Vildirect: IncomeTax-caselaws-1987-VIL-49-ITAT-DEL

1987-VIL-49-ITAT-DEL

Equivalent Citation: ITD 021, 524,

Income Tax Appellate Tribunal DELHI

Date: 09.04.1987

HINDUSTAN COMPUTERS LTD.

INCOME-TAX OFFICER.

BENCH

Member(s) : ANAND PRAKASH., M. C. AGARWAL.

JUDGMENT

Per Shri M.C. Agarwal, Judicial Member--This is an assessee's appeal against an order an order 26th December, 1986 passed by the Commissioner of Income-tax, meerut, under section 263 of the Income-tax Act, 1961 holding that the ITO wrongly allowed a deduction of Rs. 1,47,05,868 in computing the assessee's income for assessment year 1984-85 and directing the ITO to make a fresh assessment withdrawing the said deduction.

2. We have heard the learned counsel for the assessee and the learned departmental representative and have perused the material placed before us.

3. The assessee is a manufacturer of computers and for that purpose it imports certain components on which pays customs duty. The assessee has also to pay excise duty on the computers manufactured by it. In the year under consideration the accounting year for which ended onthe 30th June, 1083, the assessee paid Rs. 3,38,96,607 towards custom duty and Rs. 58,90,731 towards excise duty. At the end of the accounting year the assessee had a closing stock valued at Rs. 4,36,41,459. In this valuation was included customs duty amounting to Rs. 1,24,31,024 in respect of imported components included in the closing stock. On that basis the Trading and Profit and Loss Account prepared by the assessee showed a net profit of Rs. 57,45,485 and the assessee filed a return showing an income of Rs. 27,34,500.

4. Section 43B of the Income-tax Act, 1961 was brought on the statute book by the Finance Act, 1983 w.e.f.1-4-1984. The relevant portion is as below:

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of

(a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, 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 is actually paid by him."

Taking some clue from the aforesaid provision the assessee filed a revised return before the ITO on14-3-1986declaring a loss of Rs. 49,74,200. The assessee, inter alia, claimed that it should be allowed a deduction in respect of excise duty amounting to Rs. 22,74,844 and customs duty amounting to Rs. 1,24,31,024 in determining its taxable income for the year under consideration. The ITO allowed the assessee's claim by observing as below:

"As discussed above, the assessee has made the claim of above-mentioned customs duty at Rs. 1,24,53,914 and excise duty at Rs. 22,74,844 in the revised return under section 43B. During the proceedings, the assessee filed another chart in which customs duty had been worked out at Rs. 1,47,21,143 and excise duty at Rs. 22,74,844. The changes in the calculations is on account of higher element of customs duty as against what was submitted along with the return. The custom duty element in the stock has been worked out by applying the basic custom duty rate with surcharge and additional duty in the different components considering certain incidental charges (photo copies of certain bills of entries have been filed and kept in folder III). Customs element in all the components was claimed at higher value except for Display Tubes, Diods, connectors, Transistors, etc., where the claim was reduced from Rs. 26,45,063 to Rs. 26,22,173. Since the method adopted by the assessee is based on effective rates and the figures derived can never be said to be absolutely correct, as an abundant caution, I allow the claim as made in the revised return and the same will be reduced by an amount of Rs. 22890. Thus instead of Rs. 1,24,53,914 as claimed in the revised return only Rs. 1,24,31,024 as customs duty and Rs. 22,74,844 as excise duty will be allowed. Since the assessee is following conventional method of stock valuation the amount of Rs. 1,24,31,024 plus Rs. 22,74,844. i.e. Rs. 1,47,05,868 shall be added in the income for the assessment year 1985-86. The assessee has already been directed vide this office letter dated17-3-1986to revise its return for the assessment year 1985-86."

In the computation of the income towards the end of the assessment order the ITO allowed the assessee deductions for Rs. 1,24,31,024 and Rs. 22,74,844 in respect of customs duty and excise duty respectively describing them as deductions under section 43B. The Commissioner of Income-tax took note of the assessment order and prejudicial to the revenue. The learned Commissioner observed that the assessee had been following a consistent method of stock valuation under which the element of excise and custom duties was included in the value of the closing stock and that section 43B did not permit the revision of the value of closing stock by deducting therefrom the element of the aforesaid duties. According to him, when the actual amounts paid by the assessee had already been debited in the Trading and Profit & Loss Account, the whole of the said amounts stood allowed and the business profits were assessable under section 28 and were to be computed under section 145 in accordance with the method of accounting regularly employed by the assessee according to which the valuation of closing stock included the aforesaid duties proportionate to the extent of goods forming part of the closing stock. In his view, therefore, the deduction of the aforesaid amounts was erroneous and, therefore, he passed the order as aforesaid.

5. At the hearing before us the learned counsel for the assessee contended that section 43B is a special provision which overrides all other provisions of the Act and, therefore, the amounts of customs and excise duties paid by the assessee had to be allowed in full in the year of payment. According to him, the present assessee had actually paid the amount of duties as mentioned above and when in the closing stock a part of those duties was included in its valuation, the net result was that only a portion of the duties actually paid had been allowed as deduction in determining the profits of the assessee. According to him, this was in violation of the specific provisions of section 43B. In support of his contentions, the learned counsel for the assessee relied upon a judgment of the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1968] 162 ITR 240. The learned departmental representative, on the other hand, contended that the total amount of duties paid by the assessee in the previous year under reference had been debited by it in the Trading and Profit & Loss Account and the Income-tax Officer had made no disallowance therefrom. It cannot, therefore be said that there was any violation of section 43B and that the duties paid by the assessee had not been allowed full deduction. According to him, what the assessee wants and what the Income-tax Officer has actually done is the revaluation of the closing stock of the assessee by excluding from the closing stock of the assessee by excluding from the value of the goods an important element of cost. i.e. the customs and the excise duties. According to him, section 43B was not intended to permit that and the action of the Income-tax Officer was, therefore, patently erroneous particularly when the assessee had valued the closing by including the element of the aforesaid duties as it had been doing in the past as well.

6. We have considered the respective arguments from either side. The relevant part of section 43B has already been reproduced above and it would show that this provision was enacted with the limited purpose of allowing deduction of expenditure relating to payment of certain taxes only in the year in which the taxes were actually paid and was intended to debar a person from claiming deduction of taxes levied merely on the basis of an accrued liability which the assessee did not actually discharge. In the memorandum explaining the purposes behind the enactment of section 43, it was stated as under:

"Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of contribution to any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him."

The argument of the learned counsel for the assessee was that when a part of the excise duty or customs duty paid by the assessee is included in the value of the closing stock that figures at the credit side of the Trading and Profit & Loss Account, the net result is that the total expenditure on the payment of the aforesaid duties has not been allowed to the assessee and that this would be against the terms of section 43B which provides that the whole of the taxes paid in a particular year have to be allowed. This sort of interpretation, in our view, is not permitted either from, the language of the aforesaid provision or from the system of accounting adopted by the assessee or from the general commercial practice. Admittedly, the entire payments on account of the aforesaid duties has been debited to the Trading and Profit & Loss Account and the ITO has not disallowed even a penny out of that expenditure. Admittedly, the value of closing stock has to figure on the credit side of the Trading and Profit & Loss Account in order to arrive at the profits earned or the loss suffered by a businessman. It is also admitted that according to the method of valuation of closing stock employed by the assessee the corresponding excise duty and customs duty pertaining to the goods remaining in the closing stock is added to their value. This has been done in this year as well in which the closing stock has been valued by the assessee at Rs. 4,36,41,459. The assessee wanted that, deviating from its past practice, the closing stock of this year should be valued at Rs. 2,89,35,591 by excluding the tax component. As observed by the Hon'ble Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481, valuation of unsold stock at that close of an accounting period is a necessary part of the process of determining the trading result of that period. The Hon'ble Supreme Court further observed that the closing stock is to be valued at cost or market price whichever is lower and it is now generally accepted as an established rule of commercial practice and accountancy. The Hon'ble Supreme Court went on to observe that ordinary principles of commercial accounting have to be followed in computing the profits for income-tax purposes unless such principles have been superseded or modified by legislative enactment. Similar observations were made by the Hon'ble Supreme Court in CIT v. A. Krishnaswami Mudsliar [1964] 53 ITR 122. That was a case in which the assessee maintained accounts according to cash system of accounting. The assessee debited the cost of acquiring distribution rights of certain films but did not take into account the value of those rights as closing stock. The income-tax Officer added the value of closing stock for determining the assessee's income and this was upheld by the Hon'ble Supreme Court. The Hon'ble Supreme Court observed,' Whatever method of book keeping is adopted in the case of a trading venture, for computing the true profits of the year, the stock-in-trade must be taken into account. If the value of the stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and at the end of the year.' In the case before us the assessee had valued its closing stock according to ordinary principles of commercial accounting and practice and also according to its sown system of accounting coming from several years past. We find nothing either in the plain words of section 43B or in the explanatory memorandum to justify the view that with the enactment of section 43B, the element of taxes included in the value of goods forming part of the closing stock, should be excluded.

7. The learned counsel for the assessee concerned before us that if section 43B had not been enacted then its profit would have been the same as shown in the Profit & Loss Account and the value of the closing stock shown at Rs. 4,36,41,459 would have been correct. He also admitted that the customs and excise duties were paid during the accounting year in question and even in the absence of section 43B they would have been allowed as a deduction without disturbing the value of the closing stock. We are unable to see how the enactment of section 43B can permit a disturbance in the value of the closing stock by excluding from the value thereof the element of aforesaid duties which according to the assessee's own case should be included while valuing the closing stock.

8. The learned counsel for the assessee relied upon a judgment of the Hon'ble Gujarat High Court in Lakhanpal National Ltd.'s case. This is the only judgment that appears to have so far been reported about the interpretation of this newly inserted provision in section 43B. That was a somewhat similar case in which the assessee having estimated its income at Rs. 1,32,52,000 in the accounting year ending 31-12-1983 for payment of advance tax, filed a return showing a loss of Rs. 75,84,532 and asked for a refund requesting the ITO to make a provisional assessment. The assessee claimed deduction for excise duty and customs duty paid on goods forming part of the closing stock. It was contended on behalf of the revenue that the customs and excise duties were already debited to the Profit & Loss Account and the amounts claimed as deduction by the assessee on account of the aforesaid duties were there as part of the cost elements in the closing stock consistent with established accounting principles and, therefore, by no stretch of imagination can it be said that the customs duty and excise duty which have been paid during the year and which have been included in the closing stock had not been allowed as a deduction. We find that this argument of the revenue has not been dealt with by the Hon'ble High Court and it proceeded on the basis that the ITO wanted to disallow the duty proportionate to the goods in the ITO wanted to disallow the duty proportionate to the goods in the closing stock. This is clear from the following observations:

"At the time of hearing, Mr. J. P. Shah, the learned advocate appearing for the petitioner, submits that any sum payable by an assessee by way of tax or duty under any law for the time being in force is allowable and as per the mercantile method of accounting, it would be allowable at the time when it becomes due and/or the assessee would be liable to pay the same and not on the actual payment of tax or duty, but as per the newly added provision of section 43B of the Act, it would be allowable only in computing the income referred to in section 28 of the previous year in which the sum is actually paid by the assessee irrespective of the previous year in which the liability to pay such tax was incurred by the assessee according to the method of accounting regularly employed. He, therefore, submits that the customs duty being paid in the year 1983 on the raw material imported during the year, though the raw material is consumed in the year 1984, the assessee would be entitled to get an allowable deduction for the assessment year 1984-85 (accounting year ending on December 31, 1983) in computing the taxable income of the petitioner-assessee. Mr. S. N. Shelat, the learned advocate appearing for the respondent, submits that the words "otherwise allowable " used in section 43B of the Act would mean that it would not be allowable for the assessment year 1984-85. He submits that section 43B of the Act does not enlarge the scope deduction. According to his submission, what is allowable under commercial principles under section 45B of the Act is made an allowable deduction on the actual payment being made. He further submits that it does not permit deduction in respect of the amounts which are not allowable under commercial principles only because they are paid. He further submits that it is not an expenditure pertaining to the goods sold in that year. There is no dispute on the point that the amount of import duty and excise duty are allowable deduction. What is disputed on behalf of the respondent is that the amount of customs and excise duty on the value of the closing stock of the petitioner-assessee should not be permitted in the assessment year 1984-85 (accounting year ending onDecember 31, 1983). In fact the raw material were imported and the goods were manufactured in the year 1983, and they were cleared also in the year 1983. Therefore, their liability accrued in the year 1983, and they also paid the sum in the year 1983. In fact view of the matter, the explanation to section 43B of the Act is also not attracted in the present case.... Therefore, it is clear that in the year 1983 when the goods including the raw material were manufactured in the year 1983 (including the one under the closing stock), the liability to pay import duty and excise duty on the said goods was incurred by the petitioner-assesee. When that is so, it is also clear that the deduction of the excise duty and import duty even on the closing stock was allowable in the accounting year 1983, but because of the specific language of section 43B of the Act which has an overriding effects, it could not have been claimed by way of deduction unless payment thereof was made and here, in this case, it is not the case of the respondent that the payment of the said duty is not made and, therefore, it is not allowable. Therefore the submission of Mr. Shelat that deduction in respect of the amounts which are not allowable under commercial principles are claimed as deductions merely because that are paid, cannot be accepted. The last facet of Mr. Shelat's argument is that the expenditure on paying import and excise duty in respect of the closing stock does not pertain to the goods sold in the year. This argument runs counter to the mercantile method of accounting as well as to the specific language of section 43B of the Act. It is not disputed that the said goods in the closing stock were either imported or manufactured in the accounting year 1983 and as per the principles of the mercantile method of accounting, the expenditure incurred by way of import duty as well as excise duty would be a permissible deduction in the year 1983, and particularly when the payment thereof is made under section 43B of the Act. Under the circumstances, we do not find any merit in any of the contentions raised by Mr. Shelat, and for the same reasons we accept the contentions raised by Mr. J. P. Shah appearing for the petitioner assessee."

The above observations will show that somehow the Hon'ble High Court got the impression that the ITO wanted to disallow that portion of the customs and excise duties which pertain to the goods in the closing stock and the Hon'ble High Court held that in view of section 43B, this could not be done when the duties had actually been paid during the relevant accounting year. The ITO's assertions, on the other hand, had been that he is not disallowing any portion of the duties paid by the assessee which are already debited to the Trading and Profit & Loss Account and that what the assessee wanted was an extra deduction in respect of the duties pertaining to the goods in the closing stock which was not permissible as those amounts were an element of cost of the goods in that closing stock consistent with the established accounting principles. The Hon'ble High Court has not dealt with this question at all. The issue that arose before the Hon'ble High Court was (1) Whether by including the value of duties in the value of goods in the closing stock, as per accounting practice, it can be said that the expenditure on such duties which is already debited in the Trading and Profit & Loss Account stands disallowed to that extent even though the ITO does not disturb the expenditure finding place on the debit side of the Trading Account; and (2) Whether in order to give effect to section 43B it was permissible or necessary to disturb the valuation of the closing stock by excluding from the cost of goods the customs and excise duties paid in respect thereof. We have carefully gone through the judgment and we are unable to find any answer to these two points. From the various quotations referred to above, we find that somehow the Hon'ble High Court was lead to the impression that the ITO was trying to disallow that part of the duties that pertained to the goods in the closing stock and what the Hon'ble High Court had actually laid down is that this cannot be done.

9. On a close scrutiny of the aforesaid ruling of the Hon'ble Gujarat High Court, we find that it has not laid down the principle as canvassed by the learned counsel and although in that case the result achieved by the assessee by virtue of this judgment was the same as intended by the present assessee in the absence of any clear acceptance of the contentions raised on behalf of the assessee and in the face of some apparent confusion, we are of the view that this ruling cannot be the basis for accepting the contention of the assessee. As already observed, there is not other judicial opinion on the point. We are of the view that the terms of section 43B are quite clear and do not permit any tinkering with the value of the closing stock which has been valued by the assessee itself according to its own past practice and also according to the established commercial principles. In our view, therefore, the learned ITO was patently in error in allowing in addition to the full amount of excise and customs duties already debited in the Profit & Loss Account, the sums pertaining to those duties that were included in the value of the goods in the closing stock. The order passed by the ITO was, therefore, patently erroneous and prejudicial to the interests of revenue and the learned CIT (A) rightly interfered with the same. We, therefore, do not find any force in this appeal and it is accordingly dismissed.

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