Whether when excise duty is payable at time of clearance of finished goods or debonding from warehouse, any addition is warranted in relation to valuation of closing stock on last day of accounting year - NO: HC

THE issue before the Bench is - Whether when excise duty is payable at the time of clearance of finished goods or debonding from warehouse, any addition is warranted in relation to valuation of closing stock on the last day of the accounting year. NO is the answer.

Facts of the case

The assessee concern was engaged in the business of manufacture and sale of alcohol and vanaspati. In addition, it was having rental and interest income. During assessment, AO made addition on account of excise duty in closing stock. It was noticed that excise duty had not been included in the value of closing stock in compliance to the verdict of SC in the case of CIT Vs British Paints Ltd.- 2002-TIOL-796-SC-ITholding that valuation of stock only at the actual cost of raw material/ finished goods and not taking into account the overhead charges was not a correct mode of valuation. Excise and custom duties' payable by the manufacture were manufacturing expenses and should go into calculation of production cost and closing inventory should include on element of such duties. In this regard the auditor had reported that the company had been liable for excise duty on finished goods as and when these were, cleared as per consistant practice as also considered the accepted practice of the Excise Authority. The liability in respect of finished products lying in factory at close of the year had not been provided for in the accounts and hence not included in the valuation of inventory in the valuation of inventory of such products. When assessee company was asked it was stated that as per circular of the Excise department, the excise duty was not includible but no copy of such circular or notification had been furnished. Excise duty payable by the manufacturer were manufacturing expenses and should go into calculation of production cost and the closing stock should include an element of such duties as held by the SC, the assessee's contention was not acceptable. Accordingly an addition of Rs.3,04,39,626/- was made to the income of the assessee company on account of non inclusion of excise duty in the closing stock of finished products. Thus, AO held contrary to the ratio of SC in CIT Vs. British Paints Ltd.- 2002-TIOL-796-SC-IT. The said reasoning was wrong and legally untenable, unless the assessee had included and treated the excise duty as an expenditure in the profit and loss account. In such cases, the entry in the profit and loss account was required to be matched or balanced with the corresponding increase in the valuation of the closing stock. In CIT, Tamil Nadu Vs. Dynavision Ltd.- 2012-TIOL-61-SC-IT, AO had made addition of Rs.16,39,000/- to the valuation of the closing stock on the ground that excise duty was payable but the plea of the Revenue was rejected.

Held that,

++ in case of actual payment there would be no difficulty, but when actual payment is not made it has to be ascertained with reference to the applicable statute or the rule, whether tax, duty, cess, fee has been incurred by the Assessee to bring the goods to the place of its location and condition as on the date of valuation. In CIT Vs. Lakshmi Sugar Mills Co. Ltd., - 2012-TIOL-1078-HC-DEL-IT, appeal filed by the Revenue was allowed after recording that the excise duty, no doubt was unpaid, but the goods had been removed and therefore, the duty was payable. Thus, the taxable event had occurred, liability incurred and Section 145A was applicable. Reference was made to the decision of SC in Orient Paper Mills Ltd. Vs. UOI, - 2002-TIOL-342-SC-CX. It was observed that removal of goods from the factory premises, or any other specified place, implied that the excise duty was leviable and the liability was not postponed. In that case, SC has observed that, though Section 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 subsection (3) (d) of section 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 section 3 simplicitor. If Section 3 of the Excise Act is considered to be the only charging section and section 4 of the Excise Act is considered as only a provision for assessment, the charge levied by section 3 of the Excise Act cannot be brought home. Section 3 and 4 have to be read together to bring the charge home. The charge is partially embedded in both the provisions. In the aforesaid judgment, decision of the Supreme Court in Collector of Central Excise Vs. Polyset Corporation,- 2002-TIOL-857-SC-CX-LB was quoted and it has been observed that dutiability on excisable goods is determined with reference to the date of manufacture and the rate of excise duty payable is determined with reference to the date of clearance of the goods. In other words, in respect of the excisable goods manufactured and lying in stock, excise duty liability would crystallize on the date of clearance of goods and not on the date of manufacture. This would be the date on which goods are "removed" as per the mandate of Excise Act and the applicable Rules. This aspect has been highlighted as noticed in the decision of the Delhi High Court in Lakshmi Sugar Mills Co. Ltd.;

++ we may note that in the present case, it is not contention of the Revenue that MODVAT credit or duty in respect of the inputs has not been included in the value of the closing stock. This is not what is averred and asserted in the assessment order or an argument, which was raised before the Tribunal or even before us. When we turn to the factual matrix of the present case, it is noticeable that the Assessing Officer, while making the addition, did not go into these factors and issues. He proceeded on a wrong assumption that as per the decision of the Supreme Court in British Paints Ltd., excise duty, even if not paid or leviable or incurred, must be added to value the closing stock. This is not the correct position in law and the mandate of Section 145A. CIT (Appeals), on examination of the issue, had rightly held that as per the Assessee, the excise duty was payable at the time of removal of goods and not at the time of manufacture and the on the last date of the accounting year, the goods were lying in the bonded warehouse and the duty would be payable only at the time of unbonding. Thus, the contention of Assessee was that neither excise duty was paid nor the duty was incurred. Further, the duty had not been included and did not form part of the cost as it was not claimed in the profit and loss account. The CIT(A) therefore deleted the addition. The Tribunal has affirmed the aforesaid finding and dismissed the appeal of the Revenue. There is nothing on record to show that the Revenue in the appeal preferred before the Tribunal had raised the contention that the excise duty had, in fact, become payable and had been incurred in terms of the Excise Act or the applicable rules. In these circumstances, we have to hold that the decision of the Tribunal is correct and accordingly, substantial question of law mentioned above, is answered in favour of the respondent-Assessee and against the Revenue. The appeal is accordingly disposed of. There will be no order as to costs.