Assistant Commissioner Of Income Tax vs M/S U.P. Asbestos Ltd.

Introduction

The case of Assistant Commissioner of Income Tax vs. M/S U.P. Asbestos Ltd., adjudicated by the ITAT, Lucknow Tribunal (A) on 15th March 2019, provides a critical interpretation of Section 145A of the Income-tax Act, 1961, concerning the valuation of closing stock. The core dispute revolved around whether excise duty on manufactured finished goods lying in stock, but not yet cleared from the factory, must be mandatorily added to the closing stock valuation. The ITAT upheld the CIT(A)’s decision to delete an addition of Rs. 2,92,11,000/- made by the Assessing Officer (AO). This ruling clarifies that under Section 145A, only taxes or duties “actually incurred” must be included in stock valuation, distinguishing between the accrual of a liability and its crystallization upon clearance. The decision reinforces the accounting matching principle and provides significant relief to manufacturers by aligning tax treatment with the actual incurrence of excise duty liability.

Facts of the Case

The assessee, M/S U.P. Asbestos Ltd., a company engaged in manufacturing asbestos sheets and allied products, filed its return of income for Assessment Year 2014-15 declaring a loss. The Assessing Officer made an addition of Rs. 2,92,11,000/- to the closing stock value, arguing that the assessee had not complied with Section 145A of the Income-tax Act. The AO contended that excise duty on finished goods lying in stock must be mandatorily included in valuation, regardless of whether the goods had been cleared. The AO further invoked Section 43B, stating that the duty was deductible only if paid before the due date of filing the return. The CIT(A) deleted the addition, holding that the excise duty liability had accrued but had not become due because the goods were not cleared from the factory. Aggrieved, the Revenue appealed to the ITAT.

Reasoning of the Tribunal

The ITAT conducted a detailed analysis of the scheme of the Central Excises Act, 1944 and the Income-tax Act to determine the correct treatment of excise duty in closing stock valuation. The reasoning is structured around three key legal principles:

1. Distinction Between Levy and Collection of Excise Duty:
The Tribunal examined Section 3(i) of the Excises Act, which provides for the levy of excise duty on goods manufactured or produced in India. However, it emphasized that the collection mechanism is governed by Rule 9A of the Central Excise Rules, 1944. The ITAT noted that while the levy attaches at the stage of manufacture, the duty crystallizes and becomes payable only upon the removal of goods from the factory or warehouse. Citing the Supreme Court’s decision in CCE vs. Vazir Sultan Tobacco Co. (1996), the Tribunal held that “the levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal.” This distinction is crucial because it means that for goods lying in stock (not cleared), the excise duty liability is not yet “incurred” in the legal sense.

2. Interpretation of Section 145A – “Actually Paid or Incurred”:
The ITAT interpreted Section 145A of the Income-tax Act, which mandates that valuation of closing stock must include taxes, duties, or cess “actually paid or incurred” by the assessee. The Tribunal held that the phrase “actually incurred” refers to a liability that has crystallized and become due, not merely accrued. Since the assessee’s finished goods were lying in stock and had not been cleared, the excise duty liability had not crystallized. The ITAT relied on the Supreme Court’s ruling in Commissioner of Central Excise vs. Polyset Corporation (115 ELT 41 SC), which held that “the dutiability of the excisable goods is determined with reference to the date of manufacture and the rate of excise duty payable has to be determined with reference to the date of clearance of the goods.” Therefore, until clearance, the duty is not “incurred” and need not be included in closing stock valuation.

3. Application of the Matching Principle and Consistency:
The Tribunal noted that the assessee had not debited the excise duty in its Profit & Loss account because the liability had not become due. The ITAT upheld the CIT(A)’s reasoning that the accounting matching principle supports exclusion when the duty is not debited. The ITAT distinguished between the “exclusive method” (Accounting Standard AS-2) and the “inclusive method” (Section 145A), observing that the deviation had no effect on the determination of true income. The Revenue’s argument that the assessee’s method of accounting did not disclose true income was rejected because the assessee consistently followed the same method, and the duty was not actually incurred. The ITAT also dismissed the AO’s reliance on Section 43B, as that provision applies to deductions for payments, not to valuation of stock.

Conclusion

The ITAT dismissed the Revenue’s appeal, affirming the CIT(A)’s order. The Tribunal held that the addition of Rs. 2,92,11,000/- for excise duty on closing stock was unjustified because the duty had not been “actually incurred” under Section 145A of the Income-tax Act. The decision reinforces that for manufactured goods lying in stock (not cleared), excise duty liability does not crystallize until removal, and thus, it need not be added to closing stock valuation. This ruling provides clarity for manufacturers on the correct interpretation of Section 145A, aligning tax treatment with the actual incurrence of liability and the accounting matching principle. The ITAT’s analysis of the Excises Act and Supreme Court precedents ensures that tax adjustments under Section 145A are made only when the liability is legally incurred, not merely accrued.

Frequently Asked Questions