TMI Blog2010 (4) TMI 1198X X X X Extracts X X X X X X X X Extracts X X X X ..... edule 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 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 ₹ 20,17,000 pertaining to finished goods as on 31-3-1997 should not be included in the value of inventory of finished goods. The assessee tendered explanation under letter dated 30-12-1999 and vide para No. 4 of the said letter stated thus : Excise duty payable on finished goods lying in stock as on 31-3-1997 works out to ₹ 20,17,000 and 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 amount of ₹ 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 Assessing Officer held that the goods have been manufactured, are ready for dispatch, and hence, the lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 British Paints India Ltd. (supra), 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and was calculated on the value of manufactured goods. Therefore, according to the counsel, 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 v. State of Orissa [2000] 1 SCC 413; (2) McDowell Co. Ltd. v. CTO[1985] 154 ITR 1481 (SC); (3) Berger Paints India Ltd. v. CIT[2004] 266 ITR 992 (SC). Reliance was also placed by way of reiteration on the Apex Court decision in case of British Paints India Ltd. (supra). 10. 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 section 4 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n framed on 28-2-2000 while the show-cause notice was issued in December, 1999, much after close of the accounting year. 13. 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 v. CIT[1953] 24 ITR 481 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 15. 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 Dictio- nary 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 discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse 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-clause (iii) of clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the stock of such goods was removed from the factory after 1-3-1970 resulting in recovery of duty of central excise as the exemption in question had been withdrawn by notification dated 1-3-1970. 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. v. 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sections 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 sub-section (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 simpliciter. If section 3 of Excise Act is considered to be the only charging section and section 4 of the Excise Act is considered as only a provision for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged. 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. v. Collector of Central Excise [1990] 186 ITR 440 (SC). 23. Under the Customs Act, 1962 also there are similar provisions delineating identical scheme of levy and collection. In the case of Kiran Spg. Mills v. Collector of Customs 1999 (113) ELT 753, the Apex Court has laid down thus after referring to section 3 of the Customs Tariff Act, 1975 : Section 3, sub-section (6) makes the provisions of the Customs Act applicable. This would bring into play the provisions of section 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) of section 145 of the Act, or Accounting Standards as notified under sub-section (2) of section 145 of the Act, have not been regularly followed, the Assessing Officer may make an assessment in the manner provided under section 144 of the Act. Therefore, where the Assessing Officer 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 Assessing Officer can make a best judgment assessment. In the facts of the present case, Assessing Officer had not taken recourse to sub-section (3) of section 145 of the Act. 26. That leaves only operation of section 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 Assessing Officer that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enunciate the basic principles as to applicability of commercial accounting practice and operation of section 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 sections 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessment year 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 assessment year 1986-87 and subsequent years. [Clause 45] Though the Bill proposed retrospective insertion ultimately the section has come on the statute book only from 1-4-1999. What is more material is that the same relates to inclusion in the value of inventory the amount of any tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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