Case Law Details

Case Name : Commissioner of Income Tax, Tamil Nadu Vs M/s. Dynavision Limited (Supreme Court of India)
Appeal Number : Civil Appeal No. 197 OF 2005
Date of Judgement/Order : 30/08/2012
Related Assessment Year :
Courts : Supreme Court of India (913)

The supreme court has upheld the principle of exclusion of excise duty component from valuation of closing stock in the case of Dynavision Limited (SC).  The important principle laid down in the case of Chainrup Sampatram (24 ITR 481 (SC)) & Hindustan Zinc Ltd (291 ITR 391 SC)) has been reiterated in its decision :

“That, the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realized on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods”.

One may also take note of the other decisions of the Supreme Court on this subject – British Paints India 188 ITR 44 (SC) where it was held that all “overheads” had to be included in closing stock valuation and Berger Paints 266 ITR 99 (SC) where it was held that in view of Section 43B, excise duty need not be included in closing stock.

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.197 OF 2005

Commissioner of Income Tax, Tamil Nadu …Appellant(s) Versus

M/s. Dynavision Limited …Respondent(s)

O R D E R

Assessee is a private limited company. It carries on the businessof manufacture and sale of television sets. For the Assessment Year 1987-88 the AO while computing the assessment under Section 143(3) found that the assessee had not included in the closing stock the element of excise duty. Accordingly, he added a sum of Rs. 16,39,000/- to the income of the assessee on the ground of undervaluation of closing stock.

The question before us is whether the department is right in alleging that the closing stock is undervalued to the extent of Rs. 16,39,000/-?

At the outset, it may be stated, that, it is not in dispute that the assessee has been following consistently the method of valuation of closing stock which is “cost or market price whichever is lower.”

Moreover, the AO conceded before the CIT(A) that he revalued the closing stock without making any adjustment to the opening stock (see: page 50 of the Paper Book). Lastly, though under section 3 of the Central Excise Act, 1944, the levy of excise duty is on the manufacture of the finished product the same is quantified and collected on the value (i.e. selling price). Before concluding, we may rely on judgment of this Court in the case of Chainrup Sampatram vs. CIT, reported in 24 ITR 481 in which it has been held that, “valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period.

It cannot be regarded as source of profits. That, the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realized on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods”. (see also : para 8 of the judgment of this Court in the case of CIT vs. Hindustan Zinc Ltd. reported in 291 ITR 391).

For the above reasons, we hold, that, the addition of Rs. 16,39,000/- to the income of the assessee on the ground of undervaluation of the closing stock was wrong and that the order of CIT(A) is accordingly upheld. Consequently, this civil appeal filed by the department is dismissed with no order as to costs.

New Delhi, August 30, 2012.

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0 responses to “Excise duty not to be included in closing stock valuation – SC”

  1. CA Dev Kumar Kothari says:

    Stock valuation aspect has at most impact of deferring tax liability for few months. In real sense the deferment is only for three months. In case by lower stock valuation assesse get tax benefit in first year, then he has to pay higher tax in second year.

    He can save interest for few months. This is because in case of first year he has to pay advance tax by 15th march and self assessment tax by 30th September.The tax saved in first year become payable for next year because income of next year will increase by the same amount by which income of first year is reduced due to stock adjustment.For second year first installment of advance tax is due on 15th June.Therefore, there is hardly any revenue impact in real sense.
    Revenue should not dispute on matters which have only impact of deferment of tax for few months or say even one year. However disputes are being raised about stock valuation, allowability of sum paid in first year or second year, due to application of some provisions like S.43B, depreciation allowance etc.

    In case of assesses who has suffered loss and there is not even set off of loss in near future, there is no purpose to make such additions which have only deferment of allowance. In such cases , in fact assesses is benefited if a deduction is postponed to a future year as life of loss pertaining to such amount get extended.

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