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 accountat 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 stockvaluation 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 oftelevision 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 periodwas 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 unsoldstock 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 forstock 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.
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