Commissioner of Income Tax (C)-III v. SVP Industries Ltd.

1. By order dated 28.04.2014, the following substantial question of law was framed in this appeal, which pertains to the Assessment Year 2004-05: “Did the Tribunal fall into error in holding that no addition could be made in excess in the value of closing stock of finished goods to the tune of Rs. 3,04,39,626/-, made originally by the AO?”

2. The respondent-Assessee during the relevant period was engaged in the business of manufacture and sale of alcohol and vanaspati. In 2014:DHC:4376-DB addition, the assessee was having rental and interest income.

3. As is apparent from the substantial question of law which has been admitted for hearing, the issue raised is limited and a narrow one. The Assessing Officer, in the assessment order dated 26.12.2006 made addition of Rs. 3,04,39,626/- for the following reasons:

5. We note that the legislature, by Finance (No.2) Act, 1998, has enacted Section 145A of the Income Tax Act, 1961 (Act, in short), with effect from April 01, 1999, which reads as under: “145A. Method of accounting in certain cases- Notwithstanding anything to the contrary contained in Section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be-- (a) in accordance with the method of accounting regularly employed by the Assessee, and (b) further adjusted to include the amount of tax, duty, cess or fee (by whatever name called) actually paid or incurred by the Assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation -For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payments notwithstanding any right arising as a consequence to such payment”. The effect of the aforesaid Section is that „notwithstanding anything to the contrary in Section 145‟, valuation of purchase and sale of goods and inventory for the purposes of determining income chargeable under the head „Profits and gains of profession‟ if required and necessary, has to be adjusted to include amount of tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. 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 Commissioner of Income Tax Vs. Lakshmi Sugar Mills Co. Ltd., [2013] 215 Taxman 126 (Del.), 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 of the Act was applicable. Reference was made to the decision of the Supreme Court in Orient Paper Mills Ltd. Vs. Union of India, AIR 1967 SC 1564. 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. The following observations of the Supreme Court in Orient Paper Mills Ltd. (supra) were quoted: "Thus, though Section 3 of the Excise Act talks of levy and collection, the actual collection is only at the time of removed of excisable goods from the factory premises or any other specified place of removal. The duty is leviable and is 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".

6. The Bombay High Court in Commissioner of Income Tax Vs. Loknete Balasaheb Desai S.S.K. Ltd. [2011] 339 ITR 288 (Bom) had an occasion to examine Section 145A of the Act, and has pertinently elucidated:- “9. The expression 'incurred by the assessee' in Section 145A(b) is followed by the words 'to bring the goods to the place of its location and condition as on the date of valuation'. Thus, the expression 'incurred by the assessee' relates to the liability determined as tax, duty, cess or fee payable in bringing the goods to the place of its location and condition of the goods. Explanation to Section 145A(b) makes it further clear that the income chargeable under the head profits and gains of business shall be adjusted by the amount paid as tax, duty, cess or fee. Therefore, the expression 'incurred' in Section 145A(b) must be construed to mean the liability actually incurred by the assessee.

10. Where the excisable goods are manufactured and are lying in stock on the last day of the accounting year, whether the manufacturer has incurred liability to pay excise duty on the manufactured goods is the question”.

7. In the aforesaid judgment, decision of the Supreme Court in Collector of Central Excise Vs. Polyset Corporation, [2000] 10 SCC 241 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. (supra).

8. With regard to the MODVAT credit etc., we may notice that Central Board of Direct Taxes (CBDT) has issued circular No. 772 dated 23.12.1998, the relevant portion of which reads as under: "52. Method of accounting in certain cases.

52.1. The issue relating to whether the value of the closing stock of the inputs work-in-progress and finished goods must necessarily include the element for which MODVAT credit is available, has been a matter of considerable litigation over the years. 52.[2] Consequent with the other provisions of the Act, with a view to put an end to this point litigation and in order to ensure that the value of opening and closing stock reflect the correct value, a new section 145A is inserted. This section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed by the assessee and such valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring to goods to the place of its location and condition as on the date of valuation."

9. 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. (supra), 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 of the Act.