Commissioner of Income Tax vs K. Ravindranathan Nair

P.R. Raman, J.—This reference is at the instance of the Revenue. The Tribunal, Cochin Bench, has referred the following questions of law :

(i) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the valuation of closing stock of tins cannot be added to the income of the assessee on account of the assessee having debited an amount of Rs. 7,84,500 being duty drawback received on tin sheets while valuing the closing stock of tins ?

(ii) Whether, on the facts and in the circumstances of the case, since excise drawback is received by the assessee only after the tins are exported, can such receipt be deducted to arrive at the cost of production of tins ?

The relevant facts pertaining to the above questions are stated in the order of reference of the Tribunal. For the asst. yr. 1985-86 the AO made an addition of Rs. 2,14,425 towards the value of closing stock of tins used for packing of cashew nut for export. The assessee had paid excise duty amounting to Rs. 5,91,596 on manufacture of tin and obtained a refund of Rs. 7,84,500 being the duty drawback on manufacture of tins. The AO enhanced the unit cost of production by the margin of duty drawback adjusted and valued the closing stock of tins, thereby making the addition of Rs. 2,14,425. Following the decision in the assessee''s own case for the asst. yr. 1983-84 the CIT(A) held that the adjustment in the closing stock of the tins was unwarranted and deleted the addition so made. The Revenue preferred a second appeal before the Tribunal. The Tribunal did not advert to the issue raised on merits rather held that in the absence of new facts brought on record and good reasons shown there was no scope to differ from the view taken by the CIT(A).

From the assessment order Annex. A, the assessee has deducted an amount of Rs. 7,84,500 being the drawback received by the assessee on tin sheets, while valuing closing of tins. The AO did not accept this and arrived at the average cost of tins including the drawback. Since the assessee has valued the closing stock at the rate of Rs. 11.12 per tin based on the calculation, the AO found that the tin should be valued at the rate of Rs. 13.19 per tin and additions have been made by the AO. The first appellate authority found that the assessee had debited an amount of Rs. 7,84,500 being the drawback received on tin sheets while valuing the closing stock of tins. It was consistent with the stand taken in the earlier year''s assessment order that the AO revalued the closing stock by adding back the duty drawback. The ITO has also stated that it is consistent with the earlier year''s order that he is making the revaluation. Therefore, it cannot be disputed that the adding back by the Department was consistently being made in the past years as well. In other words, what the assessee did was not accepted by the Department in respect of the earlier assessment orders.

The learned senior standing counsel Sri P.K.R. Menon made available to us a copy of the order of the Tribunal relating to the asst. yr. 1983-84 which was passed on 18th Dec., 1991. In para 7 of the said order issue was considered. The Tribunal held that the assessee valued his closing stock consistently by taking into account the excise duty paid as an item of cost and deducting therefrom the refund he has received in order to arrive at the value of closing of tins. Reference is also made to the computation sheet filed by the assessee showing as to how the value of tin on hand was calculated. The Tribunal held that since the excise duty paid is taken as an item of cost it stands to reason that its refund should be taken credit for and that the assessee has been consistently computing the value in such manner in the past. It was on these reasons that the Tribunal did not interfere with the order passed by the CIT(A) for the asst. yr. 1983-84.

As respect the asst. yr. 1985-86 also the Department was consistent in adding back the duty drawback for the purpose of valuing the closing stock as in the case of the past years. The Department canvassed the correctness of the appellate order before the Tribunal by filing a second appeal. The Tribunal found that the valuation of the closing stock of the tins cannot be added to the income of the assessee because the assessee had debited an amount of Rs. 7,84,500 being the duty drawback received while valuing the closing stock. It also found that the assessee paid excise duty of Rs. 5,91,596 on manufacture of tins and got a refund of Rs. 7,84,500 by way of duty drawback. Since the excise duty paid was debited to the tin account, the duty refunded was credited to arrive at the cost of manufacture and after referring to the reasons given for the year 1983-84 the Tribunal held that since no new facts have been brought on record, there is no scope to differ from the view taken by the C1T(A).

It is not the case of the parties that the amount of drawback received by the assessee was treated as a revenue income during the year in question or referring to the previous years, as the case may be. The fact that the assessee has paid the excise duty on the goods manufactured by them and exported it and he has received the duty drawback as an export entitlement is also beyond dispute. But in valuing the stock whether the entire amount of drawback relates to the goods manufactured in the current year however was not considered either for the present year 1985-86 or in any of the earlier assessment years. Admittedly, as against the excise duty paid of an amount of Rs. 5,91,596, the assessee received duty drawback of an amount of Rs. 7,84,500 and it is deducting the entire amount of duty drawback that the assessee has valued the cost of tin including the closing stock. Since the assessee received in excess of the duty paid, whether the entire amount could be deducted from the duty element for the purpose of valuing the goods, has not been considered nor was raised before the Tribunal. Even though the assessee has consistently followed the system of accounting as was done for the assessment year, it is also to be noticed that the Department also was consistent in including the drawback for the purpose of computing the value of the goods. The Department having challenged the appellate order relating to the year 1983-84 before the Tribunal, it cannot be said that the Department cannot agitate the question in the subsequent year 1984-85. However, the Tribunal while passing the order (Annex. C) has merely referred to the order passed relating to the previous year 1983-84 and without an independent consideration held that in the absence of any new facts brought on record, there is no scope for taking a different view.

We have heard the learned senior standing counsel Sri P.K.R. Menon and also the senior counsel Sri P. Balachandran appearing on behalf of the assessee. So far as the duty drawback received by the assessee is not treated as revenue income, the assessee is perfectly entitled to reduce the duty drawback received by it relating to the goods manufactured in the current year. Since the drawback is received as an export entitlement, the net duty paid by the assessee on the excise duty will get reduced to that extent. But such duty drawback received by the assessee for the purpose of valuing the goods in stock can only be the proportionate amount attributable to the duty elements of the goods manufactured in the current year. Since the Tribunal or any of the authorities has not considered this aspect in this perspective, we think it is only appropriate that the matter may be reconsidered by the Tribunal, after giving an opportunity to both sides to address their contentions regarding this aspect.

In the result, we decline to answer the question as framed by the Tribunal and remand the case to the Tribunal for fresh consideration in accordance with law.