ASSTT.COMMISSIONER OF INCOME TAX, CIRCLE 4, BARODA vs. MILESTONE LIMITED

Facts

The Revenue, Assistant Commissioner of Income Tax, Circle 4, Baroda, filed two appeals challenging orders of the Income-Tax Appellate Tribunal (ITAT), Ahmedabad Bench "C", dated July 28, 2006. The appeals concerned assessment years 1998-1999 (ITA No. 1558/Ahd./2002) and 1997-1998 (ITA No. 1557/Ahd./2002). The assessee, Milestone Limited, a public limited company manufacturing dyes and intermediates, had additions made by the Assessing Officer (AO) for excise duty payable on closing stock of finished goods. The AO considered this excise duty as part of the cost of finished goods. The Commissioner of Income-Tax (Appeals) deleted these additions, a decision upheld by the ITAT. The Revenue's appeals were admitted on November 27, 2007, on a substantial question of law.

Held

The High Court held that the Tribunal was justified in excluding excise duty at the time of valuing closing stock. The Court referred to its own judgment in "Assistant Commissioner of Income-tax v. Narmada Chematur Petrochemicals Ltd." ([2010] 327 Income Tax Reports 369 (Guj)). The reasoning was based on three points: (a) no deduction for the liability was claimed by the assessee, and the excise duty was paid in the subsequent year before the due date of filing the return; (b) adding excise duty to closing stock would enhance opening stock in the next year, making the exercise revenue neutral over time, and the AO did not have recourse to Section 145(3) of the Act; and (c) for assessment year 1997-98, Section 145A of the Act, inserted with effect from April 1, 1999, could not be invoked. The question of law was answered against the Revenue and in favour of the assessee. The appeals were disposed of.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to exclude the excise duty at the time of valuing closing stock at the end of the accounting period? Assessee's contentions: The judgment does not record any specific contentions made by the assessee before the High Court, as no one appeared for the respondent. However, the CIT(A) and ITAT relied on the Madras High Court decision in "English Electric Company" which held that excise duty liability cannot be regarded as part of the assets in the form of higher valuation assigned to closing stock. The CIT(A) also distinguished the Supreme Court decision in "British Paints" as it related to inclusion of overhead expenses, whereas excise duty payable was not claimed by the assessee. Revenue's contentions: The Revenue argued that excise duty accrues at the time of manufacturing and should be added to the value of closing stock as it becomes part of the cost of finished goods. The Revenue's appeals were admitted on the substantial question of law framed above.