COMMISSIONER OF INCOME TAX vs. M/S. COMED CHEMICALS PVT. LTD.

That the assessee filed return of income for the AY 1997-98 declaring total income at Rs.25,40,810/-. That while passing the assessment order, the AO disallowed and consequently directed to make addition of Rs.11,09,733/- on the ground of undervaluation of closing stock due to non- inclusion of excise duty and also disallowed deduction under section 80IA of Rs.2,19,216/- derived from derived from Bank Guarantee Deposits, Letter of Credit and on delayed payments.

Feeling aggrieved and dissatisfied with the order passed by the AO, making disallowance of Rs.11,09,733/- and consequently making addition of the aforesaid amount on the ground of undervaluation of closing stock due to non-inclusion of excise duty as well as disallowance of deduction under section 80IA with respect to interest of Rs.2,19,216/- and other disallowances, the assessee preferred an appeal before the learned CIT(A) and the learned CIT(A) partly allowed the said appeal and deleted disallowance of Rs.11,09,733/- which was made by the AO on the ground of undervaluation of closing stock due to non-inclusion of excise duty and also deleted disallowance of deduction under section 80IA with respect to interest of Rs.2,19,216/- derived from derived from Bank Guarantee Deposits, Letter of Credit and on delayed payments.

Feeling aggrieved and dissatisfied with the order passed by the CIT(A), the revenue preferred an appeal before the learned ITAT and by the impugned judgement and order, the learned ITAT has dismissed the said appeal preferred by the revenue confirming the order passed by the CIT(A) deleting disallowance made by the AO.

Feeling aggrieved and dissatisfied with the impugned order passed by the learned ITAT, revenue has preferred the present Tax Appeal to consider the following substantial questions of law : “(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law approving exclusion of excise duty from valuation of closing stock of finished goods? (2) Whether the Appellate Tribunal was right in holding that interest of Rs.2,19,216/- derived from Bank Guarantee Deposits, Letter of Credit and on delayed payments, is eligible for deduction u/s.80IA?

Heard Mr.Manish Bhatt, learned counsel appearing on behalf of the revenue and Mr.Agarwala, learned advocate appearing on behalf of the respondent.

Now, so far as question No.(1), Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law approving exclusion of excise duty from valuation of closing stock of finished goods, is concerned, it is reported that the said issue is now not res-integra in view Chematur Petrochemicals Ltd., reported in [2010] 327 ITR 369 (Gujarat). It is required to be noted that the issue / dispute in the present case is with respect to the period prior to amendment in the Act i.e. 1/4/1999. Therefore, the ratio and the law laid down by the Division Bench of this Court in the case of Narmada Chematur Petrochemicals Ltd. (supra) would be squarely applicable. In the case of Narmada Chematur Petrochemicals Ltd., the Division Bench of this Court has observed and held that excise duty at the time of valuation of the closing stock of finished goods at the end of the accounting period is to be excluded. While holding so, the Division Bench of this Court has assigned the following reasons:- “(a) no deduction for the liability had been claimed by the assessee. The excise duty payable on the finished goods lying in the closing stick at the end of the relevant accounting period had been paid in the subsequent year before the due date of filing of the return of income and that was how the amount was available considering the fact that the assessment had been framed and the show-cause notice was issued much after the close of the accounting year; (b) the Assessing Officer had not had recourse to sub-section (3) of section 145 of the Act. The assessee was following the mercantile system of accounting but it was not the case of the Assessing Officer that the Assessing Officer was not in a position to deduce true profits of the year under consideration. Such duty of Central excise if added to enhance the value of closing stock would result in enhanced opening stock on the first day of the next accounting period, namely, April 1, 1997. So the next year’s profits would get depressed accordingly. Over a period of time the whole excise would even out, in other words, be revenue neutral. At the same time while disturbing the value of the closing stock the assessing authority could not change the method of accounting regularly employed. (c) the assessment year being 1997-98 the provisions of section 145A of the Act inserted by the Finance (No.2) Act, 1998 with effect from April 1, 1999 could not be invoked.” Under the circumstances and applying the ratio and law laid down by the Division Bench in the case of Narmada Chematur Petrochemicals Ltd. (supra), question No.(1) is answered against the revenue.

Now, question No.(2), Whether the Appellate Tribunal was right in holding that interest of Rs.2,19,216/- derived from Bank Guarantee Deposits, Letter of Credit and on delayed payments, is eligible for deduction u/s.80IA of the Act, is concerned so far as interest derived from Bank Guarantee Deposits and Letter of Credit is concerned, the same is covered by the decision of the Hon'ble Supreme Court in the down by the Hon'ble Supreme Court in the case of Liberty Rafik.