TMI Blog1992 (2) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... is a manufacturer of cigarettes. The dispute before us arises on account of valuation of closing stock. Inventories were valued by the assessee at cost or market value whichever was lower. The cost of finished goods was determined on standard direct cost basis. The assessee was including excise duty on stock of duty paid finished goods in the valuation. However, a change was introduced from assessment year 1981-82. Excise duty in respect of excisable goods manufactured by the company for sale was excluded from the inventory values on the ground that it was not direct cost of production, nor was it expenditure incurred in bringing the inventories to their present condition and location. Being fiscal levy on the manufacturer, it was fully charged against the revenues (see summary of Accounting policies in printed accounts for the year ended 31-12-1980). The following note was given to the accounts for the year ended 31-12-1980 : " The Company has changed its method of accounting for Excise Duty and the valuation of stocks of duty paid finished goods : (a) The applicable excise duty paid on manufactured goods has from this year been excluded from the valuation of closing stocks. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finished goods held in stock. Excise duty being major levy in the case of cigarettes, it cannot be left out without distorting the valuation of the cigarettes held in stock. Logically even a proportionate part of the period cost items for example electricity, power, fuel, direct over-heads, administration expenses, depreciation etc. should be included on estimate basis in valuation of accounts. The expenses on these heads are normally allowed to be debited in full as a period cost because in most of the cases their contribution to the cost of the finished goods is not very high. However this is not the case with excise duty and specially in cigarette manufacturing industry. (iv) Since the receipts declared by the assessee are not inclusive of the realisable value of the stocks held, there is no justification in debit of total excise duty payable without enhancing the value of closing stock as that will not be for the goods sold or broadly the expenses will not be relatable to the receipts declared by the assessee in the relevant previous year. (v) There is a material change in the method of accounting of the assessee company in regard to the debit of excise duty in profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture is completed and the inventory is valued at direct manufacturing cost it may be charged out as an expense of the period in which the expenditure in incurred, provided (i) the accounting treatment is consistent from period to period and (ii) the full liability is provided in respect of all excisable goods manufactured during the period irrespective of whether such goods have been removed from the factory or stored in bond. It is also advisable in such circumstances to disclose the accounting treatment followed. " 10. After the analysis of the Guidance Note, the CIT (Appeals) next referred to insertion of section 43B in the IT Act w.e.f., 1-4-1984 according to which deduction for excise duty would be allowed only in the previous year in which such sum was actually paid, without considering the year in which the liability was incurred. The CIT (Appeals) observed that even if the assessee's method was accepted for assessment year 1981-82, it could not be accepted for assessment year 1984-85. The changed method would therefore have a very short span of life of only 3 years. 11. Thereafter the CIT (Appeals) referred to the publication of "Proposed Statement on Accounting Treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty arises at the point of time at which manufacture is completed. (c) The point of time at which the 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. " 12. It was brought to the notice of the CIT (Appeals) that the above was only a draft of the Proposed Statement and could not be taken as the statement itself but the CIT (Appeals) observed that he was in agreement with the views expressed in the Proposed Statement and he expressed his opinion that the excise duty was a manufacturing expense and should therefore be included in the inventory valuation. 13. The CIT (Appeals) next examined the applicability of proviso to section 145(1). He referred to the observations of the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 relevant extracts from which is given below : " The true purpose of crediting the value of unsold stock is to balance the cost of these 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise duty is incurred.It was explained that though the Committee may have expressed its opinion regarding the preferred method of considering excise duty as a manufacturing expense and includible as an element of cost for inventory valuation, at the same time the other option was still available to the assessee. In this connection he again invited reference to para 37(d) of the Guidance Note dealing with cases where excise duty is not considered as a manufacturing expense on the basis that the liability arises only after manufacture is completed. It was stated therein that in such cases the accounting treatment should be consistent, and full liability should be provided in respect of all excisable goods manufactured during the period. It was also stated therein that the disclosure of the accounting treatment should be made in the accounts. The learned counsel submitted that all these conditions were fulfilled, including a disclosure in the accounts, to which we have already referred in the beginning. The learned counsel also invited attention to the Auditor's Report where no qualifications have been made. 18. Attention was also invited to copy of a letter dated 14-5-1974 from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel thereafter referred to draft proposed Statement issued by the Institute of Chartered Accountants in 1985, which had been relied upon by the CIT (Appeals). He submitted that this Proposed Statement was duly dropped later on and did not become a 'Statement' at all. The relevant report is reproduced below : " The Research Committee considered the comments received on the above exposure draft at its last meeting held in June 1986. The Committee has decided that no revision in the existing Guidance Note is called for at present. Accordingly the members are being informed that the existing Guidance Note on Accounting Treatment for Excise Duties continues to remain in force. " 22. In view of this it was emphasised that only the Guidance Note issued earlier was in force and in those Guidance Notes the assessee had an option to adopt the treatment which it had done from assessment year 1981-82. A reference was also invited to the decision of the Gujarat High Court in Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 and observations at pages 246 and 247 saying that after introduction of section 43B the excise duty must be allowed in the year of payment and if full effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taken the cost of the closing stock did not result in the determination of the true and correct profits of the year and the Tribunal held that the lower authorities was justified in rejecting the assessee's method of valuation and in revaluing the closing stock on proper basis. The learned counsel for the assessee submitted before us that the facts in that case were distinguishable from the facts of the case under consideration by us, inasmuch as in that case the assessee has not included customs duties on raw material, countervailing duty on synthetic fibres imported and excise duty on locally purchased synthetic fibres, excise duty on production and manufacture of intermediate products, excise duty on its end-products and sales/purchase tax, octroi duty etc. on materials purchased as well as goods sold. The learned counsel submitted that the method was far too irregular to be acceptable, and according to him the decision was not an authority for the proposition that the end-product excise duty should form part of the closing stock. 25. In the end the learned counsel for the assessee also invited attention to the decision of the Supreme Court in CIT v. British Paints (India) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more now in light of the decision of the Supreme Court in British Paints (India) Ltd.'s case where it was held that the method of accounting should disclose true picture of profits and gains and if the system adopted did not disclose true and proper income, the AO is entitled and has duty to adopt appropriate computation to determine true income by virtue of section 145 of the IT Act and the proviso thereto. 30. The learned D.R. thereafter referred to the decision of the Tribunal in the case of Goodlass Nerolac Paints Ltd.) and submitted that the facts in that case were distinguishable inasmuch as the bona fides of the change in the system of valuation of closing stock were not in doubt, whereas the bona fides in the present case were not acceptable. He submitted that the application of proviso to section 145(1) by the AO was a clear indication that the bona fides were not accepted in the case. 31. The learned D.R. thereafter referred to the Exposure Draft of the Research Committee of the Institute of Chartered Accountants containing a Proposed Statement on Accounting Treatment for Excise Duty issued in 1985. He submitted that this draft may not have been finalised as a stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es deserve to be respected highly but cannot prevail where judgment of courts are available on the same subject. In this regard we will first refer to decision of the Supreme Court in British Paints (India) Ltd.'s case. In this case the assessee company was engaged in the manufacture and sale of paints and had, as a consistent practice, valued its goods in process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. It was held that it was a fit case for rejecting the accounts under proviso to section 145(1). The relevant part from the head note is reproduced below : " Held, reversing the decision of the High Court, (i) that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the Income-tax Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Income-tax Act, 1961. (ii) that any system of accounting which excluded, for the valuation of stock-in-tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that excise duty must be taken into account in determining the cost of production. In the second set of schedules, excise duty was mentioned apart from manufacturing and other items of cost. It was in this context that the above observations were made by their Lordships of the Supreme Court. 37. We have already reproduced above in para 11 the observations of the Madhya Pradesh High Court in Kirloskar v. Union of India (sic) and the Supreme Court in Bombay Tyre International Ltd.'s case and McDowell Co. Ltd.'s case. It was observed by the Supreme Court in McDowell Co. Ltd.'s case that the position has been put beyond doubt by a series of decisions that the incidence of excise duty is directly relatable to manufacture but its collection can be deferred to a later stage as a measure of convenience or expedience. There is some apparent variation in the observations of the Hon'ble Supreme Court in the cases of Saraswati Industrial Syndicate Ltd. and McDowell Co. Ltd.. It is seen that the judgment in the case of Saraswati Industrial Syndicate Ltd. was delivered by a Bench consisting of 3 Judges whereas the judgment in the case of McDowell Co. Ltd. was delivered by a Bench consist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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