the Central Excise Tariff Act, 1985. Therefore, on the last day of the accountings period, closing stock of the manufactured goods had to be correctly valued by including therein the component of excise duty liability and the Tribunal had committed an error in holding that such an addition to the closing stock could not be made. It was further submitted that unless and until correct value of the closing stock was considered, the AO would not be in a position to compute correct taxable income and therefore, once liability had been incurred in law, the assessee was bound to include the same.
8. Considering the number of tax appeals filed by Revenue on this issue, the Court had also called upon other standing counsel representing IT Department to intervene and address the Court, if they so desired.
9. Accordingly, Shri M.R. Bhatt, learned senior standing counsel appeared 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 apex Court decision in case of Moriroku Ut India (P) Ltd. vs. State of Uttar Pradesh & Ors. (2008) 4 SCC 548, it was submitted that the entire scheme of Excise Act had been considered and para Nos. 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, provision of s. 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. Patanaik (Dead) Through LRs. vs. State of Orissa & Ors. (2000) 1 SCC 413; (2) McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC); (3) Berger Paints India Ltd. vs. CIT (2004) 187 CTR (SC) 193 : (2004) 266 ITR 99 (SC). Reliance was also placed by way of reiteration on the apex Court decision in case of CIT vs. Britsh Paints India Ltd. (supra).
On behalf of respondent assessees, Mr. S.N. Soparkar, learned senior advocate as well as learned advocates Mr. B.D. Karia, Mr. M.J. Shah, Mr. M.K. Kazi and other learned advocates have been heard. It was submitted that unless and until there is actual incurring of liability under the Excise Act, no liability can be said to arise which was required to be added to the value of closing stock. Attention was invited to provisions of s. 4 of the Act to submit that under the Excise Act, no liability is incurred till the point of time of removal of the excisable goods and hence, unless and until the transaction value was determined, it was not possible to apply the rate of duty of central excise for the purposes of levy and collection under the Excise Act. The judgment in the case of Asstt. CCE vs. National Tobacco Co. of India Ltd. 1972 CTR (SC) 219 : AIR 1972 SC 2563 was pressed into service to point out the difference between concepts of ‘levy’ and ‘collection’, more particularly para No. 20 of the said judgment was referred to point out that though the term ‘levy’ was wider than the term ‘assessment’ yet did not extend to the term ‘collection’, and as per Art. 265 of the Constitution of India, there was a distinction between ‘levy’ and ‘collection’. The submission was that as laid down therein even if a payment was made by making of a debit entry, the same could not be treated as a levy and the act of payment could be invested with validity only after carrying out the obligation to make an assessment.
As the issue involved pertains to the true meaning of the provisions of ss. 3 and 4 of the Excise Act, the Court had requested Shri Uday Joshi, learned advocate to render assistance as amicus curiae and the Court notes with appreciation the assistance rendered by the learned advocate.
The facts are not in dispute. Admittedly, at no point of time the assessee had made any claim in relation to the excise duty on finished goods, assessee contending that excise duty on finished goods had not become due and was thus not payable. In fact, it was only upon the AO calling for an 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 AO derive the figure of Rs. 20,17,000. Para No. 3.1 of the order of CIT(A) 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 28th Feb., 2000 while the show-cause notice was issued in December, 1999, much after close of the accounting year.
As per 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. 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 vs. CIT (1953) 24 ITR 481 (SC) in the following words : “It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year’s trading. As pointed out in para 8 of the Report of the Committee on Financial Risks Attaching to the Holding of Trading Stocks, 1919, ‘as the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure………… From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year’s results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question’ (extracted in para 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded 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 vs. Hindustan Zinc Ltd. (2007) 210 CTR (SC) 282 : (2007) 291 ITR 391 (SC). 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 value of unsold stock is to balance the cost of those goods entered on the other side of the account, as laid down by the apex Court in the case of Chainrup Sampatram (supra). Though the term “liability” is used in the context of taxing provisions time and again the said term has not been defined. The origin of the term “liability” is the word “liable”, which has been defined in Webster’s Dictionary & Thesaurus,—to mean obliged in law or equity; subject; answerable; responsible. Thus liability is the state of being liable; having responsibility or obligation, e.g. to make payment of debts. Therefore the question that is required to be posed and answered is : does the law cast a pecuniary obligation which is required to be discharged, correspondingly investing revenue with a right in law which can be enforced in a Court of law ?
The issue therefore would be whether it is a liability which has been incurred by the assessee as per method of accounting regularly employed so as to go in the P&L a/c at the end of the accounting period. For this purpose, one will have to read and appreciate the provisions under the Excise Act, namely ss. 3 and 4 of the Excise Act, which deal with levy and collection of the duty of central excise. Though Courts have time and again stated that the taxing event for the purpose of levy of duty of central excise is the manufacture and s. 3 of the Excise Act gets attracted upon manufacture of excisable goods, while s. 4 of the Excise Act relates to value for the purpose of assessment a close reading of the said two provisions along with relevant rules would indicate that the position is otherwise. Sec. 3 and s. 4 of the Excise Act, as are relevant for the present, read as under : “3. Duties specified in the schedule to the Central Excise Tariff Act, 1985 to be levied.—(1) There shall be levied and collected in such manner as may be prescribed,— (a) a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986); 4. Valuation of excisable goods for purposes of charging 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 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 on premises wherein the excisable goods have been permitted to be deposited without payment of duty; (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; (cc) ‘time of removal’, in respect of the excisable goods removed from the place of removal referred to in sub-cl. (iii) of cl. (c), shall be deemed to be the time at which such goods are cleared from the factory; (d) ‘transaction value’ means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales-tax and other taxes, if any, actually paid or actually payable on such goods.”
17. If one reads s. 3(1) of the Excise Act in isolation, it appears to indicate that the charge is levied in s. 3 and the liability stands incurred upon manufacture of excisable goods at the rates set out in First Schedule to the Central Excise Tariff Act, 1985. However, though the opening portion of subs. (1) states that there shall be levied and collected, there is no other provision for collection in the said section and the manner of collection as well as levy are found in the rules as prescribed. It may indicate that s. 4 would be a standalone provision, but when one reads the said provision it becomes clear that the levy is incomplete, in as much as the assessee under the Excise Act is not required to discharge the liability to pay duty levied upon the manufacture of excisable goods, till such goods are removed from the factory premises, or a bonded warehouse. The test to determine as to whether the liability had been incurred or not would be as to whether a corresponding right is available with the excise authority to enforce such a liability. Mere production or manufacture by itself would not be sufficient. Though there might be levy under s. 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 be necessarily 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 judgments of this High Court in this regard may be usefully referred to.
18.1 In the case of Alembic Chemical Works Co. Ltd. vs. Union of India & Ors. (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 1st March, 1970 and the stock of such goods was removed from the factory after 1st March, 1970 resulting in recovery of duty of central excise as the exemption in question had been withdrawn by notification dt. 1st March, 1970. The High Court after referring to various Supreme Court judgments stated :
“That excise duty was primarily a duty on the manufacturer or producer in respect of the commodity manufactured or goods produced within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence would always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax could be levied at a convenient stage so long as the character of the impost, that it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. In Shinde Bros. vs. Dy. CIT AIR 1967 SC 1512, their Lordships reiterated this position by pointing out that in order to be an excise duty, the levy must be upon goods and the taxable event must be the manufacture or production of goods. Further, the levy need not be imposed at the stage of production, or manufacture but might be imposed later. Therefore, in that case it was held that if the duty was levied on an excisable article but that duty was collected from a retailer, it could not necessarily cease to be an excise duty.”
18.2 This judgment has been followed in the case of Maheshwari Mills Ltd. vs. Union of India & Ors. 1988 (35) ELT 252 (Guj). Reference to r. 9 and r. 9A of the Central Excise Rules, 1944 has been made in the said judgment.
18.3 While deciding challenge to constitutional validity of amendment made in 1973, a Full Bench of this High Court in the case of The Ahmedabad Mfg. & Calico Printing Co. Ltd. vs. Union of India & Ors. 1983 (1) GLR 1 formulated various questions in relation to challenge to provision of s. 4(4)(d) (1) of the Excise Act. The Court negatived the plea that the value of packing material cannot be included for the purposes of arriving at transaction value for levy of duty on central excise and for the said purpose, stated thus :
“What is overlooked is that s. 3 and s. 4 of the Act taken as a whole en bloc and read conjointly constitute the charging section. It is fallacious to assume that s. 3 standing alone is the charging section. This is as evident as day light if the test we will presently formulate is applied. Can the impost be given effect at all if both the sections are not read as supplementary and complementary. If s. 4 were not there, the result would be that under s. 3 goods are made excisable at the rates set forth in 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 letter—an impotent paper levy. It cannot be made workable unless s. 4 is read conjointly as constituting another part of a complete code made up of ss. 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 composed of ss. 3 and 4 read in a conjoint manner as two supplementary parts of a complete code. Once this view is taken there remains no difficulty. The extent of the duty in the sense of the burden of duty is not justiciable. It is not for the Court to say how heavy the burden should be—it being within the power sphere of the legislature. Since neither the Constitution nor the Act prescribes any upper limit of the burden of levy, Parliament can impose levy of such an order as is deemed appropriate by it. An illustration will make the point clear. Say the ad valorem rate is 10 per cent of the value of excisable goods the valuation being made by including cost of packing material. Can the Parliament not levy 20 per cent and exclude the cost of packing ?
10 per cent of cost of article plus packing might be much less than 20 per cent of value sans cost of packing. In other words the mode of computation insofar as the value of packing material is included serves only to enhance the burden of levy. But the levy in essence retains its nexus with the manufacture of the excisable article only. It is not a levy on the sale of the packing material. The taxing event is ‘manufacture’ of excisable article but valuation for the purposes of crystalization of the burden includes the value of packing. In other words the levy becomes 10 per cent of value of excisable article loaded with the packing factor. There is nothing illegal, unconstitutional or impermissible in evolving this formula for computation. It is therefore, futile to contend that it partakes of the character of sales-tax. Secondly, sales-tax is linked to sale—not to ‘manufacture’. Excise duty is payable on manufacture (at the time of clearance since the rules so provide and yet is linked to manufacture of the article).”
19. In the case of Orient Paper Mills Ltd. vs. Union of India AIR 1967 SC 1564, the apex Court while dealing with rr. 9 and 9A of the Central Excise Rules, 1944 analysed provisions of the Excise Act in para No. 7 of the judgment and stated in para No. 12 : “(12) It will thus be seen that in the case of manufactured goods the payment of duty and the clearance of goods may be synchronous or the payment may be postponed although the goods may be removed (provisos to r. 9). This immediately sets up two kinds of cases in respect of manufactured goods. The critical time thus becomes the removal from the factory or warehouse but if the payment 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 were 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 proper on a gate pass, not only under the ruling of the Board but also on the application of the rules as explained here these goods became free of the enhanced duty. The recovery was accordingly erroneous. The duty collected must, therefore, be refunded and we order accordingly. The appellant’s costs must be paid by the respondent.”
20. Thus, though s. 3 of the Excise Act talks of levy and collection, the actual collection is only at the time of removal of excisable goods from the factory premises or any other specified place of removal. The duty is leviable and is actually imposed on the transaction value defined in sub-s. (3) (d) of s. 4 of the Excise Act. In these circumstances, it is not possible to state that under the Excise Act, the duty has become due and payable only by operation of s. 3 simpliciter. If s. 3 of Excise Act is considered to be the only charging section and s. 4 of the Excise Act is considered as only a provision for assessment, the charge levied by s. 3 of the Excise Act cannot be brought home. Secs. 3 and 4 have to be read together to bring the charge home. The charge is partially embedded in both the provisions. It is in this context that one finds various judgments in relation to disputes raised on the basis of a particular cut-off date say, 28th February or 1st March qua the goods already manufactured and lying in stock upto 28th February which become amenable to duty of central excise only upon the point of time of removal namely, after 1st March. Therefore, to read provision of s. 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 Excise Act read with Rules thereunder evolve a self-contained scheme upon a conjoint reading of ss. 3 and 4 of the Excise Act with rr. 9 and 9A of the Central Excise Rules. Then, for the purposes of the Act, namely, IT 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 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 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 : Wallace Flour Mills Co. Ltd. vs. CCE (1990) 186 ITR 440 (SC).
Under the Customs Act, 1962 also there are similar provisions delineating identical scheme of levy and collection. In the case of Kiran Spinning Mils vs. Collector of Customs (2000) 10 SCC 228 the apex Court has laid down thus after referring to s. 3 of the Customs Tariff Act, 1975 :
“Sec. 3 sub-s. (6) makes the provisions of the Customs Act applicable. This would bring into play the provisions of s. 15 of the Customs Act which, inter alia, provides that the rate of duty which will be payable would be (sic the rate in force) on the day when the goods are removed from the bonded warehouse. That apart, this Court has held in Sea Customs case (SCR at p. 803) that in the case of duty of customs the taxable event is the import of goods within the customs barriers. In other words, the taxable event occurs when the customs barrier is crossed. In the case of goods which are in the warehouse the customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country… The import would be completed only when the goods are to cross the customs barriers and that is the time when the import duty has to be paid and that is what has been termed by this Court in Sea Customs case (SCR at p. 823) as being the taxable event. The taxable event, therefore, being the day of crossing of customs barrier, and not on the date when the goods had landed in India or had entered the territorial waters, we find that on the date of the taxable event the additional duty of excise was leviable under the said Ordinance and, therefore, additional duty under s. 3 of the Tariff Act was rightly demanded from the appellants.”
Similar enunciation of law has been made in the case of Priyanka Overseas (P) Ltd. & Anr. vs. Union of India & Ors. AIR 1991 SC 583.
The principal plank of Revenue is upon the powers vested in the AO under s. 145 of the Act. That is how the emphasis was on judgment in case of Britsh Paints India Ltd. (supra). During the course of hearing, a reference was made to provisions of s. 145 of the Act with special reference to sub-s. (2) thereof to submit that an assessee is bound to follow the accounting standards notified by the Central Government as provided in s. 145(2) of the Act. There can be no dispute with the said proposition. However, when one considers the Accounting Standards notified under s. 145(2) of the Act as appearing in Notification No. 9949 (F. No. 132/7/95-TPL), dt. 25th Jan., 1996 [(1996) 130 CTR (St) 33], 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 para No. 6(b) of Part A of AS-I does not indicate anything to the contrary, i.e., contrary to the settled legal position. So far as Part B relatable to AS-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 accounting policies.
Under s. 145(3) of the Act, it is provided that where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) of s. 145 of the Act, or Accounting Standards as notified under sub-s. (2) of s. 145 of the Act, have not been regularly followed, the AO may make an assessment in the manner provided under s. 144 of the Act. Therefore, where the AO records that he is not satisfied about the correctness or completeness of the accounts of the assessee or that the assessee has not followed the method of accounting regularly employed, the AO can make a best judgment assessment. In the facts of the present case, AO had not taken recourse to sub-s. (3) of s. 145 of the Act. That leaves only operation of s. 145(1) of the Act which talks of computing profits and gains of business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. A plain reading of the assessment order in question makes it clear that the assessee is following mercantile system of accounting but it is not the case of the AO that the AO is not in a position to deduce true profits of the year under consideration. The AO has merely referred to the apex Court judgment in case of Britsh Paints India Ltd. (supra) as well as accounting practices initiated by ICAI and held that excise duty is a part of the manufacturing expense and hence an integral element for valuation of inventory of finished goods. As already noticed hereinbefore, in a catena of decisions rendered by the apex Court it has been stated, in no uncertain terms, that duty of central excise is a duty levied on goods namely, excisable goods manufactured by an assessee and, therefore, it would be an incorrect proposition to state that such duty would be a part of the manufacturing expense. Unless and until goods, classified as excisable goods, are manufactured there would be no occasion, no taxable event to charge duty of central excise and, therefore, such duty cannot be termed to be part and parcel of the manufacturing expenses. At best, the same can be termed to be a post-manufacturing expense.
In the case of Britsh Paints India Ltd. (supra), the observations made have to be read in the context of the controversy brought before the Court. It has been recorded by the apex Court : “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 ITO to make the necessary additions or deductions so as to arrive at the correct value of the stock for the purpose of determining 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 insofar as the stock is valued without taking into account the production expenditure. The question, therefore, is whether or not the AO 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.” Thereafter, the Court goes on to reiterate and enunciate the basic principles as to applicability of commercial accounting practice and operation of s. 145 of the Act. The question to be asked is whether the system of accounting followed by the assessee excludes, for the valuation of the stock-in-trade, any cost other than the cost of raw materials so as to result in a distorted picture of true state of business for the purpose of computing the chargeable income. The emphasis is on the phrase “chargeable income”. As already noted, if the duty of central excise is not due and payable, 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 payable at the said stage and for the purposes of Excise Act, the levy is not complete unless and until ss. 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. To state so would result into an anomalous situation under the two statutes, the Excise Act and the IT Act leading to contrary positions under both the statutes. At the cost of repetition, it is required to be stated that 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 IT Act. Hence, without there being any dispute as regards the general propositions laid down in the judgment of Britsh Paints India Ltd. (supra) 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 Revenue cannot be sustained.
28. There is one more aspect of the matter. Such duty 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 1st April, 1997. So next year’s profits get depressed accordingly. Over a period of time the whole exercise results in evening (sic) 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 Transfomers Ltd. vs. CIT (2008) 217 CTR (Guj) 254 : (2008) 7 DTR (Guj) 84 : “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 negative. In the case of CIT vs. British Paints India Ltd. (supra), the apex Court itself has stated that the AO 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 option of the assessee to adopt a particular method of valuation of closing stock, namely, the cost or market price, whichever is lower, as per settled principles of commercial accounting.
10. The taxing authority is entitled to disturb such valuation by modifying the cost or the market value whichever is adopted by the assessee by reflecting the correct cost or nearest market value on the basis of facts and evidence on record after recording a clear-cut finding that the value adopted by the assessee does not reflect either correct cost or correct market price. However, once the assessee has chosen one of the two, the authority cannot discard the same and impose other one. To wit, in a case where the assessee has opted to adopt the cost as the basis for valuing the closing stock the taxing authority can substitute the same by bringing cogent and material evidence on record to show that such cost does not reflect all the components of cost of the goods forming part of closing stock. Similarly, in a case where the assessee has adopted the market price for the purpose of valuing the closing stock it is open to the authorities to disturb the same by bringing cogent and reliable evidence on record to establish that the market price is not what has been shown by the assessee, but is something else.”
29. 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 ICAI) cannot lay down anything to the contrary. As held by the apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) : “It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override s. 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. vs. Ridgway (Inspector of Taxes) (1970) 77 ITR 857 (CA), 860, the IT law does not march step by step in the footprints of the accountancy profession.”
30. On behalf of the appellant Revenue reliance has also been placed on provisions of s. 145A of the Act which has been inserted by Finance (No. 2) Act, 1998 w.e.f. 1st April, 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 Provisions In Finance (No. 2) Bill, 1998 which read as under (relevant extract) : Notes on Clauses : “Clause 45 seeks to insert a new s. 145A in the IT 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 1st 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 liability incurred for the same under any law in force. This amendment is proposed as valuation of inventory after this adjustment will present the correct value. This amendment will take effect retrospectively from 1st April, 1986, and will, accordingly, apply in relation to the asst. yr. 1986-87 and subsequent years.” Memorandum Explaining Provisions : Computation of value of inventory The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which Modvat credit is available has been the matter of considerable litigation.
In order to ensure that the value of opening and closing stock reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.
The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st April, 1986, and will accordingly apply in relation to asst. yr. 1986-87 and subsequent years.” (Clause 45) Though the Bill proposed retrospective insertion ultimately the section has come on the statute book only from 1st April, 1999. What is more material is that the same relates to inclusion in the value of inventory the amount of any tax, duty etc. paid or liability incurred for the same under any law in force. Meaning thereby such tax, duty, etc. should have been actually paid or should be actually due and payable under the law applicable to such tax, duty, etc. in force. Otherwise even s. 145A of the Act will also not carry case of Revenue any further. Various judgments cited on behalf of the parties which have not been specifically referred to have been considered while rendering this judgment bearing in mind the salutary principle that a judgment is an authority for what is actually decided and the observations made therein would be applicable in the context in which they are made and what is binding is only the ratio decidendi of the decision which has to be gathered from the statements of legal principles set out in the facts of the case brought before the Court.
This Court is in respectful agreement with the opinion expressed by the Madras High Court in the two judgments cited on behalf of the parties.
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 light of what is stated hereinbefore. The appeal is accordingly dismissed with no order as to costs.
[Citation : 327 ITR 369]
