Income Tax Appellate Tribunal - Mumbai
Dy. Cit, Ward 4(2) vs Advent Pharma (P) Ltd. on 8 June, 2005
Equivalent citations: [2005]4SOT42(MUM)
ORDER
D.C. Agrawal, A.M. This is an appeal filed by the revenue against the order of CIT(A) for the assessment year 1995-96 raising the following effective ground:
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in treating the excise duty of Rs. 3,03,080 as allowable under section 43B when the said amount was relating to closing stock of current assessment year and sales of next assessment year totally disregarding the established principle of matching income with expenses available in sections 28 & 29."
2. The main grievance of the revenue is that CIT(A) had deleted the addition of Rs. 3,03,080 added to the closing stock on account of excise duty paid by the assessee before filing of the return and claimed as payable under section 43B by virtue of first proviso thereof. The facts of the case are that the assessee is a manufacturer of drugs and organic items. It showed finished goods in the closing stock at Rs. 25,18,192. This was kept, after manufacture, in the bonded warehouse. In respect of these goods excise duty of Rs. 3,03,080 was paid before filing of the return for the assessment year 1995-96 and was claimed as deduction under section 43B in the assessment year 1995-96. The assessing officer, however, thought that the assessee company could not specify any date during financial year 1994-95 when the said excise duty could have been said to have been crystallised. According to him, it was a contingent liability. This had arisen only in April, 1995, when the goods were sold. In response to the queries raised by assessing officer on this issue, the assessee vide his letter dated 13-2-1998, replied to the assessing officer that liability to pay excise duty arises when the excisable goods are manufactured and not when goods are removed. The assessee relied on the decisions in Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240, and decision of ITAT, Delhi S.R. Pauskar v. Third ITO (1994) 49 ITD 36 (Del) and Philipson Stow v. Inland Revenue Commissioner (1963) 49 ITR 21 (HLR).
While disallowing the claim of the assessing officer under section 43B, the assessing officer made the following observations :
1. If a particular expenditure is not a part of the books of account of accounting year 1994-95, there cannot be any question of this expenditure finding its way to closing stock.
2. The excise duty claimed as deduction in computation of income is not part of the profit and loss account and it has not been included in the valuation of closing stock :
3. The assessee-company has not shown as how exactly the price of closing stock was worked out. The costing of final product with regard to cost incurred in manufacturing process, was not submitted.
3. The CIT(A) deleted the addition by making following observations :
2.1 "The assessee's representative in his elaborate submissions stated that the assessing officer's contention is not correct. As the value of the closing stock includes the element of excise duty, the liability to excise duty takes place when the goods are manufactured in the factory. Thus, the closing stock as on 31-3-1995 consisted an element of excise duty. When the part of the closing stock has been sold on 3-4-1995 to 12-4-1995 and the liability of excise duty is paid before filing of the return, the proviso to section 43B would apply in this case as the liability to pay such amount was incurred by the assessee during the accounting year 1-4-1994 to 31-3-1995 itself.
Hence, the payment made before filing of the return should be allowed as deduction under section 43B, i.e., in the assessment year 1995-96 only and not in the assessment year 1996-97 as stated by the assessing officer. In support of his contention the assessee has relied on Delhi ITAT's decision in the case of Indian Communication Network (P) Ltd. v. Inspecting Asstt. CIT and ITAT orders in the case of ITO v. Food Specialities India Ltd.
2.2 After going through the submissions and also the order of the assessing officer, 1 am of the view that assessee's contention that assessee-company has incurred liability of the payment of excise duty on the finished goods is correct. As per the proviso to section 43B, the assessee has incurred the liability to pay such duty. The assumption of the assessing officer that liability to pay excise duty takes place only when the goods are removed from the factory premises is not correct and the fact remains that once goods are manufactured as finished entity, they cannot be removed without the payment of the duty. In strict sense, the liability to pay duty arises when excisable goods are manufactured in the finished form. Thus, when the closing stock when included an element of excise duty was sold in the subsequent period and the duty has been paid before the filing of return the same is allowable under section 43B.
2.3 More so, when the excise duty which is claimed by the assessee in the return on the basis of payment in subsequent year is written back in the return of income in the next year to void the double claim. Hence the disallowances unwarranted and the same is deleted."
The revenue is in appeal against the above order of the CIT(A).
4. Before us, the learned Department Representative submitted that it is necessary that accounting entries should have been passed by increasing the value of closing stock by excise duty. If it is not done, then the claim cannot be allowed during the financial year, as there is no evidence that claim pertained to the accounting year 1994-95 relevant to assessment year 1995-96.
5. On the other hand, the learned counsel for assessee submitted that:
(i) The liability to pay excise duty arises as soon as the goods are manufactured. It is only realization of duty, which is deferred to the point when goods are removed from the warehouse.
(ii) The method of collection of excise duty does not affect the essence of duty, which is primary on the production.
(iii) Application of section 43B does not depend upon method of accounting followed by the assessee.
(iv) The excise duty paid during financial year 1995-96 has been added in the computation of income for the assessment year 1996-97 as it pertained to the assessment year 1995-96 and has been correctly claimed on payment basis as per section 43B.
It will not be material whether excise duty has been accounted for in the closing stock. Though, such duty is included in the valuation of closing stock of Rs. 25,18,192 inasmuch as the assessee has shown gross profit at a rate of 18.66 per cent after accounting the excise duty in the closing stock.
6. We have heard the rival submissions and considered the facts and material on record. We are of the view that appeal of the revenue has no merit. In fact, filing of appeal was not called for. The assessing officer has made addition to the total income without appreciating either the legal principles or the accounting entries. The first issue is as to the point of time when the liability to pay excise duty arises. Where the assessee is following mercantile system of account, the liability is incurred as soon as the excisable goods are manufactured or processed. The duty is not directly on the goods but on manufacture thereof. (pl. ref. to UOI v. Delhi Cloth & General Mills AIR 1963 SC 791: Shinde Bros. v. Dy. CIT AIR 1967 SC 1512). The levy is on the production and manufacture of the goods as the Legislature considers it to be the most convenient stage. However, its realisation may be differed or postponed for administrative convenience to the date of removal of goods from the factory (ref. Wallace Flour Mills Co. Ltd. v. CCE (1990) 186 ITR 440 (SC). The removal of goods is not a taxable event. Hon'ble Supreme Court in this case observed as under:
"Excise is a duty on manufacture or production. But the realisation of the duty may be postponed for administrative convenience to the date of removal of goods from the factory. Rule 9A of the Central Excise Rules, 1944, merely does that. That is the scheme of the Central Excises and Salt Act, 1944. Rule 9A does not make removal the taxable event. The taxable event is the manufacture but the liability to pay the duty is postponed till the time of removal under rule 9A. Even though on the date of manufacture the goods are exempt from excise duty, on the basis of rule 9A, the central excise authorities are within their competence to apply the rate of excise duty prevailing on the date of removal.
7. In many other cases also it has been held by the Honble Supreme Court that levy of excise duty is at the stage of manufacture or production of goods and realisation is only postponed or differed at the removal or sale point. In Ujagar Prints v. UOI (1989) 179 ITR 317 (SC), the Hon'ble Supreme Court observed as under :
"The retrospective operation of the amendments to the definition of manufacture" in the Central Excises and Salt Act, 1944, so as to include processing is not an unreasonable restriction on the fundamental right of the processors (of grey fabric provided by the manufacturers) under article 19(1)(g) of the Constitution of India.
Duties of excise are imposed on the production or manufacture of goods and are levied upon the manufacturer or the producer in respect of the commodity taxed. The question whether the producer or the manufacturer is or is not the owner of the goods is not determinative of the liability. The essential and conceptual nature of the tax has to be kept clearly distinguished. from both the extent of the power to impose and the stage at which the tax is imposed. Though the levy is on the manufacture or production of goods, the imosition of the duty could be at the stage which the law considers most convenient to impose as long as a rational relationship with the nature of the tax is maintained." (Emphasis supplied)
8. Thus, as soon as the assessee has shown the manufactured goods in the finished stock at Rs. 25,18,192, the liability to pay the excise duty has arisen. For accounting and paying excise duty, there can be two types of situations. One is where liability to excise duty so arisen has been accounted for by passing appropriate accounting entries. Trading account is credited with enhanced value of closing stock including excise duty and profit and loss account is debited with "excise duty payable". In the balance sheet, enhanced value of closing stock is shown on "asset" side and "excise duty payable" is shown as credit entry on "liabilities" side. The net effect would be that the two entries will neutralise each other. In trading and profit and loss account, the two sides will be enhanced by the same figure of excise duty and in balance sheet the two sides, i.e., assets and liabilities sides will also be enhanced by the same figure. The net effect, therefore, will be zero both in trading and profit and loss account and in balance sheet. When excise duty is paid within the time allowed by first proviso to section 43B, the excise duty payable account will be debited by crediting cash/bank account. The second situation would be where the assessee does not pass any entry in the books in the current assessment year. When excise duty is actually paid, the cash account is credited and either profit and loss account is directly debited by the excise duty paid or first excise duty paid account is debited and then same is transferred to profit and loss account of that year. In the final computation, if excise duty pertain to goods manufactured in earlier year, but paid in subsequent year, the claim will be added back in that subsequent year and will be made in current year as per proviso to section 43B on actual payment basis before filing the return of income. This is exactly what the assessee has done in the case before us.
9. Thus, in either situation, whether the entry is passed through books or not, it will not make any difference so long as the excise duty pertaining to goods manufactured or produced in earlier year and is paid next year within the time allowed by first proviso to section 43B. Now coming to section 43B and first proviso, they read as under :
"43B. Notwithstanding anything contained in any other provision of this D Act, a deduction otherwise allowable under this Act in respect of
(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force,or
(b) to (f) shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) or clause (f) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return :
Explanation 1.-For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1-4-1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him."
10. Thus, in this section and its proviso, it is nowhere mentioned that allowability of claim will depend upon the accounting treatment of the excise duty or the method of accounting followed by the assessee. Any claim of cess, duty or tax will be allowed by actual payment basis and if payment is made next year before filing of the return then still the claim can be allowed in the year to which the claim pertains. Therefore, the argument that claim under section 43B will be allowed only when such entry relating to cess, duty or tax is passed in trading account or in the books of account has to be out rightly rejected.
11. The next argument of the revenue has been that there should be matching of revenue and expenses. It has been already explained above that how the accounting entries are done to match credit and debit which will not make any difference to the net results as the entries on both sides of trading & profit and loss account will neutralise each other. This argument of the revenue has also to be rejected.
12. Further, the assessee has added back the debit of excise duty to the total income in the final computation of income for the assessment year 1996-97 so as to avoid claim of double deduction. The claim of Rs. 3,03,080 has been made only in assessment year 1995-96 on the basis of proviso to section 43B. in view of the above, we find no merit in the appeal of the revenue. Accordingly, we uphold the order of CIT(A).
13. In the result, the appeal of the revenue is dismissed.