The Commissioner Of Income-Tax Tamil Nadu I, Madras v. M/S India Pistons Limited Huzur Gardens, Sembium, Chennai 11

In the High Court of Judicature at Madras Dated : 01.12.2009 Coram :- The Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mr.Justice M.M.SUNDRESH Tax Case (Appeal) No.461 of 2004 The Commissioner of Income-TaxTamil Nadu I, Madras.. Appellant Vs. M/s India Pistons LimitedHuzur Gardens, Sembium, Chennai 11.. Respondent TAX CASE (APPEAL) under Section 260-A of the Income TaxAct,1961, against the order of the Income Tax Appellate TribunalMadras 'B' Bench dated 22.08.2003 made in I.T.A.No.875/Mds/1996 andagainst the order of the Office of the Commissioner of Income Tax(Appeals) V, Madras 600 034 dated 29.1.1996 in IT/WT/GT/AppealNo.ITA.419/94-95 and against the assessment order of 1992-93 passedby the Deputy Commissioner of Income Tax Special Range I, Madrasdated 23.1.1995 in PAN/GIR.No.47-004-CV-7357/2-1. For Appellant : Mr.K.Subramaniam For Respondent: Mr.R.Venkatanarayanan JUDGMENT (Judgment of the Court was delivered by K.RAVIRAJA PANDIAN,J.) The appeal is filed against the order of the Tribunal dated22.08.2003 made in I.T.A.No.875/Mds/1996 relating to the assessmentyear 1992-93. 2. The facts:- (i) The assessee company is the manufacturer ofpiston, piston rings cylinders, liners etc. The assessee claimeddeduction of excise duty and custom duty payable from the value ofclosing stock. The Assessing Officer of the opinion that the exciseduty payable on finished goods is not taken into account for thepurpose of valuation of stock of finished goods. The Income taxOfficer added back the excise duty payable on finished goods. The https://hcservices.ecourts.gov.in/hcservices/ first appellate authority deleted the addition so made. Thedepartment preferred an appeal before the Income Tax AppellateTribunal and the Income Tax Appellate Tribunal following thedecision in the case of Commissioner of Income Tax vs. EnglishElectric Co. Of India Limited reported in 243 ITR 512 held thatexcise liability not to be included in valuation of closing stock.The Assessing Officer disallowed the investment allowance claim onthe ground that by notification 50 233(e) dated 19.03.1990, theGovernment abolished the scheme of investment allowance with effectfrom 01.04.1990. (ii) The First Appellate Authority set aside that finding anddirected the Assessing Officer to allow assessee's claim in respectof incremental cost after verifying the arithmetical accuracy of theactual sum which is claimed and after ensuring that other conditionsin this behalf is satisfied. Against that, the revenue preferred anappeal before the Income Tax Appellate Tribunal. The Tribunal, byreason of the impugned order, rejected the appeal. The revenue onceagain on appeal before this Court under Section 260-A of the IncomeTax Act. 3. The tax case appeal was admitted on the following questions of law:- "1. Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in holding that the Exciseduty and custom duty liability is not to beincluded in valuation of closing stock? 2. Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas right in holding that the increase in theliability of the assessee during the previousyear on account of change in the ratio ofexchange was part of the actual cost of themachinery acquired from a foreign country andthe assessee would be entitled to investmentallowance on the additional cost?". 4. We have heard the argument of the learned counsel appearingfor the assessee as well as the revenue and perused the materialsavailable on record. of law:- "1. Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in holding that the Exciseduty and custom duty liability is not to beincluded in valuation of closing stock? 2. Whether on the facts and in thecircumstances of the case the Appellate Tribunalwas right in holding that the increase in theliability of the assessee during the previousyear on account of change in the ratio ofexchange was part of the actual cost of themachinery acquired from a foreign country andthe assessee would be entitled to investmentallowance on the additional cost?". 4. We have heard the argument of the learned counsel appearingfor the assessee as well as the revenue and perused the materialsavailable on record. 5. Upon hearing the counsel and on perusing the materialsavailable on record, we are of the view that both the issue iscovered by the decision of this Court. The facts are not disputedthat the imported materials are not cleared by the assessee and arekept in the bonded warehouse. Likewise, the manufactured goods arealso not cleared from the factory of the assessee and it is stillavailable in the factory. 6. In the above said circumstances of the case, in order tovalue the closing stock, whether the customs duty payable on the rawmaterials imported, which is still not cleared from the customsfrontier and the excise duty payable on the goods not cleared fromthe factory and when the taxable event is yet to come, whether theexcise duty can be included in the valuation is the point thatarises for consideration. 7. The issue came up before this Court in the case ofCommissioner of Income Tax vs. English Electric Co. Of India Ltd.,reported in 243 ITR 512, wherein, this Court while rejecting thesubmission of the learned counsel for the revenue held that theliability for payment of excise duty arises at the point ofmanufacture and, therefore, that liability goes to increase thevalue of stock awaiting sale. By observing that the argumentproceeded on a misconception held that the stock which the assesseehas at the end of the financial year is required to be valued atcost meaning thereby all the costs incurred by the assessee for thepurpose of manufacturing the goods including the overheads or atmarket price at the option of the asessee; that the liability forpayment of excise duty is incurred by the assessee when the processof manufacture was complete in relation to that excisable item; thatliability of the assessee was a liability that was shown in theexcise duty account maintained by the assessee, all payments andliability so incurred towards such duty are being exhibitedseparately as amounts paid as excise duty or as liability incurredfor payment of excise duty. The Court further observed that if theargument of the revenue was accepted, the result would be anomalous,that the liability for payment of duty would then be regarded aspart of the assets held by the assessee in the form of the highervalue assigned to the closing stock; that the liability cannot beconverted into an asset in that manner. The same analogy wouldequally applicable to the customs duty payable in respect of thegoods which are under bond. 8. The learned counsel appearing for the revenue sought todistinguish the Judgment by placing reliance on the Judgment of thisCourt in the case of Southern Asbestos Cement Limited vs.Commissioner of Income Tax reported in 259 ITR 631 to contend thatthe cost of imported raw material of the assessee would necessarilyinclude the customs duty paid thereon, as without the payment ofsuch duty, the assessee would not be entitled to remove the importedraw material from the ports. On payment of such duty, itnecessarily constituted a part of the cost of the raw material tothe assessee. The value of that imported raw material would notundergo any change depending on whether it is used up in the courseof manufacture, or is stored in the godown to be used at a futurepoint of time in the course of manufacture. The value of theimported raw material was, therefore, required to be shown uniformlywhen it was used up in the process of manufacture as also when it was required to be valued as part of the closing stock by includingthe customs duty component. We find there is a material differencebetween the Southern Asbestos case with which reliance has beenmade by the learned counsel for the revenue and the present case.In that Southern Asbestos's case, the assessee has importedasbestos fibre and cleared the goods from the customs authority onpayment of customs duty. So the cost of asbestos fibre was directedto include the customs duty paid and the other expenses incurred tobring the goods to the factory of the assessee. There is also afactual statement available in the Southern Asbestos's case to theeffect that the assessee claimed revenue deduction for excise dutypaid on the cost of the finished products after paying duty andremoving the same from its godown and moving it to other places ofstorage, on the ground that until sales are effected, excise dutypaid should be regarded as a separate item, and the amount of dutypaid thereon is to be deducted from the value of the closing stockof those finished products. Hence, reliance placed on the decisionreported in 259 ITR 631, in our view is misplaced reliance as thefacts are different, in the sense in the Southern Asbestos's casethe goods are imported, customs duty paid and goods are availablewith the assessee. In respect of manufactured goods, the goods aremanufactured and cleared from the factory by paying the excise duty.But, here in the case on hand, the imported goods are yet to becleared from the customs and they still remain in the bondedwarehouse and the manufactured goods are also very much availablewithin the assessee's factory and it is not cleared by payment ofexcise duty. Hence, the said different factor make an ocean ofdifference with the Southern Asbestos's case. But the facts areidentical with that of English Electric Co.'s case. Hence the firstissue is answered in favour of the assessee. 9. In respect of the 2[nd] question of law, we are of the viesthat the issue is already covered in favour of the assessee inSouthern Asbestos's case referred to above. In that case also, thequestion of law to the following effect was referred for opinion. "Whether on the facts and in thecircumstances of the case, and on a properconstruction of section 43 B of the Income TaxAct, 1961, the assessee is entitled to a revenuededuction in respect of customs and excise dutycomponent of the value of the closing stock?". 10. After referring to the statutory provision Section 43 andthe Supreme Court case in the case of Commissioner of Income Tax vs.Arvind Mills Limited reported in [1992] 193 ITR 255 and the circularissued by the Central Board of Direct Taxes explaining the scope ofSection 43-A and taking note of the decision of this Court in thecase of Commissioner of Income Tax vs. Chengalvarayan Co.operativeSougar Mills Ltd., reported in [2000] 242 ITR 440 ultimately heldthat increase in the liability of the assessee during the previous https://hcservices.ecourts.gov.in/hcservices/ 10. After referring to the statutory provision Section 43 andthe Supreme Court case in the case of Commissioner of Income Tax vs.Arvind Mills Limited reported in [1992] 193 ITR 255 and the circularissued by the Central Board of Direct Taxes explaining the scope ofSection 43-A and taking note of the decision of this Court in thecase of Commissioner of Income Tax vs. Chengalvarayan Co.operativeSougar Mills Ltd., reported in [2000] 242 ITR 440 ultimately heldthat increase in the liability of the assessee during the previous https://hcservices.ecourts.gov.in/hcservices/ year on account of the change in the rate of exchange is part of theactual cost of the machinery acquired from a foreign country and theassessee is entitled to investment allowance on the additional cost.The said decision is squarely applicable to the facts of the presentcase. Hence, the 2[nd] question of law is also answered in favour ofthe assessee and against the revenue. 11. We find no merit in the appeal filed by the revenue andhence the same is dismissed. No costs. rgSd/-Asst. Registrar//True Copy//Sub Asst. RegistrarTo1.The Assistant Registrar, Income Tax Appellate Tribunal,III Floor, Rajaji Bhavan,Besant Nagar, Madras-90. 2.The Secretary, Central Board of Revenue,New Delhi.3.The Deputy Commissioner of Income Tax,Special Range I, Madras.4. The Income Tax Appellate Tribunal Madras 'B' Bench5. The Commissioner of Income-Tax, Chennai.+ 1 cc to Mr.K.Subramanian, Sr Standing Counsel SR No.65166SGL(CO)SR/15.12.2009T.C.A.No.461 of 2004