Income Tax Appellate Tribunal - Mumbai
Godfrey Philips India Ltd. vs Income-Tax Officer on 12 February, 1992
Equivalent citations: [1992]41ITD544(MUM)
ORDER
V.K. Sinha, Accountant Member
1. These three appeals filed by the assessee are being consolidated for the sake of convenience since common points are involved.
2. The first ground in all three years relates to rejection by the CIT (Appeals) in the change in the method of accounting adopted by the assessee for valuing the closing stock. The additions made on this account were Rs. 92,03,357 in assessment year 1981-82, Rs. 60,62,910 for assessment year 1982-83 and Rs. 1,68,73,765 for assessment year 1983-84. The closing stock for assessment year 1981-82 was the opening stock for assessment year 1982-83 and the closing stock for assessment year 1982-83 was the opening stock for assessment year 1983-84. The additions for assessment years 1982-83 and 1983-84 were made after giving credit for enhancement of the value of the opening stock, which was the result of enhancement of the value of the closing stock of the previous year.
3. The assessee 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.
(b) Excise duty payable on manufactured goods lying in the factories has been provided for, but has not been included in the valuation of such goods. Previously no provision was made in the Accounts for excise duty payable in respect of such stocks.
(c) Provision for tax has been made on the basis that the excise duty charged in the Profit and Loss Account would be allowed as a deduction for tax purposes.
As a result of the above changes, the profit for the year is lower by Rs. 92,03,357, before tax and Rs. 37,61,872 after tax.
4. In the course of assessment proceedings for assessment year 1981-82, the Assessing Officer examined the matter in detail and also whether reduction of profits by Rs. 92,03,357 was justified. The assessee explained that it was following guidelines issued by the Institute of Chartered Accountants of India in October 1979 on the accounting treatment of excise duty. It was in the view of those guidelines that the company decided to exclude excise duty from the valuation of its finished inventories in closing stock and to write off complete charge for the excise duty even in respect of the cigarettes manufactured in its account for the year in which the liability was incurred. It was also claimed that it was a bona fide permanent change in the method of accounting. The A.O. did not accept the change in the method of accounting for the reasons enumerated by him as under:
(i) Guidelines issued by the Institute of Chartered Accountants of India is meant for the members. The guidelines itself presents the views of eminent experts, who have voiced their dissenting views. The guidelines are not binding and are optional. It also does not have any statutory force to affect the computation of income as per the provisions of the IT Act.
(ii) Without going into merits or otherwise of the referred guidelines, it is observed that they are definitely not helping the assessee's books of accounts to reflect the correct income of the assessee for the Assessment Year 1981-82 in view of the fact that earlier the assessee used to debit the excise duty on an altogether different basis. This fact is clearly born out even from the Annual report itself.
(iii) Considering the fact that the excise duty is levied while the manufactured goods are taken out of the factory premises, the finished inventory has to take into account the actual cost of 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 duly 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 and loss account and the valuation of finished inventories in its manufacturing account. Admittedly the above changes have resulted into decrease in the assessee's income prior to tax by a huge sum of Rs. 92,03,357 compared to the assessee's returned income of Rs. 1,35,290.
5. The AO rejected the assessee's accounts under proviso to Section 145(1) and made an addition of Rs. 92,03,357.
6. When the matter went to the CIT (Appeals) he examined the matter in greater depth. He referred to paras 16 to 19 of the Guidance Note on accounting treatment on excise duty published by the Institute of Chartered Accountants and noticed that a view had been expressed in para 17 that excise duty cannot be treated differently from other expenses, and it was as much a cost of manufacture as any other expenses. It had also been stated in para 18 that excise duty contributed to the value of the product. It was thereafter concluded in para 19 that to exclude excise duty for determining cost for inventory valuation would mean damaging the basic objective of inventory valuation, namely, the matching of costs with related revenues.
7. The CIT (Appeals) next referred to para 21 of the Guidance Note where it was stated that liability for excise duty normally arises at the very moment at which manufacture is completed. Excise duty was stated to be a cost directly attributable to the manufacturing process. A reference was made to a contrary view that the liability for excise duty arises only after the goods are produced and that it is an expenditure incurred not for bringing the goods into the present location and condition but is an expenditure which arises only after the change of location and condition takes place. Since this change takes place only after the manufacture is completed, the contrary view was that the excise duty is not a manufacturing expense. However, in the opinion of the Committee the former is the better view.
8. A reference was also made to paras 30-31 of Guidance Note where a conclusion was arrived at that the better accounting treatment is to include the excise duty in the valuation of inventories.
9. The details were duly noted of para 37(d), on which reliance had been placed by the assessee and which is reproduced below:
37(4) Where excise duty is not considered as a manufacturing expenses on the basis that the liability arises only after manufacture 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 43 B 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 Treatment for Excise Duty" (hereinafter referred to as the "Proposed Statement") in November 1985. He reproduced in particular paras 12-16 as below:
12. The true nature of excise duty has been examined in a number of judicial decisions notably by the High Court of Madhya Pradesh in Kirloskar Bros. v. Union of India, and the Supreme Court in Union of India v. Bombay Tyre International Ltd. [1983] 15 Taxman 29 and the Supreme Court in Mc Dowell & Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148.
13. In Kirloskar Bros. case the Court has observed that:
(a) No sooner the process of manufacture or production is completed, the liability for excise duty arises at that point of time. In our opinion, its removal or disposal will be wholly immaterial.
(b) The nature of the duty is that it is essentially a tax on production or manufacture of excisable goods.
(c) We are of opinion that the liability for tax, namely the excise duty, would arise no sooner the manufacture or the production is completed and it is immaterial as to what machinery may be devised by the Central Government under the rule-making powers for recovery of a tax.
Special leave Petition to the Supreme Court against the above decision was rejected on merits.
14. In Bombay Tyre International Ltd.'s case (supra) the Supreme Court observed that:
(a) While the nature of an excise is indicated by the fact that it is imposed in respect of the manufacture or production of an article, the point of time at which it is collected is not determined by the point of time when its manufacture is completed but will rest on consideration of administrative convenience.
(b) While the levy is on the manufacture or production of goods, the stage of collection need not, in point of time, synchronise with the completion of the manufacturing process.
15. In McDowell's case (supra) the Supreme Court observed that the 'position has been put beyond doubt by series of decisions' and on the basis of a number of decisions examined by it the Court came to the conclusion 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".
16. The true nature of excise duty as it emerges from the above decisions can therefore be summarized as under :
(a) It is a levy on manufacture.
(b) The liability for the 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 sides of the accounts would leave only the transactions on which there have been actual sales in the course of the year showing the profit and loss actually realised on the year's trading.
14. The CIT (Appeals) expressed the view that the new method of valuation of closing stock introduced by the assessee did not serve the true purpose of crediting the value of unsold stock and in the circumstances the ITO was justified in invoking proviso to Section 145(1) for computation of the assessee's business income.
15. For the above reasons the CIT (Appeals) upheld the addition of Rs. 92,03,357. At the same time he made reference to the decision of the Supreme Court in the case of McDowell & Co. v. CTO [1985] 154 ITR 148 and the observations regarding tax planning. It was observed by the Supreme Court that Tax Planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning. The CIT (Appeals) held that the change in the method of valuation of closing stock could not be considered as bona fide in view of the fact that the main purpose behind it was to retain with it a substantial amount which otherwise would have been payable by it to the Income Tax department. He confirmed the addition for this additional reason also.
16. The learned counsel for the assessee submitted before us that the change in method of accounting of valuation of closing stock of finished duty paid goods was bona fide and consistent and within the Guidance Note issued by the Institute of Chartered Accountants. He invited reference to para 1 of the Guidance Note which is reproduced below:
The Research Committee was requested to consider the appropriate accounting treatment for excise duties and in particular whether (i) excise duty should be treated as an element of cost for the purpose of inventory valuation or (ii) excise duty should be expensed out in the very accounting period in which liability for excise duty is incurred or (iii) excise duty, to the extent to which it relates to excisable products included in the inventory, should be treated as a pre-paid expense or deferred charge.
17. The learned counsel submitted that from assessment year 1981-82 the assessee had followed the second method mentioned in the above para i.e., excise duty should be expensed out in the very accounting period in which liability for excise 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 Institute of Chartered Accountants to M/s. Sandvik Asia Limited (at page 63, part IV of Paper Book), where it was clear that writing off of excise duties in the annual accounts was also permissible. In this connection it was emphasised that the question for consideration was not whether the new system adopted by the assessee was better than the earlier system, but only whether the new system was permissible system. It was clear from the Guidance Note and the above mentioned letter that the method followed by the assessee was permissible treatment.
19. It was next submitted that the assessee was entitled to change the method of valuation of stock, relying on the decision in Sarupchand v. CIT [1936] 4 ITR 420 (Bom.) at 421 and 422 and Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 at 333 (Ker.). It was immaterial whether revenue was affected as held in Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 at 36 (Mad.). The only consideration was whether the new treatment was an acceptable treatment as held in CIT v. K. Sankarapandia Asari & Sons [1981] 130 ITR 541 (Mad.) at 544. The learned counsel further emphasised that if the change was bona fide and consistent then it had to be accepted notwithstanding the fact that in the year of change prejudice may be caused to the revenue. Reliance was placed on the decision in CIT v. Carborundum Universal Ltd. [1984] 149 ITR 759 (Mad.) at 770.
20. The learned counsel thereafter invited attention to the decision of the Supreme Court in Saraswati Industrial Syndicate Ltd. v. Union of India AIR 1975 SC 460. The issue under consideration was fixation of sugar prices under Sugar (Control) Order 1966, Clause 7. C1.7(2) requires the Government to fix the price "having regard to the estimated cost of production of sugar on the basis of the relevant schedule". In this connection the following observations of the Supreme Court were highlighted :
There is nothing in the first set of Schedules to indicate that excise duty must be taken into account in determining the cost of production. In the second set of schedules excise duty is mentioned apart from manufacturing and other items of cost. Excise duty is really imposed on goods when they have come into existence in the manufactured form. It could more properly be taken into consideration in determining net profits than in calculating cost of manufacture.
21. The 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 effect has to be given the excise duty should not be part of the closing stock.
23. The learned counsel for the assessee thereafter invited attention to the decision of the Tribunal in Goodlass Nerolac Paints Ltd. v. I AC [1985] 13 ITD 270 (Bom.). It was held in that case that where the assessee's bona fides in changing method of valuation of closing stock are not doubted or challenged, the department cannot revalue the stock and make additions. In that case the assessee company valued its stock at cost or market value, whichever was lower, up to the accounting year ended 31-12-1975. However, in the next year i.e., accounting year ended 31-12-1976 a change in the method of ascertaining the cost was made and excise duty was added to the value of stock. This method continued up to the accounting year ended 31-12-1979. However, in the accounting year ended 31-12-1970 the assessee excluded excise duty from the cost for the purpose of valuation of closing stock in view of the guidelines prepared by the Research Committee of Institute of Chartered Accountants of India published in October 1979, and reverted back to the method of valuation adopted by it prior to 31-12-1975. The Assessing Officer examined this change for assessment years 1981-82 and 1982-83 and added to the returned income certain amounts after revaluing the closing stock. The CIT (Appeals) upheld the assessment order. The Tribunal observed that there was nothing to suggest that there was any mala fide intention, since the guidelines issued by the Institute of Chartered Accountants was being followed. Further, the income returned for each of the years was of the same order and no one could justifiably say that the assessee was contemplating adjustment of profits from year to year so as to reduce the tax liability. In the facts and circumstances the additions made by the AO were deleted by the Tribunal. The learned counsel for the assessee submitted that the facts in the present case were quite similar and therefore there was no justification for the additions made to the returned income in the present case also.
24. The learned counsel for the assessee also referred to the decision of the Tribunal in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom.)(TM). In this case the assessee admittedly followed the cost method for valuation of closing stock. The manner in which the assessee had 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) Ltd. [1991] 188ITR 44. In this case the assessee had valued stock only at actual cost of raw materials, not taking into account the over-head charges at all. It was held that this was not a correct mode of valuation and the AO was entitled to add the overhead charges. The learned counsel submitted before us that the facts of that case were also distinguishable for the facts of the present case since in the present case overhead charges had been duly incorporated in the valuation of closing stock and excise duty had been excluded in light of the Guidance Note from the Institute of Chartered Accountants. Thus according to him the abovementioned decision did not apply to the facts of the present case.
26. For the above reasons the learned counsel submitted before us that the additions to the closing stock sustained by the CIT (Appeals) were not justified and should be deleted.
27. On the other hand the learned departmental representative supported order of the CIT(Appeals) and submitted that the additions had been rightly upheld. He submitted that excise duty was a direct post and not different from other expenses which had been included as having been incurred for bringing the goods to the present state and location. In the circumstances, according to him the change in method adopted by the assessee was not bona fide.
28. The learned D.R. thereafter referred to the decision in Sarupchand's case (supra) relied upon on behalf of the assessee and also in Forest Industries Travancore Ltd.'s case (supra) to the effect that the assessee was entitled to change its method of valuation of stock. He submitted that those cases were distinguishable inasmuch as the assessees were traders and not manufacturers. In the first case it was the ITO who wanted to disturb the method of valuation whereas in the present case it is the assessee who wants to change the method. In the second case it was simply a case of choice between cost or market value.
29. The learned D.R. thereafter referred to the decision of the Madras High Court in K. Sankarapandia's case (supra) and Carborundum Universal Ltd.'s case (supra) relied upon on behalf of the assessee. It was held that the assessee under the circumstances was entitled to change the method of valuation of closing stock notwithstanding that prejudice may be caused to the revenue. The learned D.R. submitted before us that those observations cannot prevail any more now in light of the decision of the Supreme Court in British Paints (India) Ltd.'s case (supra) 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. (supra) 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 statement, but the decisions of the Madhya Pradesh High Court and the Supreme Court described therein continued to be a powerful argument in favour of including the excise duty in the cost for the purpose of valuation of closing stock. In particular he referred to the decisions of the Supreme Court in Union of India v. Bombay Tyre International Ltd. [1983] 15 Taxman 29 (SC) and McDowell & Co. Ltd.'s case (supra) and submitted that in light of the observations it was quite obvious that excise duty has to be included as part of cost, being a levy on manufacture and the liability for the duty arising at the point of time at which manufacture is completed.
32. For the above reasons the learned D.R. submitted that the decision of the CIT(A) upholding the additions was quite justified and should be confirmed.
33. We have considered the submissions of both sides carefully, and have perused the papers produced before us. The assessee has relied on the Guidance Note issued by the Institute of Chartered Acsountants in 1979 on Accounting Treatment for Excise Duties and on its basis has excluded the excise duty from the valuation of closing stock on cost basis. The revenue has relied on different parts of the same Guidance Note for making the addition of excise duty to the cost. A reading of the Guidance Note shows that a preference is indicated for including the excise duty in the cost. But excluding the excise duty has not been ruled out altogether. According to the assessee a choice is therefore available and the assessee has exercised that choice in goodfaith and in a bona fide manner. Case law has been cited on behalf of the assessee in support of its stand that it is entitled to change the method in a bona fide manner if it is consistent. The revenue has also relied on a Proposed Statement of Accounting Treatment for Excise Duty issued by the Chartered Accountants in 1985, whereafter considering decisions of the Supreme Court and Madhya Pradesh High Court a specific unambiguous view was expressed that excise duty cannot be treated differently from other expenses for the purpose of determination of cost for inventory valuation. According to the assessee this Proposed Statement was subsequently dropped but according to the revenue the case law mentioned therein still prevails.
34. In order to resolve the controversy, we are of the opinion that recommendations of expert bodies 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 (supra). 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-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true stale of the business for the purpose of computing the chargeable income. Such a system might 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, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the respondent was found to be such that income could not properly be deduced therefrom. It was, therefore not only the right but the duty of the Income-tax Officer to act in exercise of his statutory power for determining what, in his opinion, would be the correct income.
35. Respectfully following the above decision, we hold that the A.O. was in principle entitled to examine the facts of the case in order to ascertain whether the correct profits and gains could be deduced from the accounts as maintained by the assessee.
36. Coming now to the merits of the valuation, the decision of the Supreme Court in Saraswati Industrial Syndicate Ltd.'s case (supra) has been cited in support-of the assessee and particularly the observation that excise duly is really imposed on goods when they have come into existence in the manufactured form, and that it could more properly be taken into consideration in determining net profits than in calculating cost of manufacture. In this case the Supreme Court was considering the question of fixation of sugar prices, according to the Sugar (Control) Order 1966, Clause 7. The cost of manufacture had to be determined for this purpose. Clause 7(2) requires the Government to fix the price "having regard to the estimated cost of production of sugar on the basis of the relevant schedule". Thus the cost of production was to be considered not on the basis of principles of accountancy but on the basis of "the relevant schedule". There were two schedules to be considered. There was nothing in the first set of schedules to indicate 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 (supra) and McDowell & Co. Ltd.'s case (supra). It was observed by the Supreme Court in McDowell Co. Ltd.'s case (supra) 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. (supra) and McDowell & Co. Ltd. (supra). It is seen that the judgment in the case of Saraswati Industrial Syndicate Ltd. (supra) was delivered by a Bench consisting of 3 Judges whereas the judgment in the case of McDowell & Co. Ltd. (supra) was delivered by a Bench consisting of 5 Judges. We have the utmost respect for the observations in both the judgments, but in the circumstances we have to follow the observations contained in the judgment or McDowell & Co. Ltd.'s case (supra) and we therefore hold that the incidence of excise duty is directly relatable to manufacture.
38. Having regard to the above conclusion, it follows that the liability for excise duty arises at the point of time at which manufacture is completed and therefore it contributes to the value of the manufacture. It follows that excise duty cannot be treated differently from other expenses for the purpose of determination of goods for inventory valuation. The excise duty should therefore be included in the computation of cost for the purpose of valuation of closing stock.
39. If the excise duty should be included in the computation of cost for the valuation of closing stock but the assessee excludes it, it follows that the method of accounting employed by the assessee is such that the income cannot be properly deduced therefrom and the accounts can be rejected under proviso to Section 145(1), as held by the Supreme Court in British Paints (India) Ltd.'s case (supra). The exclusion of excise duty from the computation of cost was likely to result in a distorted picture of its true state of the business for the purpose of computing the chargeable income in a period of rising turnover and rising prices. Such a system was apt to diminish the assessment of taxable profits of a year. The profit of one year was likely to be shifted to another year, which would be an incorrect method of computing profits. We find that in the present case it is exactly what has happened. The closing stock of one year is the opening stock of the next year and it may appear prima facie that taking the 2 years together there may not be any difference in the total income of the 2 years. However, for assessment years 1982-83 and 1983-84 we have seen that even after enhancing the opening stock on the basis of enhancement of the closing stock of the preceding year, there was substantial difference in the total income, only because the enhancement of the value of the closing stock was far more than the enhancement in the value of the opening stock. This is the precise situation envisaged by the Supreme Court in the case of British Paints (India) Ltd. (supra). For these reasons we are of the opinion that the CIT(A) was justified in confirming the additions to the total income made by the Assessing Officer and confirm the finding of the CIT(A).
40. Our decision above is based on decisions of the Supreme Court and therefore the various other decisions of the Tribunal and the High Courts have not been discussed.
In the result the 3 appeals filed by the assessee are dismissed.