TMI Blog1994 (2) TMI 269X X X X Extracts X X X X X X X X Extracts X X X X ..... , like NESCAFE " instant coffee, "LACTOGEN" baby food, "MAGGI" noodles, "CERELAC" baby cereal, etc. In the year under consideration, there was a change in the method of accounting followed by the assessee vis-a-vis the valuation of closing stock and which is denoted by Note No. 3 to the audited accounts as follows : "In past years, it has been the practice to charge the total expenses on excise duty to the profit and loss account and include the amount relating to unsold stocks in the closing stock valuation. The current year's liabilities for excise duty have been charged as an expense only in respect of goods cleared and sold and the balance amount of Rs. 81.61 lakhs relating to goods cleared from bonded warehouse and remaining unsold has been included under 'loans and advances' in Schedule H. Had the previous year's practice been followed, the charge to excise duty and the value of closing stock would have been higher by Rs. 81.61 lakhs. However, this change has no effect upon the profit before taxation for the year. In computing the provision for income-tax, the above-referred sum of Rs. 81.61 lakhs has been considered as an allowable deduction under the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also stated that the claim of Rs. 81.61 lakhs, if admitted in the year under consideration, would lead to a corresponding add back in the succeeding assessment year, viz., assessment year 1985-86. A copy of the computation of the assessable income for the subsequent year was filed to show that the amount in question had actually been added back suo motu. The Income-tax Officer did not accept the view-point canvassed on behalf of the assessee and proceeded to reject the arguments advanced. The detailed reasons given by him in the assessment order can be summarised as follows : (a) That although the provisions of section 43B superseded the other provisions of the Act, these had a limited overriding effect since they were intended to allow deduction for certain items on actual payment basis although the assessee's consistent method of accounting was mercantile, whereby the claims on account of expenditure were to be allowed on accrual basis ; (b) That the provisions of section 43B could not be utilised by an assessee to revise/change the method of valuation of the closing stock arrived at by following a consistent method since all that it provided was for a deduction to be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r were reiterated. The first appellate authority, relying on the decision of the Delhi Bench of the Tribunal in the case of Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524, proceeded to reject the claim made. He also referred to the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. [1986] 162 ITR 240 as considered by the Tribunal in the aforesaid judgment. Being of the view that the provisions of section 43B did not permit tampering with the valuation of the closing stock and there being no justification on the part of the assessee to reduce from the closing stock the proportionate excise duty which entered into the valuation of such closing stock, he confirmed the action on the part of the Income-tax Officer. In the further appeal filed before the Tribunal, learned counsel, Shri S. E. Dastur, appearing for the assessee, at the outset, reiterated the facts of the case and stated that the result of the order passed by the Commissioner of Income-tax (Appeals) was that the entire claim on account of excise duty paid, was allowed under section 43B, but the closing stock stood increased to the extent of Rs. 81,60,723 which represented the excise duty on unsol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se cases the assessee had not sought a change in the "method of accounting" regularly followed, but claimed a deduction at the return stage unlike the present assessee which had changed its method of accounting on an acceptable basis ; (j) That the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd. v. Union of India, AIR 1975 SC 460 was squarely applicable since that probably was the solitary decision where their Lordships had examined the concept of "cost of manufacture" and decided that it would not include excise duty ; (k) That the decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 was not an authority for the proposition that cost of manufacture/production included excise duty since that was a decision primarily concerned with the question, whether excise duty paid by the purchaser formed part of the turnover of the manufacturer ; (l) That the decision of the Bombay Bench of the Tribunal in the case of Godfrey Philips India Ltd. v. ITO [1992] 41 ITD 544 was not correct in the sense that it had held the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1993] 46 ITD 387 (ITAT, Mad). Learned counsel, Shri G. C. Sharma, appearing for one of the interveners, at the outset, supported the arguments advanced by Shri Dastur, but highlighted for our consideration the following, which he also reduced to writing by means of a note and a copy of which was also given to the Departmental Representatives : "1. Valuation of stock of finished products by applying 'direct cost' method is a well-recognised method of valuation in accounting practice. 2. Direct cost in common parlance, apart from what a man in the profession of accountancy thinks, the same means prime cost plus works or factory overhead expenses, but excluding administration, selling and distribution expenses. 3. Excise duty levied on manufactured goods is not a part of the prime cost of manufacture of the product. Excise duty is an expenditure incurred under the compulsion of law only, after the product has come into existence whether the product is sold or not. It is a selling expense and not cost of manufacture. 4. Such expenditure is properly debitable to the profit and loss account and not to the 'trading account' like any other revenue expenditure incurred by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and by this a reference was made to the levy on account of excise duty, which, on the one hand, was required to be collected from the purchaser and, on the other hand, it was meant to be paid over to the State ; (e) That excise duty was part of the "selling cost" and not "manufacturing cost" ; (f) That the issue under consideration was clearly covered by the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and the decision of the apex court in the case of McDowell and Co. Ltd. [1985] 154 ITR 148 was not applicable being unrelated to the issue in question. In addition to the decisions relied upon by Shri Dastur, learned counsel placed reliance on the judgment of the Supreme Court in the case of Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 as also the decision of the House of Lords in the case of Duple Motor Bodies Ltd. v. IRC [1961] 39 TC 537, and which came to be discussed by their Lordships of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. The learned Departmental Representative, Shri A. K. Gupta, on the other hand, strongly supported the order passed by the Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t guidelines which were issued in 1988 ; (b) That direct cost included excise duty ; (c) That the assessee by excluding excise duty from the figure of the closing stock, had deviated from an accepted method of valuation and which had led the auditors of the company to "qualify" the balance-sheet ; (d) That the Income-tax Officer was empowered to determine the correct profits of an assessee and this was so even after the said assessee had obtained expert advice and changed its method of stock valuation ; (e) That profits for a particular assessment year had to be worked out for that year itself and by the non-inclusion of the excise duty in the closing stock, the taxability was postponed to a subsequent assessment year, which was not permissible in law ; (f) The judgment of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, was not applicable, inasmuch as it had been rendered in a different context altogether and not at all pertaining to the question, which was being raised in the present appeal. Further it was not permissible to pick up a sentence or a word from a judgment and treat it as the law without reading the judgment as a whole an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by the guidelines laid down by the Institute, which did not shun the practice of treating excise duty as a deferred item of expenditure but only advised its inclusion ; (iv) That the guidelines laid down by the Institute were contrary to the law laid down by the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and hence required to be ignored ; (v) That the excise duty which had been levied in the assessee's case pertained to the post-manufacturing period and not to any period prior to that or even at any intermediary stage ; (vi) That an assessee was entitled to value the closing stock at cost or market price, whichever was lower, and the term "cost" meant cost of production or manufacture ; (vii) That any change in the method of stock valuation/accounting, whereby excise duty was excluded on the ground that it was not a part of the cost of production or manufacture, vis-a-vis the decision of the Supreme Court supra, was required to be accepted by the tax authorities, since it had legal sanction ; and (viii) That the guidelines of the Institute were meant only for its members who engaged themselves in professional work mainly of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot tantamount to a "tinkering with the closing stock" as was the view expressed by certain Benches of the Tribunal, but allowing to the assessee the full deduction to which it was entitled under the provisions of section 43B. In other words, the Special Bench departed from the view expressed by other Division Benches. It, however, sounded a word of caution to the effect that the assessee's opening stock for the subsequent assessment year would stand reduced by the corresponding figure which had been taken out of the closing stock of the current year. We were, however, called upon by the parties to adjudicate upon the question whether excise duty formed part of the cost of manufacture/ production and was hence includible in the figure of closing stock to the extent the goods remained unsold after having been cleared from the bonded warehouse. To this was connected the undisputed fact that the assessee was all along following a method of accounting whereby excise duty paid was charged to the profit and loss account and to the extent the goods remained unsold, it was reflected in the closing stock. In the assessment year under consideration, however, it changed the earlier method and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [1986] 59 Comp Cas 460 ; [1983] 15 Taxman 29 (SC) and McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). The observations in paragraph 14 of the revised guidelines are : "The true nature of excise duty as it emerges from the above decisions, can, therefore, be summarised as under: (a) It is a levy on manufacture. (b) The liability for the duty arises at the point of time at which manufacture is completed. (c) The point of time at which duty is collected may be determined by considerations of administrative convenience. (d) The point of time at which duty is collected is immaterial in determining the true nature of the levy.'' (emphasis* supplied by us). A comparison of the guidelines for 1979 and 1988 does reveal some changes since the portion with the heading "Can excise duty paid be treated as a pre-paid expense or deferred charge" has been omitted in the latter. The "Summary of Recommendations", however, does not reveal any material differences between 1979 and 1988. The Institute, however, takes the view that the liability for excise duty arises at the point of time at which the manufacture is complete, viz., a post-manufacture levy but in the Summary of Recomm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to the point of time at which it arises. Learned authors have explained the concept of excise duty in the following terms : Per Arvind P. Datar Guide to Central Excise Law and Practice, Second Edition 1990-91 : Volume I (pages 66 and 67) : " An excise duty is a duty on production. . . . It is an indirect tax capable of being passed on to the consumer as part of the price. Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passed on to the ultimate consumer, that is, ultimate incidence will always be on the consumer.'' Per R. K. Jain, Central Excise Law Guide : Sixth Edition 1991 (pages 166 and 167) : "In order to be 'goods', they should be something which can ordinarily come to the market to be bought and sold. Thus the goods which are not capable to be bought and sold are not liable to duty. The mere fact that excisable goods are not actually sold, will not make any difference in determining the excisability of that product so long as the goods are saleable or marketable." "duty of excise is on 'goods' and in order to be 'goods' it should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough both excise duty and sales tax are levied with reference to goods, the two are very different imposts ; in one case the imposition is on the act of manufacture or production while in the other, it is on the act of sale. In neither case, therefore, can it be said that the excise duty or sales tax is a tax directly on the goods. " A careful reading of the views of the Institute, the commentaries of learned authors and the decisions rendered by courts on the nature, scope and object of excise duty leaves us in no doubt that excise duty is a levy on the "manufacture" or "production" of goods and is not related to a stage prior to the completion of the manufacturing or production process, but to a stage thereafter, viz., post-manufacture and on coming into existence of a marketable commodity. The very basis of quantification of excise duty is related to the value to be placed on the commodity, i.e., selling price and if that be so, then the levy itself cannot enter into the said value but has to remain outside although for the ultimate consumer both the value and the quantum of excise duty together with the quantum of profit and other incidental items such as packing, forwarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture" which is of universal application. We do not find anything to the contrary in the subsequent decision of the Supreme Court in the case of McDowell and Co. Ltd. [1985] 154 ITR 148, which dealt no doubt with the question of excise duty, but in a totally different context altogether, viz., whether excise duty paid by the purchaser formed part of the turnover of the seller. The reliance of the Departmental Representative on the decision of the Supreme Court in the case of Sun Engg. Works P. Ltd. [1992] 198 ITR 297 is misplaced and the other decisions relied upon by him do not advance the Revenue's case in the face of the direct decision of the apex court (supra). At this stage we would like to revert to the decision of the Bombay Bench of the Tribunal in the case of Godfrey Philips India Ltd. v. ITO [1992] 41 ITD 544 (ITAT, Bom), wherein arguments identical to those tendered in the present appeal were advanced on behalf of the assessee but rejected on the following main grounds : (a) The Assessing Officer was entitled to examine the facts of the case in order to ascertain, whether the correct profits and gains could be deduced from the accounts maintained by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Delhi), no adjustment is required in the figure of opening stock for the assessment year under appeal. In the view that we have taken, we do not find it necessary to decide whether excise duty is a selling expense or its non-allowance in full would negate the overriding charge of the State. Ground No. 1 is, accordingly, allowed. The only other remaining ground in the assessee's appeal pertains to the disallowance under section 37(3A) of the Income-tax Act, 1961. To this is connected ground No. 2 in the Revenue's appeal and the subsequent discussion disposes of these common grounds. The Income-tax Officer in the course of assessment proceedings included for the purposes of disallowance a sum of Rs. 26,19,000 being the rent/hire charges of shelf space in show windows. According to him, the display of goods by the assessee on these shelves constituted expenditure under the head "Advertisement and Publicity" with a view to attract customers. On further appeal before the Commissioner of Income-tax (Appeals), the assessee submitted a written note and which finds place in paragraph 3.2 of the appellate order. The submission on the part of the assessee was that the shelves had been t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of excise duty paid by F. S. L. to the excise authorities. However, a dispute arose as to the determination of 'wholesale cash price' which was the basis for calculating excise levy. As the Central excise authorities did not agree to the claim of the assessee and the assessee was required to pay more excise duty in pursuance of the agreement, it asked for increase in the supply price to N. P. I. Messrs. Nestles' Products (India) Ltd., vide its letter dated March 25, 1970, agreed to it and at the same time requested the assessee 'to move the higher authorities by filing appeals in the matter, if necessary'. Upon such request the assessee-company moved first the High Court and then the Supreme Court and incurred certain legal expenses. It is also understood that ultimately the assessee won the case and a refund of Rs. 1,23,88,718.24 was received by it which was passed on to N. P. I. Thus it is clear that the legal expenses incurred by the assessee are not wholly and exclusively for the purpose of its own business as it fought the case for N. P. I. at their request and the benefits received were also passed on to them. The assessee in its letter dated March 20, 1987, has ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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