Vildirect: IncomeTax-caselaws-1994-VIL-66-ITAT-DEL

1994-VIL-66-ITAT-DEL

Equivalent Citation: [1994] 206 ITR (A. T.) 119, 49 ITD 21

Income Tax Appellate Tribunal DELHI

I.T.A.No. 4869 (Del) of 1982 and I.T.A.No.4726/Del/1987

Date: 02.02.1994

INCOME-TAX OFFICER

FOOD SPECIALITIES LTD.

BENCH

Order

JUDGMENT

The order of the Special Bench was delivered by R. M. Mehta (Accountant Member). - These are cross appeals, preferred by both the parties, being aggrieved with the order of the Commissioner of Income-tax (Appeals) on various grounds. These came up for hearing before the Special Bench constituted by the President along with the appeal of Indian Communication Network (P.) Ltd. in the circumstances narrated in the order of the Tribunal in the latter appeal. Taking up for consideration the assessee's appeal, the first ground raised reads as follows:

"1. Your appellant submits that, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals)-IX erred in law in not allowing excise duty as claimed by your appellant in the sum of Rs. 81,60,723 under the provisions of section 43B of the Income tax Act, 1961. "

The assessee in this case is a public limited company, engaged in the manufacture and sale of various kinds of food products, like NESCAFE " instant coffee, "LACTOGEN" baby food, "MAGGI" noodles, "CERELAC" baby cereal, etc.

In the year under consideration, there was a change in the method of accounting followed by the assessee vis-a-vis the valuation of closing stock and which is denoted by Note No. 3 to the audited accounts as follows :

"In past years, it has been the practice to charge the total expenses on excise duty to the profit and loss account and include the amount relating to unsold stocks in the closing stock valuation. The current year's liabilities for excise duty have been charged as an expense only in respect of goods cleared and sold and the balance amount of Rs. 81.61 lakhs relating to goods cleared from bonded warehouse and remaining unsold has been included under 'loans and advances' in Schedule H. Had the previous year's practice been followed, the charge to excise duty and the value of closing stock would have been higher by Rs. 81.61 lakhs. However, this change has no effect upon the profit before taxation for the year.

In computing the provision for income-tax, the above-referred sum of Rs. 81.61 lakhs has been considered as an allowable deduction under the provisions of section 43B of the Income-tax Act, 1961. ''

By means of a letter dated July 18, 1986, the assessee stated that the aforesaid change had been effected with a view to "comply with the requirements of section 43B of the Income-tax Act, 1961". To appreciate the view-point canvassed on behalf of the assessee, the Income-tax Officer extracted in the assessment order the relevant figures vis-a-vis the earlier method and the new method, which was sought to be adopted. These figures are as under : "Profit and loss account for the year 1983 (Rs. in lakhs) As per current As per old presentation presentation Income : Sales 8,523.74 8,523.74 Others 244.50 244.50 8,768.24 8,768.24 Expenditure : Materials 4,994.34 4,994.34 Manufacturing and other expenses 2,016.63 2,016.63 Interest 37.17 37.17 Excise duty amount paid 612.29 Less : C/F as a deferred credit 81.61 530.68 612.29 Depreciation 150.61 150.61 Adjustment due to increase/ decrease of stock (4.21) (85.82) Profit before taxation 1,043.02 1,043.02 8,768.24 8,768.24 Calculation of adjustment due to increase/decrease of stock Opening stock 720.03 720.03 Less : Closing stock 724.24 805.85 (4.21) (85.82).''

It became apparent from the aforesaid that by adopting the new method the closing stock had been shown less by a figure of Rs. 81.61 lakhs, whereas the corresponding claim for deduction on account of excise duty had been increased by the same figure.

The Income-tax Officer, taking note of the aforesaid change in the method of accounting, asked the assessee to show cause "why the excise duty of Rs. 81.61 lakhs be not added back to the value of the closing stock in conformity with the past accounting policy/presentation". In reply, the assessee stated that if the amount in question was added back, then it would be tantamount to denial of the full deduction for the amount of excise duty paid allowable under section 43B of the Act during the assessment year. In support of these arguments, reliance was placed on the judgment of the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240. The further argument which was advanced was in the direction of contending that the provisions of section 43B had an overriding effect over other provisions of the Act, inasmuch as they disturbed the regular method of accounting followed by the assessee, which included the valuation of the closing stock. It was also stated that the claim of Rs. 81.61 lakhs, if admitted in the year under consideration, would lead to a corresponding add back in the succeeding assessment year, viz., assessment year 1985-86. A copy of the computation of the assessable income for the subsequent year was filed to show that the amount in question had actually been added back suo motu.

The Income-tax Officer did not accept the view-point canvassed on behalf of the assessee and proceeded to reject the arguments advanced. The detailed reasons given by him in the assessment order can be summarised as follows :

(a) That although the provisions of section 43B superseded the other provisions of the Act, these had a limited overriding effect since they were intended to allow deduction for certain items on actual payment basis although the assessee's consistent method of accounting was mercantile, whereby the claims on account of expenditure were to be allowed on accrual basis ;

(b) That the provisions of section 43B could not be utilised by an assessee to revise/change the method of valuation of the closing stock arrived at by following a consistent method since all that it provided was for a deduction to be allowed on actual payment basis. In other words, the provisions of section 43B could not be stretched beyond a certain limit ;

(c) That the business profits could be correctly ascertained only by bringing into the trading account the closing stock at a valuation which was in accordance with the consistent and acceptable method followed by an assessee. Further, the element of excise duty was includible in the closing stock to determine the correct figure thereof ;

(d) That the argument of the assessee vis-a-vis the element of excise duty forming a part of the closing stock in the assessment year under appeal and its automatic deduction in the subsequent assessment year by taking it as a part of the opening stock, was not relevant in so far as the provisions of section 43B were concerned, since such inclusion was entirely due to the method of accounting and the valuation of the closing stock which was a part thereof consistently followed by the assessee ; (e) By applying the same logic, the assessee should also agree to reduce the value of the opening stock for the assessment year under consideration, i.e., 1984-85, by the amount of the excise duty component and which would go to increase its profits. The Income-tax Officer, thereafter, referred to the following observations of the Third Member in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom) to come to the conclusion that section 43B would not have any effect on the maintenance of the accounts :

"It is assumed that even now quite a few assessees paid tax as and when liability arises. The effect of section 43B is going to be in the manner of computing the income for tax purposes, I have my doubts whether it will have any bearing in the manner of maintaining accounts. . . ."

In the final analysis, the Income-tax Officer rejected the view-point canvassed on behalf of the assessee with the following observations :

" Therefore, in view of these aspects with due regard to the Gujarat High Court, the decision in Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 is not accepted and excise duty to the tune of Rs. 81,60,723 is not allowed in the name of section 43B. It will result in an addition of Rs. 81,60,723 made to the total income declared by the assessee. "

On further appeal before the Commissioner of Income-tax (Appeals), the same arguments as advanced before the Income-tax Officer were reiterated. The first appellate authority, relying on the decision of the Delhi Bench of the Tribunal in the case of Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524, proceeded to reject the claim made. He also referred to the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. [1986] 162 ITR 240 as considered by the Tribunal in the aforesaid judgment. Being of the view that the provisions of section 43B did not permit tampering with the valuation of the closing stock and there being no justification on the part of the assessee to reduce from the closing stock the proportionate excise duty which entered into the valuation of such closing stock, he confirmed the action on the part of the Income-tax Officer.

In the further appeal filed before the Tribunal, learned counsel, Shri S. E. Dastur, appearing for the assessee, at the outset, reiterated the facts of the case and stated that the result of the order passed by the Commissioner of Income-tax (Appeals) was that the entire claim on account of excise duty paid, was allowed under section 43B, but the closing stock stood increased to the extent of Rs. 81,60,723 which represented the excise duty on unsold stock and which the assessee had excluded in the audited accounts and in the tax return. According to him, this action on the part of the Commissioner of Income-tax (Appeals) was not justified. The subsequent arguments of learned counsel can be summarised as follows :

(a) The assessee had followed an "acceptable" method of valuation of closing stock which need not necessarily be the best ;

(b) The assessee had changed the method of accounting for which it was not required to seek the permission of the Department or offer any reasons ;

(c) That the Institute of Chartered Accountants of India in its Guidance Note of September 16, 1979, had accepted a method, whereby excise duty on unsold stock could be treated as a "prepaid" or a "deferred" item, although in the same note it had been opined that it would be "preferable" to treat it as an "element of cost" in the valuation of inventories ;

(d) That the Institute did not "frown" upon the aforesaid method of exclusion since the term used in the note was "less objectionable" although, at the same time, its inclusion was advised ;

(e) That, in case a company followed the aforesaid method then, it was incumbent on the part of the auditors to make a "disclosure" and Note 3 (reproduced earlier) to the audited accounts was such a disclosure ;

(f) That, neither the Company Law Board nor the Institute regarded excise duty as part of the cost of production (letter dated July 20, 1978, addressed by the Senior Cost Accounts Officer, Company Law Board, regarding additional information to be given in the Cost Audit Report (pages 25 to 28 of compilation) and the clarification given by the Institute to Messrs. Sandvik Asia Ltd., Poona, vide letter dated May 14, 1974 ( page 29 referred to ) ;

(g) That excise duty was not to be included in "cost of manufacture" since it was a "post-production" levy ;

(h) That excise duty was a charge in arriving at net profits, whereas stock valuation was a stage prior to this. It was an "impost on manufacture" but did not form part of the cost of manufacture ; (i) That the Tribunal decisions in Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 (Delhi) ; Durametallic (India) Ltd. v. IAC of I. T. [1991] 38 ITD 211 (Mad) ; Southern Asbestos Cement Ltd. v. Dy. CIT [1991] 38 ITD 449 (Mad) ; and Berger Paints India Ltd. v. CIT [1993] 44 ITD 573 (Cal) were distinguishable since in those cases the assessee had not sought a change in the "method of accounting" regularly followed, but claimed a deduction at the return stage unlike the present assessee which had changed its method of accounting on an acceptable basis ; (j) That the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd. v. Union of India, AIR 1975 SC 460 was squarely applicable since that probably was the solitary decision where their Lordships had examined the concept of "cost of manufacture" and decided that it would not include excise duty ;

(k) That the decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 was not an authority for the proposition that cost of manufacture/production included excise duty since that was a decision primarily concerned with the question, whether excise duty paid by the purchaser formed part of the turnover of the manufacturer ;

(l) That the decision of the Bombay Bench of the Tribunal in the case of Godfrey Philips India Ltd. v. ITO [1992] 41 ITD 544 was not correct in the sense that it had held the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, to be inapplicable and that in the case of McDowell and Co. Ltd. [1985] 154 ITR 148 (SC) as applicable, both on incorrect appreciation of the facts ;

(m) That the decision of the Tribunal in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom) (T. M.) was not applicable since it did not deal with the issue, whether excise duty formed part of the "cost of manufacture". That the facts of the assessee's case were akin to those of Glaxo Laboratories (India) Ltd., discussed at page 107 of the report rather than the facts prevailing in the case of Raymond Woollen Mills Ltd. [1986] 18 ITD 64 (Bom) ;

(n) That even otherwise, the assessee was entitled to succeed in the light of the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240.

To summarise his arguments, learned counsel put forward for our consideration the proposal that excise duty did not form part of the closing stock since it was not an item which entered the "cost of manufacture" being a post-manufacture levy and further, whether any change in the "method of accounting" regularly followed by an assessee to exclude such excise duty from the figure of closing stock, merited acceptance specially when it met with approval from no less an authority than the Supreme Court and the Institute of Chartered Accountants not discarding or rejecting the said method.

To support his arguments, learned counsel placed reliance on the following decisions in addition to those mentioned in the arguments advanced :

(i) Sarupchand v. CIT [1936] 4 ITR 420 (Bom) ;

(ii) Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker) ;

(iii) Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad) ;

(iv) CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) ;

(v) CIT v. K. Sankarapandia Asari and Sons [1981] 130 ITR 541 (Mad) ;

(vi) Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) ;

(vii) Sea Customs Act [1878] S. 20(2), In re (Special Reference No. 1 of 1962) AIR 1963 SC 1760 ;

(viii) Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460 ; [1983] 15 Taxman 29 (SC) ;

(ix) CIT v. Century Enka Ltd. [1981] 130 ITR 267 (Cal) ;

(x) Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association [1980] 121 ITR 1 (SC) ;

(xi) ITO v. Modi Rubber Ltd. [1992] 43 ITD 396 (ITAT, Delhi) ; and

(xii) E. I. D. Parry (India) Ltd. v. Dy. CIT [1993] 46 ITD 387 (ITAT, Mad).

Learned counsel, Shri G. C. Sharma, appearing for one of the interveners, at the outset, supported the arguments advanced by Shri Dastur, but highlighted for our consideration the following, which he also reduced to writing by means of a note and a copy of which was also given to the Departmental Representatives :

"1. Valuation of stock of finished products by applying 'direct cost' method is a well-recognised method of valuation in accounting practice.

2. Direct cost in common parlance, apart from what a man in the profession of accountancy thinks, the same means prime cost plus works or factory overhead expenses, but excluding administration, selling and distribution expenses. 3. Excise duty levied on manufactured goods is not a part of the prime cost of manufacture of the product. Excise duty is an expenditure incurred under the compulsion of law only, after the product has come into existence whether the product is sold or not. It is a selling expense and not cost of manufacture.

4. Such expenditure is properly debitable to the profit and loss account and not to the 'trading account' like any other revenue expenditure incurred by the assessee during the course of carrying on the business. All liabilities incurred under compulsion of law or otherwise as are mentioned in section 43B of the Income-tax Act have to be debited to the profit and loss account only. No different treatment is warranted when it comes to levy of excise duty.

5. In the preparation of a 'trading account' in respect of any business of dealing in goods, stock valuation is inevitable, but it is the cost of acquisition of the goods alone that forms the basis of valuation. In determining the cost of acquisition of goods manufactured or traded in, no component can enter which, by itself, does not contribute to or is incapable of contributing to the profitability when goods are sold. Whatever excise duty is leviable is passed on as such to the purchaser/consumer. Not a pie less not a pie more and neither its levy on the assessee nor its reimbursement by the purchaser contributes anything to the profitability.

6. Excise duty included in sale bills might contribute a trading receipt but that component is in the nature of an overriding charge of the State and has to be allowed as a deduction from the net profits. The inclusion of excise duty in closing stock would amount to taxing an element of the selling price or trading receipt which has neither yet been received nor accrued to the manufacturer and also where no claim for reimbursement has arisen.

7. The trading account and profit and loss account as presented in the annexure should be acceptable after its scrutiny under well-accepted principles of commercial trading and accountancy. If regularly employed, where there is no distortion of assessable profits in any year the proviso to section 145(1) is inapplicable. ''

The other arguments advanced by Shri G. C. Sharma were on the following lines :

(a) That the valuation of the closing stock could not depend only on the guidelines issued by the Institute of Chartered Accountants of India and these, in any case, could not have precedence over judicial decisions ;

(b) Something which was the basis of a levy could not be included in the levy itself ;

(c) Excise duty was a charge of the State on the goods manufactured and by including the same in the figure of closing stock, the said overriding charge was negated ;

(d) That nothing should enter the valuation of the closing stock which was not capable of producing profit and by this a reference was made to the levy on account of excise duty, which, on the one hand, was required to be collected from the purchaser and, on the other hand, it was meant to be paid over to the State ;

(e) That excise duty was part of the "selling cost" and not "manufacturing cost" ;

(f) That the issue under consideration was clearly covered by the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and the decision of the apex court in the case of McDowell and Co. Ltd. [1985] 154 ITR 148 was not applicable being unrelated to the issue in question.

In addition to the decisions relied upon by Shri Dastur, learned counsel placed reliance on the judgment of the Supreme Court in the case of Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 as also the decision of the House of Lords in the case of Duple Motor Bodies Ltd. v. IRC [1961] 39 TC 537, and which came to be discussed by their Lordships of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44.

The learned Departmental Representative, Shri A. K. Gupta, on the other hand, strongly supported the order passed by the Commissioner of Income-tax (Appeals). His arguments pertaining to the provisions of section 43B have already been detailed and discussed in our separate order in the case of Indian Communication Network (P.) Ltd. [1994] 206 ITR 96 (ITAT, Delhi), in I. T. A. No. 3483/(Delhi) of 1988. The observations in that order, in so far as they relate to the issue under consideration in the present appeals, would be treated as a part of the present order.

To summarise these, the case of the Revenue was that the profits and gains of a business were to be computed in accordance with normal commercial principles and within the meaning of section 28 read with section 145. That the field of operation of section 43B was defined and limited to deductions and it did not stipulate the recomputation of profits as was normally understood for purposes of section 28 read with section 145. Further, in interpreting a statute, the language of the section was to be strictly followed and it was only in case of doubt that the background of bringing the said provision on the statute book had to be considered. That by the introduction of section 43B, the mischief which was proposed to be curbed was the claim for deduction vis-a-vis the unpaid amounts. That the decision of the Gujarat High Court in the case of Lakhanpal National Ltd. [1986] 162 ITR 240 did not advance the view-point canvassed on behalf of the assessee.

In support of the aforesaid arguments reliance was also placed on the following decisions of the Tribunal in addition to the judgments of the High Courts and the Supreme Court which had taken a view in favour of the Department :

(i) Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 (ITAT, Delhi) ;

(ii) Durametallic (India) Ltd. v. IAC of I. T. [1991] 38 ITD 211 (ITAT, Mad) ;

(iii) Southern Asbestos Cement Ltd. v. Dy. CIT [1991] 38 ITD 449 (ITAT, Mad) ; and

(iv) Berger Paints India Ltd. v. CIT [1993] 44 ITD 573 (ITAT, Cal).

The arguments of the learned Departmental Representative on the question, whether the element of excise duty was to be included in the valuation of the closing stock, were on the following lines :

(a) That the guidelines issued by the Institute of Chartered Accountants in 1979 categorically stated that excise duty was includible for the purposes of valuing the closing stock and to the same effect were the views expressed by the Institute in the subsequent guidelines which were issued in 1988 ;

(b) That direct cost included excise duty ;

(c) That the assessee by excluding excise duty from the figure of the closing stock, had deviated from an accepted method of valuation and which had led the auditors of the company to "qualify" the balance-sheet ;

(d) That the Income-tax Officer was empowered to determine the correct profits of an assessee and this was so even after the said assessee had obtained expert advice and changed its method of stock valuation ;

(e) That profits for a particular assessment year had to be worked out for that year itself and by the non-inclusion of the excise duty in the closing stock, the taxability was postponed to a subsequent assessment year, which was not permissible in law ; (f) The judgment of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, was not applicable, inasmuch as it had been rendered in a different context altogether and not at all pertaining to the question, which was being raised in the present appeal. Further it was not permissible to pick up a sentence or a word from a judgment and treat it as the law without reading the judgment as a whole and examining the context in which it was delivered ;

(g) That the expression "cost of manufacture" was not defined anywhere including the publications of the Institute of Chartered Accountants of India ;

(h) That a deviation from the guidelines laid down by the Institute was permissible, but the auditors had to qualify the accounts in such a situation and that is what the auditors of the assessee-company had done. That, in comparison to the guidelines, accounting "statements" and "standards", had a better authority ;

(i) That the guidelines of 1979 and 1988, if read together, would clearly show that excise duty was to be included in the figure of closing stock to reflect the true state of affairs and in case of non-inclusion, the Income-tax Officer was empowered to tamper with the figure of the closing stock ;

(j) That excise duty could not be treated as a selling expense since the latter was never levied on a per item basis, which the former was ; and

(k) That the point at which excise duty was leviable was immaterial since as soon as it was paid and the item in question remained unsold, it entered the figure of closing stock.

In support of his arguments, the Departmental Representative placed reliance on the following decisions:

(i) CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) ;

(ii) CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 (SC) ;

(iii) ITO v. Modi Rubber Ltd. [1992] 43 ITD 396 (ITAT, Delhi) ;

(iv) Land and Estate Corporation v. ITO [1986] 18 ITD 106 (ITAT, Ahd) ; and

(v) Godfrey Philips India Ltd. v. ITO [1992] 41 ITD 544 (ITAT, Bom). In reply, Shri Dastur made the following further submissions :

(i) That the guidelines of the Institute could not prevail over the decisions of the High Courts or the Supreme Court and since the decision of the apex court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, was directly on the question of "cost of production/manufacture", it was binding and required to be followed ;

(ii) That there could be no quarrel with the proposition laid down by the Supreme Court in the case of CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297, but one could not ignore the legal position that even an obiter or observation was binding and was tantamount to the laying down of law ;

(iii) Without prejudice to the earlier arguments, the assessee's case was squarely covered by the guidelines laid down by the Institute, which did not shun the practice of treating excise duty as a deferred item of expenditure but only advised its inclusion ;

(iv) That the guidelines laid down by the Institute were contrary to the law laid down by the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and hence required to be ignored ;

(v) That the excise duty which had been levied in the assessee's case pertained to the post-manufacturing period and not to any period prior to that or even at any intermediary stage ;

(vi) That an assessee was entitled to value the closing stock at cost or market price, whichever was lower, and the term "cost" meant cost of production or manufacture ;

(vii) That any change in the method of stock valuation/accounting, whereby excise duty was excluded on the ground that it was not a part of the cost of production or manufacture, vis-a-vis the decision of the Supreme Court supra, was required to be accepted by the tax authorities, since it had legal sanction ; and

(viii) That the guidelines of the Institute were meant only for its members who engaged themselves in professional work mainly of auditing and these were not binding on others outside the profession.

In support of these arguments, learned counsel placed reliance on the following reported decisions :

(a) CIT v. Cap Steel Ltd. [1986] 162 ITR 533 (Kar) ;

(b) Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC) ; (c) National Thermal Power v. IAC of I. T. [1988] 24 ITD 1 (ITAT, Delhi) [SB] ; and

(d) Sandvik Asia Ltd. v. ITO [1985] 14 ITD 35 (ITAT, Bom).

The Departmental Representative was again heard in respect of the arguments advanced by Shri Dastur and the case law relied on.

We have examined the rival submissions and have also perused the material on record to which our attention was invited. The decisions cited at the Bar have also been considered. The assessee in this case has actually paid a sum of Rs. 6,12,25,374 as excise duty but has booked as expenditure only a figure of Rs. 5,30,64,651 and the balance of Rs. 81,60,723 has been taken directly to the balance-sheet under the head "Loans and Advances". In terms of section 43B the entire amount paid, viz., Rs. 6,12,25,374, would be an allowable deduction in the light of our order in the case of Indian Communication Network P. Ltd. [1994] 206 ITR 96 (ITAT, Delhi) in I. T. A. No. 3483/(Delhi) of 1988. The detailed reasons recorded in that order would be treated as forming a part of the present order.

To recapitulate the Tribunal held that the provisions of section 43B had an overriding effect on the other provisions of the Act and this in fact disturbed the existing and accepted position of an assessee's accounts. That the decisions of the Tribunal relied upon by the Revenue stressed more on the aspect of "stock valuation" overlooking in the process the exact and precise impact of the judgment of the Gujarat High Court (Lakhanpal National Ltd. [1986] 162 ITR 240), which dealt primarily with the question of section 43B. That under the provisions of the said section an assessee was entitled to full deduction subject to the amount having been actually paid during the previous year, but by including a part of the excise duty/customs duty in the closing stock the deduction was given only in part whereas their Lordships of the Gujarat High Court intended full deduction to be allowed within the meaning of section 43B. That the removal of the amount in question from the figure of closing stock did not tantamount to a "tinkering with the closing stock" as was the view expressed by certain Benches of the Tribunal, but allowing to the assessee the full deduction to which it was entitled under the provisions of section 43B. In other words, the Special Bench departed from the view expressed by other Division Benches. It, however, sounded a word of caution to the effect that the assessee's opening stock for the subsequent assessment year would stand reduced by the corresponding figure which had been taken out of the closing stock of the current year. We were, however, called upon by the parties to adjudicate upon the question whether excise duty formed part of the cost of manufacture/ production and was hence includible in the figure of closing stock to the extent the goods remained unsold after having been cleared from the bonded warehouse. To this was connected the undisputed fact that the assessee was all along following a method of accounting whereby excise duty paid was charged to the profit and loss account and to the extent the goods remained unsold, it was reflected in the closing stock. In the assessment year under consideration, however, it changed the earlier method and charged to the profit and loss account only that quantum of the excise duty which pertained to the goods cleared and sold and the balance was reflected in the balance-sheet as "deferred expenditure" under the head "Loans and Advances". In the tax return, however, it claimed the entire amount as deduction under section 43B. The further issue for our decision, therefore, would be, whether the change effected by the assessee is an acceptable one in the light of reported decisions, the guidelines of the Institute of Chartered Accountants of India and the commentaries of learned authors.

At the outset, we take up for consideration the guidelines issued by the Institute in 1979 and which were in force during the period under consideration. These do not reject the method of treating excise duty on unsold goods as a "deferred" item of expenditure but at the same time advise its inclusion for quantifying the closing inventory. In other words, the method followed by the assessee is not frowned upon or shunned outright. This can be gauged from the following observations :

"A deferred charge on the other hand is an expenditure of a period which is proposed to be charged to the revenue of a subsequent period. In that sense, excise duty to the extent it relates to inventories could perhaps be considered as a deferred charge. Such a treatment would accord with the objective of inventory valuation as stated in paragraph 5 above and could, therefore, be considered as an alternative method of achieving the same result. "

"To the extent to which the charge for excise duty is deferred to a subsequent year, it would cease to be an expense of the year for the purposes of inventory valuation and would, therefore, not form part of the cost to be considered for the purposes of valuation. "

"On a consideration of the above matters, in the opinion of the Committee, excise duty applicable to inventories cannot be considered as a pre-paid expense. While it may be less objectionable to treat it as a deferred charge, in the view of the Committee the better accounting treatment is to include it in the valuation of inventories. " ( emphasis * supplied by us).

These guidelines came to be revised in 1988 "consequent" to certain decisions, namely, Kirloskar Bros. v. Union of India (unreported decision of the Madhya Pradesh High Court) ; Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460 ; [1983] 15 Taxman 29 (SC) and McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). The observations in paragraph 14 of the revised guidelines are :

"The true nature of excise duty as it emerges from the above decisions, can, therefore, be summarised 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.

(d) The point of time at which duty is collected is immaterial in determining the true nature of the levy.'' (emphasis* supplied by us).

A comparison of the guidelines for 1979 and 1988 does reveal some changes since the portion with the heading "Can excise duty paid be treated as a pre-paid expense or deferred charge" has been omitted in the latter. The "Summary of Recommendations", however, does not reveal any material differences between 1979 and 1988. The Institute, however, takes the view that the liability for excise duty arises at the point of time at which the manufacture is complete, viz., a post-manufacture levy but in the Summary of Recommendations it treats it as a "manufacturing expense", which envisages expenditure incurred in the course of manufacture and till the stage of coming into existence of a marketable commodity. These views are somewhat contradictory.

A few words at this stage about the status of "Guidance Notes" issued by the Institute and as outlined in the December, 1985, issue of "The Chartered Accountant" the official journal of the Institute. According to the Institute, the "Guidance Notes are recommendatory in nature" and designed to "provide guidance" to members on matters which may arise in the course of their professional work or in resolving issues which may pose difficulty. As compared to this, the "Accounting Standards" and "Statements on Standard Auditing Practices" issued by the Institute are "mandatory" in effect. In other words, both express the views of the Institute, but with varying effects, while the former is recommendatory the later is mandatory.

Let us now examine the effect of the views expressed by a professional body, viz., the Institute of Chartered Accountants of India, on the legal provisions and their interpretation by the courts. Their Lordships of the Karnataka High Court in the case of CIT v. Cap Steel Ltd. [1986] 162 ITR 533 observed as follows ( at page 536 ) :

"This principle recommended by the Institute is no doubt useful to the assessee in this case, but we are afraid that it cannot be taken advantage of by the assessee since it appears to be contrary to the statutory taxability of the interest income. "

In our view, there can be no two opinions on the proposition that the views of the Institute cannot override the decisions of the High Courts or the Supreme Court and to the extent they are in conflict with such decisions, they have to be ignored.

We now advert to the well-accepted proposition that an assessee is empowered to change its method of accounting regularly followed, provided the change is bona fide and there is no attempt to evade taxes or hoodwink the Department.

In order to appreciate the aforesaid proposition, it would be necessary to examine on the facts of the present case, whether the exclusion of excise duty from the figure of closing stock, vis-a-vis, unsold goods was a justified action on the part of the assessee. For this purpose, it would be incumbent on our part to examine the nature of the levy itself and as to the point of time at which it arises.

Learned authors have explained the concept of excise duty in the following terms :

Per Arvind P. Datar Guide to Central Excise Law and Practice, Second Edition 1990-91 : Volume I (pages 66 and 67) :

" An excise duty is a duty on production. . . . It is an indirect tax capable of being passed on to the consumer as part of the price.

Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passed on to the ultimate consumer, that is, ultimate incidence will always be on the consumer.''

Per R. K. Jain, Central Excise Law Guide : Sixth Edition 1991 (pages 166 and 167) :

"In order to be 'goods', they should be something which can ordinarily come to the market to be bought and sold. Thus the goods which are not capable to be bought and sold are not liable to duty. The mere fact that excisable goods are not actually sold, will not make any difference in determining the excisability of that product so long as the goods are saleable or marketable."

"duty of excise is on 'goods' and in order to be 'goods' it should be something which can ordinarily come to the market to be bought and sold. Thus, the test of marketability is an essential ingredient for dutiability."

"Since the duty of excise is on the manufacture and production of goods, the excise duty is not leviable unless the goods have come into existence because the manufacture has taken place. In other words, manufacture of a new article is necessary before levy of excise duty. Thus where no manufacture is involved, no duty is leviable. The manufacture means bringing into existence a new and different commercial commodity." (emphasis* supplied by us).

It may be mentioned that the views expressed by the aforesaid authors find their origin in the reported decisions including those of the apex court. Their Lordships of the Supreme Court observed as follows in the decision of A. K. Roy v. Voltas Ltd. [1977] ELT (J 177) :

" Excise is levied only on the amount representing the manufacturing cost plus manufacturing profit and excludes post-manufacturing cost and the profit arising from post-manufacturing operation, namely, selling. "

Sea Customs Act (1878) S. 20(2), In re (Special Reference No. 1 of 1962), AIR 1963 SC 1760, their Lordships of the Supreme Court observed (at page 1776) :

" The taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. "

"Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience."

" This will show that the taxable event in the case of duties of excise is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof. We may in this connection contrast sales tax which is also imposed with reference to goods sold, where the taxable event is the act of sale. Therefore, though both excise duty and sales tax are levied with reference to goods, the two are very different imposts ; in one case the imposition is on the act of manufacture or production while in the other, it is on the act of sale. In neither case, therefore, can it be said that the excise duty or sales tax is a tax directly on the goods. "

A careful reading of the views of the Institute, the commentaries of learned authors and the decisions rendered by courts on the nature, scope and object of excise duty leaves us in no doubt that excise duty is a levy on the "manufacture" or "production" of goods and is not related to a stage prior to the completion of the manufacturing or production process, but to a stage thereafter, viz., post-manufacture and on coming into existence of a marketable commodity. The very basis of quantification of excise duty is related to the value to be placed on the commodity, i.e., selling price and if that be so, then the levy itself cannot enter into the said value but has to remain outside although for the ultimate consumer both the value and the quantum of excise duty together with the quantum of profit and other incidental items such as packing, forwarding, freight, octroi, sales tax, etc., would constitute his cost of the commodity. This proposition becomes apparent from the decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460 and which we are informed is the only decision pertaining to "cost of production/manufacture". This has been sought to be distinguished by the Revenue on the ground that it pertains to the fixation of the price of sugar under the Sugar (Control) Order, 1966, and is alien to the issue before us.

In our opinion, these arguments on the part of the Departmental Representative are not well founded. We have gone through the entire judgment of the Supreme Court and do find that it deals primarily with the question of "cost of production" of sugar in the light of certain schedules laid down in the report of the Sugar Enquiry Commission in October, 1965. Their Lordships observed as follows at page 463 of the report :

" Some of the items, which, according to the appellants, should be treated as items of cost may not even properly find a place there. For example, it was suggested that excise duty was wrongly left out as an item of cost. 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." (emphasis* supplied by us).

The aforesaid decision of the apex court, is directly on the subject and is binding on us. Though the Supreme Court dealt with a marketable item, namely, sugar, it had to deal with "cost of production" as to what it would mean and include and in that context laid down unequivocally the principle that excise duty would more properly be taken into account in determining net profits and not in ascertaining cost of manufacture. This principle is general in nature and would apply to all items manufactured. No exception can be taken to the enunciation of this principle on the ground that the Supreme Court was dealing with sugar. The point to be noted is that the Supreme Court was dealing with the meaning of the expression "cost of manufacture" which is of universal application. We do not find anything to the contrary in the subsequent decision of the Supreme Court in the case of McDowell and Co. Ltd. [1985] 154 ITR 148, which dealt no doubt with the question of excise duty, but in a totally different context altogether, viz., whether excise duty paid by the purchaser formed part of the turnover of the seller. The reliance of the Departmental Representative on the decision of the Supreme Court in the case of Sun Engg. Works P. Ltd. [1992] 198 ITR 297 is misplaced and the other decisions relied upon by him do not advance the Revenue's case in the face of the direct decision of the apex court (supra).

At this stage we would like to revert to the decision of the Bombay Bench of the Tribunal in the case of Godfrey Philips India Ltd. v. ITO [1992] 41 ITD 544 (ITAT, Bom), wherein arguments identical to those tendered in the present appeal were advanced on behalf of the assessee but rejected on the following main grounds :

(a) The Assessing Officer was entitled to examine the facts of the case in order to ascertain, whether the correct profits and gains could be deduced from the accounts maintained by the assessee. The decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 was relied upon ; (b) That liability for excise duty arose at the point of time at which manufacture was complete and, therefore, it contributed to the value of manufacture. That excise duty was to be included for the purpose of valuing closing stock. The decision of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 was relied upon.

The Tribunal also referred to the unreported decision of the Madhya Pradesh High Court in the case of Kirloskar Bros. v. Union of India and that of the Supreme Court in the case of Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460 to come to the conclusion that it did. The Tribunal also referred to the observations in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and without saying that the decision was distinguishable, it chose to follow the judgment in the case of McDowell and Co. Ltd. [1985] 154 ITR 148 (SC) on the ground that the same was of a Bench consisting of five judges whereas the earlier decision was delivered by three judges. In our opinion, the said decision of the Tribunal, with due respect, does not appear to be laying down a correct principle in the light of what we observed earlier.

In the final analysis, we hold that the change in the method of accounting effected by the assessee in the assessment year under appeal by excluding excise duty on the unsold goods from the figure of closing stock was a bona fide one finding support from the direct decision of the Supreme Court in the case of Saraswati Industrial Syndicate Ltd., AIR 1975 SC 460, and there being no specific prohibition laid down by the Institute of Chartered Accountants of India and its guidelines being recommendatory in nature. We, however, sound a word of caution to the effect that in the succeeding assessment year, viz., 1985-86, the assessee would not get the benefit of the amount in question, i.e., Rs. 81,60,273 and the same would become a part of its income in case it is claimed as a deduction in any manner. There is in fact an observation in the assessment order to the effect that the amount has been added back in the return for assessment year 1985-86. For the reasons stated in our separate order of Indian Communication Network (P.) Ltd.'s case [1994] 206 ITR 96 (ITAT, Delhi), no adjustment is required in the figure of opening stock for the assessment year under appeal. In the view that we have taken, we do not find it necessary to decide whether excise duty is a selling expense or its non-allowance in full would negate the overriding charge of the State. Ground No. 1 is, accordingly, allowed.

The only other remaining ground in the assessee's appeal pertains to the disallowance under section 37(3A) of the Income-tax Act, 1961. To this is connected ground No. 2 in the Revenue's appeal and the subsequent discussion disposes of these common grounds.

The Income-tax Officer in the course of assessment proceedings included for the purposes of disallowance a sum of Rs. 26,19,000 being the rent/hire charges of shelf space in show windows. According to him, the display of goods by the assessee on these shelves constituted expenditure under the head "Advertisement and Publicity" with a view to attract customers. On further appeal before the Commissioner of Income-tax (Appeals), the assessee submitted a written note and which finds place in paragraph 3.2 of the appellate order. The submission on the part of the assessee was that the shelves had been taken on hire with a view to provide adequate and safe storage facilities for the goods manufactured by the assessee and the same could not be treated as advertisement expenditure subject to the disallowance under section 37(3A). The Commissioner of Income-tax (Appeals) accepted the view-point canvassed on behalf of the assessee partly and allocated the expenditure 50 per cent. towards "advertisement" and the balance 50 per cent. towards "storage facilities".

We have heard both the parties at some length in respect of the specific ground raised in the assessee's appeal. The arguments advanced by learned counsel were more or less on identical lines as tendered before the Commissioner of Income-tax (Appeals) whereas the learned Departmental Representative supported the order passed by the Income-tax Officer. In our opinion, no interference is warranted in the order passed by the Commissioner of Income-tax (Appeals) to allocate the expenditure equally between advertisement and storage facilities. The percentage of 50 per cent. also appears to be reasonable and does not require any modification on our part. In the result, the common ground in both the appeals stands rejected.

In the Revenue's appeal, there is only one other ground which remains to be decided by us and which reads as follows :

" On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 1,30,000 made on account of litigation expenses relating to Central Excise liability of the manufacturer company. "

The Income-tax Officer, in the course of assessment proceedings noted that the assessee had claimed as deduction a sum of Rs. 1,30,000 paid to Messrs. J. B. Dadachanji and Co. "in connection with the work done in excise matters in High Court/Supreme Court. " On further enquiry, the following facts emerged :

" The assessee-company, Messrs. Food Specialities Ltd. (F. S. L.) pursuant to an agreement entered into with Messrs. Nestle's Products (India) Ltd. (N. P. I.) were engaged in the manufacture solely of, for and on behalf of the latter, sweetened condensed milk, soluble coffee, baby milk foods, etc., for sale in India by N. P. I. under certain trade marks in respect of which Nestle's was registered as the sole registered user in India. The agreement between F. S. L. and N. P. I. was certain price + actual payment of excise duty paid by F. S. L. to the excise authorities.

However, a dispute arose as to the determination of 'wholesale cash price' which was the basis for calculating excise levy. As the Central excise authorities did not agree to the claim of the assessee and the assessee was required to pay more excise duty in pursuance of the agreement, it asked for increase in the supply price to N. P. I. Messrs. Nestles' Products (India) Ltd., vide its letter dated March 25, 1970, agreed to it and at the same time requested the assessee 'to move the higher authorities by filing appeals in the matter, if necessary'. Upon such request the assessee-company moved first the High Court and then the Supreme Court and incurred certain legal expenses. It is also understood that ultimately the assessee won the case and a refund of Rs. 1,23,88,718.24 was received by it which was passed on to N. P. I. Thus it is clear that the legal expenses incurred by the assessee are not wholly and exclusively for the purpose of its own business as it fought the case for N. P. I. at their request and the benefits received were also passed on to them. The assessee in its letter dated March 20, 1987, has argued that the excise duty is levied on the manufacture and hence the liability to pay duty lies with the manufacturer and only F. S. L. had the locus standi to fight the case. The assessee has also given an example of similar treatment by another supplier, Messrs. Alembic Glass Industries. Though it is true that the excise duty is levied on the manufacturer and F. S. L. had the locus standi to fight the case but if one sees the terms of agreement between the assessee and N. P. I. which provides for certain price plus actual reimbursement of excise duty to F.S.L., then one is inclined to see the necessity and viability of the expenditure of the assessee (F. S. L.). The point becomes more significant when one finds the close relation between the two companies, viz., F. S. L. and N. P. I., inasmuch as both the companies are subsidiaries of the foreign company _ Nestle's Holding Ltd. Considering all these aspects I treat this expense of Rs. 1,30,000 as not pertaining wholly and exclusively to the assessee's own business and disallow the same." On further appeal before the Commissioner of Income-tax (Appeals), it was contended that the assessee-company alone had the locus standi to fight the excise case and the legal expenses incurred by it in that connection should be allowed as a deduction. The aforesaid submissions found favour with the Commissioner of Income-tax (Appeals), who proceeded to delete the addition on the following lines :

" I do not think the issue needs much discussion. In my opinion, the Income-tax Officer is patently wrong in disallowing the claim of legal expenses. The excise duty liability is imposed upon the manufacturer and, therefore, it is the right and duty of the manufacturer alone to fight a wrong liability imposed upon it. The fact that the benefit of success in such a case ultimately passes on to customers will not justify a finding that the manufacturer should not fight a wrong liability of excise duty. Indirect taxes are always recoverable from customers but it does not mean that for that reason alone the manufacturer should accept all kinds of wrong levies of indirect taxes. The reason is that excessive excise duty pushes up prices of products which ultimately leads to fall in sales. The appellant was, therefore, justified in fighting the excise case and the legal expenses are, therefore, allowable in its hands. I would, therefore, delete the disallowance of Rs. 1,30,000. Relief of Rs. 1,30,000. "

After hearing both the parties and perusing the material on record, we find no good ground to interfere with the decision taken by the Commissioner of Income-tax (Appeals) in allowing necessary deduction in the hands of the assessee-company. As rightly held by him, excise duty was imposed on the manufacturer and all disputes arising from the said levy were required to be contested by the said manufacturer and it was immaterial as to who ultimately benefited from the litigation. We agree with the aforesaid view taken by the Commissioner of Income-tax (Appeals) and decline to interfere with his orders. The relevant ground in the Revenue's appeal is rejected.

In the result, the assessee's appeal is partly allowed, whereas that of the Revenue is dismissed.

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