CIT vs. Dynavision Limited (Supreme Court)

DATE: (Date of pronouncement)
DATE: September 10, 2012 (Date of publication)

Click here to download the judgement (dynavision_146_closing_stock_excise_duty.pdf)

S. 145: Excise duty need not be included in closing stock

The assessee valued its closing stock without including excise duty. The AO held that excise duty had to be included in the closing stock though the CIT(A), Tribunal and High Court (267 ITR 600 (Mad)) upheld the assessee’s plea on the basis (following English Electric Co. 243 ITR 512 (Mad)) that the inclusion of excise duty in the valuation of closing stock was permissible only if the liability for that amount in the excise duty account was given a deduction and otherwise it would be anomalous. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

The assessee has been following consistently the method of valuation of closing stock which is “cost or market price whichever is lower.” Also, while the AO revalued the closing stock, he did not make any adjustment to the opening stock. Excise duty is on the manufacture of the finished product though it is quantified and collected on the selling price. Valuation of unsold stock at the close of the accounting period is a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. 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” (Chainrup Sampatram 24 ITR 481 (SC) & Hindustan Zinc Ltd 291 ITR 391 SC) followed.

Contrast between 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 s. 43B, excise duty need not be included in closing stock

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