ORDER
K.C. Singhal, J.M.
Though various issues are involved in this appeal, the main issue which has been contested tooth and nail by the parties relates to the deduction of excise duty liability in respect of closing stock of finished goods.
2. The assessee is engaged in the business of manufacturing of cutting tools. The product manufactured by the assessee is liable to excise duty under the Central Excises and Salt Act, 1944 (herein referred to as the after called Excise Act). As per the consistent method adopted by the assessee in the past, it did not include the element of excise duty payable in respect of closing stock of finished goods while valuing such stock at the end of the year. However, it made a provisions of Rs. 3,35,12,888 on account of excise duty liability payable in respect of such closing stock and the same was shown in the balance sheet as liability and simultaneously debited the profit & loss account and claimed the same as deduction. Since, the amount was paid before filing of the return the same was claimed as deduction under section 37 read with section 43B.
3. However, the assessing officer was of the view that the claim of the assessee was premature inasmuch as the excise duty liability did not accrue to the assessee merely on the manufacture or production of goods. According to him the excise duty was payable only on the removal of goods from the factory premises. Accordingly, a show-cause notice was issued by the assessing officer as to why the aforesaid claim should not be disallowed.
4. In response to the aforesaid show-cause notice, the assessee replied vide letter dated 22-3-1999 wherein it was submitted that according to section 3 of the Excise Act, the taxable event was the date of manufacture or production of goods and, therefore, there was accrual of liability to pay the excise duty on such date. According to the assessee, it is the collection of excise duty which has been postponed to the date of removal as per the rule 9 of the Central Excise Rules, 1944 (hereinafter referred to as the Excise Rules). In support of these submissions, it relied on various decisions of Supreme Court, viz., Wallace Flour Mills Co. Ltd. v. Collector of Central Excise (1990) 186 ITR 440 (SC), Collector of Central Excise v. Vazir Sultan Tabacco Co. Ltd. (1996) 83 ELT 3, Empire Industries v. Union of India (1986) 162 ITR 846 (SC), McDowell & Co. Ltd. v. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) and Mohan Breweries v. CTO AIR 1997 SC 3497.
5. After considering the submissions of the assessee, the assessing officer held that liability to pay the excise duty was on the date of removal of goods from the factory premises even though it was leviable on the manufacture of goods. This legal finding was given on the basis that no excise authority could raise a demand of excise duty merely on the manufacture or production of goods. Accordingly, the claim of the assessee could not be allowed under section 37 itself and, therefore, the question of allowing any deduction under section 43B did not arise. The above finding has been given in para 6.3 of the assessment order. In support of his conclusion, the assessing officer relied on the various decisions of the Supreme Court, viz., Guruswamy & Co. v. State of Mysore AIR 1967 SC 1512, McDowell & Co. Ltd. v. CTO (supra), Abdul Kadar v. State of Kerala AIR 1976 SC 182, Radha Krishna Ram Narayan Ltd. v. Parthasarathi (1980) 6 ELT 709 (Bom) Union of India v. Spinning & Weaving Co. Ltd. (1978) 2 ELT (J) 680 (Bom) Wallace, Flour Mills Co. Ltd. v. CCE (supra), CCE v. Vazir Sultan Tobacco Co. Ltd. (1996) 83 ELT 3 (SC). Though the assessing officer has agreed that excise duty constitutes a post-manufacturing cost of finished goods (para 6.6) yet, it was further observed by him that in case the provision for excise duty is considered as an expenditure, then, the cost of finished products should be increased by that amount while valuing the closing stock. These observations were made on the basis that it was not open to the assessee to adopt one position for valuation of closing stock and adopt different position for claiming deduction on the basis of the provision of excise duty. Therefore, as an alternate ground, he proposed to make the addition on the ground that excise duty element should be included in the closing stock of the finished goods. Accordingly, he proposed the alternate addition of Rs. 1,01,20,383 as per para 7 of the assessment order.
6. The matter was carried before the Commissioner (Appeals) before whom, the contentions raised before the assessing officer were repeated. However, he agreed with the legal finding given by the assessing officer and, therefore, held that liability to pay the excise duty did not accrue to the assessee in the year under consideration inasmuch as such liability depended upon the date of removal of goods from the factory premises. Since neither the excise duty was paid nor the goods were removed from the factory premises under the year under consideration, the Commissioner (Appeals) upheld the order of assessing officer. Aggrieved by the same, the assessee is in appeal before the Tribunal.
7. The learned counsel for the assessee, Mr. Mistry has vehemently assailed the orders of Commissioner (Appeals) as well as the assessing officer. He drew our attention to the provisions of section 3 of Excise Act and rules 9 and 9A of Excise Rules. According to him, section 3 provides that excise duty shall be levied on all excisable goods which are produced or manufactured in India and the words “in such manner as may be prescribe” appearing in section 3 qualify the word “collected” and not the word “levied”. Therefore, the rules 9 and 9A were made for collection of such excise duty. However, as far as the levy is concerned, the taxable event is the manufacture or production of the excisable goods. He also drew our attention to the definition of “excisable goods” provided in section 2(d), according to which, it means “the goods specified in the first schedule and the Second Schedule to the Central Excise Tarrif Act, 1985 as being subject to duty of excise and includes salt.” According to him, once an item falls within the definition of excisable goods, then the liability to excise duty accrues to the assessee on manufacture of such goods by virtue of section 3 irrespective of the rate of excise duty. Further, it was argued by him that claim of the assessee cannot be rejected merely on the ground that such liability is quantified later on the date of removal. In support of this contention, he relied on three Supreme Court decisions, viz., Keshav Mills Ltd. v. CIT (1953) 23 ITR 230 (SC), Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC). He also relied on the decision of Supreme Court in the case of Wallace Flour Mills Co. Ltd. (supra) and in the case of Vazir Sultan Tabacco, Co. Ltd. (supra) for the proposition that excise duty was leviable on the manufacture or production of the goods, though it is quantified on the date of removal under rules 9 and 9A.
8. On the other hand, the learned Senior Departmental Representative has repeated the reasonings of the assessing officer. He also drew our attention to rule 9A(i), (ii) to point out that what is payable by assessee is rate of duty in force on the date of removal has to be applied for determining the liability of excise duty to be paid by assessee and not as per the rate in force as the date of manufacture. Therefore, it cannot be said that any liability to pay excise duty accrues to assessee on the manufacture of goods. He also relied on the decision of Supreme Court in the case of Wallace Flour Mills (supra). It was also submitted by him that in case of provisions made by the assessee, are held to be expenditure then the same should be added to the closing stock of the finished goods which would negate the claim of the assessee. He also referred to the decision of Supreme Court in the case of CIT v. British Paints Ltd.: (1991) 188 ITR 44 (SC) for the proposition that the claim of the assessee cannot be accepted merely because it was adopting particular method of valuation of closing stock consistently if such method is not in accordance with law. At the end of the hearing, a query was raised from the Bench as to what would be the legal position, if the rate of excise duty is brought down to the zero after the end of the accounting year and no tax is payable on the date of removal and vice versa. The learned Senior Departmental Representative sought time to answer this query in writing within the fortnight. The learned counsel for the assessee had no objection to this request, but it was requested by him that he may be given the proper opportunity to reply the written submissions which may be filed by the Senior Departmental Representative.
9. In the meantime, the Income Tax Department sought the opinion of the Central Excise Department on this issue on the basis of which, it has been submitted in writing by the learned Senior Departmental Representative that “though the taxable event is manufacture/production of goods, but the levy and collection of excise duty iss on the removal of the goods from the factory. Accordingly, the goods which have been manufactured at the time, when these were leviable to particular rate of duty but at the time of removal, if the rate becomes nil, the duty charged on the removal will be the nil rate. If the goods have been manufactured, when they were exempted, but subsequent to manufacture exemption notification is withdrawn or they become chargeable to some rate of duty, then, they will be leviable to such rate as is applicable on the date on which the goods are removed from the factory”. In support of this contention, he relied on the decision of the Supreme Court in the case of Parmali Wallace v. CCE (1996) 88 ELT 306, apart from the decision of Supreme Court in the case of Wallace Flour Mills (supra). Thus, according to him, the liability in respect of unsold finished goods as on 31-3-1996, was contingent and indeterminate inasmuch as the levy and quantification of the same depended as on removal of goods after such date. He also drew our attention to rule 49 according to which no duty was payable in case of natural calamity, fire or theft notwithstanding the manufacture of goods. According to him, this rule supported the contention of the department. He also drew our attention to rule 9A according to which the rate of duty applicable would be the rate in force at the time of removal of the goods and not the rate of duty in force at the time of manufacture. Accordingly, he reiterated that liability to pay the excise duty could be determined only on the date of removal since the quantum of duty payable would depend upon the rate applicable at that time.
10. Regarding the decision of the Supreme Court in the case of Vazir Sultan Tabacco Co. Ltd. (supra) relied upon by the learned counsel for the assessee, it was submitted that the said decision was rendered in the context of special excise duty which is levied from year to year by the Finance Act while the basic excise duty is levied under entry 84 of List I of the 7th Schedule of the Central Excise Act, 1944, and rule 9A of the Central Excise Rules. Thus, according to learned Senior Departmental Representative, the said decision of the Supreme Court is distinguishable. It was also pointed out by him that in para 12 of the judgment of the Supreme Court in the case of Vazir Sultan Tobacco Ltd. (supra), reference was made to the earlier decision in the case of Wallace Flour Mills Ltd. (supra), but the court nowhere stated that the said decision was incorrect or it was taking contrary view. In fact, in para 5 of the judgement, it was observed that special excise duty is independent duty of excise, separate and distinct from the duty of central excise leviable under Central Excises Act, 1944.
11. In reply, the learned counsel for the assessee, Mr. Mistry has also filed a written note reiterating his earlier submissions and also took sufficient time in the fresh hearing in canvassing for the proposition that levy is on the manufacture of excisable goods though the collection of the same is postponed to the date of removal. Hence, the liability accrued to the assessee in the year under consideration when goods were manufactured. Since the assessee was following mercantile method of accounting, it was entitled to the deduction on the basis of provisions made by it in respect of the excise duty liability incurred by it.
12. The rival submissions of the parties, case law and the relevant provisions of statute have been considered carefully. Admittedly, the assessee has been maintaining accounts on mercantile method. It is the settled legal position that where the mercantile method of ccounting is adopted by the assessee, he is entitled to deduction in, respect of the liability incurred in the year under consideration even though it has not been paid. This legal position is well settled by various decisions of the Supreme Court and the same is not disputed by either party.
13. Therefore, the only controversy to be resolved by us is whether the liability to pay excise duty was incurred by the assessee in the year under consideration. This aspect of the matter was considered by the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. (supra). In that case, the assessment year involved was 1955-56. The return of income was filed on 13-1-1956, without claiming any deduction on account of sales-tax liability. However, during the pendency of assessment proceedings, the demand notice was served by the sales-tax authorities on 21-11-1957, on the basis of which it filed a revised return claiming the aforesaid deduction. The claim of the assessee was rejected by the assessing officer on two grounds, viz., (1) that assessee had denied its liability to pay by filing appeals to the higher authorities and (2) the assessee had not made any provisions in the books of accounts with regard to such liability. The assessee remained unsuccessful till High Court. However, on appeal to Supreme Court, it was held that obligation to pay the tax had arisen the moment, the assessee made either purchases or sales subject to taxation even though such liability could not be enforced till quantification was affected by the assessment proceedings. According to the Apex Court, the liability for payment of tax was independent of the assessment. Consequently, the liability to sales-tax had accrued during the assessment year 1955-56 even though it had to be discharged at a future date and, therefore, such claim of the assessee could not be rejected merely on the ground that provisions of such liability was not made in the books of accounts. The judgment of the Hon’ble Supreme Court is, therefore, an authority for the proposition that obligation or liability to pay taxes is incurred, the moment the taxable event is occurred and the assessee, following the mercantile method of accounting, is entitled to deduction under section 37 even though such liability is to be discharged at a future date and no provisions are made in the books of accounts. Therefore, in our opinion, this ratio would be applicable in every case where the issue regarding accrual of liability under fiscal statute is raised. It is to be noted that subsequently, this judgment has been applied by various High Courts, where dispute related to excise duty. Reference can be made to decision of Kerala High Court in the case of L.J. Patel & Co. v. CIT (1974) 97 ITR 152 (Ker), Allahabad High Court in the case of CIT v. J.K. Synthetics (1983) 143 ITR 771 (All) and also Delhi High Court in the above case, CIT v. J.K. Synthetics (1995) 126 CTR (Del) 172 : (1995) 215 ITR 593 (Del).
14. Keeping in mind the above legal position, let us resolve the controversy before us. In the present case, there is no dispute between the parties that taxable event is manufacture or production of excisable goods. However, in short, the stand of department is that according to section 3 of Excise Act, duty is to be levied and collected in the prescribed manner which is provided in rules 9 and 9A according to which the liability to pay excise duty arises on the date of removal of excisable goods; and the rate of excise duty would be the rate in force on the date of removal. On the other hand, stand of the assessee is that levy of excise duty is provided by section 3 of the Act itself and it is only the collection of duty which is provided in the prescribed manner. Therefore, rules 9 and 9A provide for collection of excise duty and not the levy thereof. Therefore, once the goods are manufactured, the liability to pay the duty is incurred and it is only the quantification and collection thereof which is postponed to the date of removal. Both these arguments have been deeply considered in the light of relevant provisions of statute and case law referred to. In our opinion, both the arguments are on extreme side.
15. In our opinion, the levy of excise duty is on the manufacture or production of excisable goods and liability to pay such duty accrues the moment taxable event is occurred i.e., the manufacture/production. It is only the collection of such duty which is postponed to the date of removal. It is the accepted fundamental principle of law that levy of any duty, tax or case is the domain of the legislature and, therefore, it has to be provided by enactment by such legislature and the same cannot be delegated to subordinate legislation. According to the Constitution of India, field of legislation is provided in Schedule VII. List I of such Schedule provides the field over which Parliament has the exclusive domain. Entry 84 of List I authorises the Parliament to enact laws for levy of excise duty on tobacco and other goods manufactured or produced in India. It was under this authority, the Parliament enacted Excise Act. Therefore, it is not possible to accept the stand of the department that levy of excise duty is also governed by rules 9 and 9A of Excise Rules. The words “in such manner as may be prescribe, would, therefore, qualify only the word “collected” and not the word “levy”. This aspect of the matter was considered by the Hon’ble Supreme Court in the case of Vazir Sultan Tabacco Co. Ltd. (supra) at page 8 thereof.Relevant portion of the same is reproduced below :
“Section 3(1) of the Central Excises Act says :
“(1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the First Schedule”.
6. The expression “prescribed” is defined in clause (g) of section 2 to mean prescribed by Rules made under the Act.
7. It is evident that the words “in such manner as may be prescribed” qualify the word “collected” and not the word “levied”. While the levy is created by section 3 itself, the collection of the duty is left to be regulated by the Rules made under the Act”.
This position has been further explained by their Lordships in para 11 as under :
“11. We are of the opinion that section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal. Once this is so, the fact that the provisions of the Central Excises Act, are applied in the matter of levy and collection of special excise duty cannot and does not mean that wherever the central excise duty is payable, the special excise duty is also payable automatically. That is so an ordinary rule. But insofar as the goods manufactured or produced prior to 18-3-1978, are concerned, the said rule cannot apply for the reason that there was no levy of special excise duty on such goods at the stage and at the time of their manufacture/production. The removal of goods is not the taxable event. Taxable event is the manufacture or production of goods.”
In view of the above discussion, it is held that levy of excise duty is exclusively provided by section 3 of Excise Act and it is only the collection thereof which is postponed to the date of removal under rule 9. Consequently, the liability to pay excise duty accrues to the assessee, the moment the excisable goods are manufactured or produced even though discharge of such liability is postponed to the date of removal.
16. Similarly, in our opinion, it is not possible to accept the argument of the learned counsel for the assessee that liability to pay excise duty is to be quantified in accordance with the rate of excise duty in force on the date of manufacture. The process of quantification is part of collection process which is provided in rules 9 and 9A. Rule 9 provides that no excisable goods can be removed from the place of manufacture unless the duty leviable thereon is paid. Rule 9A provides the rate at which such duty is payable. According to this rule, duty payable would be the duty in force on the date of removal. In view of these clear provisions, it is held that quantum of liability to be deducted from the profits has to be determined in accordance with the rate of excise duty in force on the date of removal. However, it is clarified that such deduction is subject to the provisions of section 43B.
17. Heavy reliance has been placed by the learned Senior Departmental Representative on the two decisions of the Apex Court in the case of Wallace Flour Mills Ltd. (supra) and in the case of Permali Wallace, Ltd. (supra). In our opinion, there is no conflict of views expressed in the above decisions on one hand and the view expressed in the case of Vazir Sultan Tabacco Co. (supra). There is a distinction between two situations namely : (1) where goods manufactured are excisable goods subject to levy under section 3 even though no duty is payable on the date of manufacture, and (2) where goods manufactured are not excisble goods and not subject to levy of duty under the charging provisions. If this distinction is kept in mind, then it is seen that there is no conflict between the decisions referred to by the parties. In the case of Wallace Flour Mills Co. Ltd. (supra) and in the case of Permali Wallace Ltd. (supra), the goods manufactured were excisable goods at the time of manufacture though no rate of duty was chargeable on the date of manufacture. However, at the time of removal of goods, such goods became dutiable at a particular rate. The question arose whether assessee was liable to pay the duty in force at the time of removal. The Supreme Court held that taxable event was the manufacture of excisable goods while the payment of such duty related to the date of removal of goods. Since, the goods manufactured were excisable goods at the time of manufacture, the assessee was liable to pay the duty at the rate in force on the date of removal. On the other hand, in the case of Vazir Sultan Tobacco Co. Ltd., there was no levy of special duty of excise on the date of manufacture though it was leviable on the date of removal of goods. It is because of this fact, Supreme Court held that no duty was payable at the time of removal of goods. In para 5 of the judgment, it was held “once the levy is not there at the time when the goods are manufactured or produced in India, it cannot be levied at the stage of removal of the said goods. The idea of collection at the stage of removal is devised for the sake of convenience”. Even the Supreme Court in para 12 held that the decision in Wallace Flour Mills Ltd. (supra) did not lay down a contrary position.
18. There is also no force in the submission of learned Senior Departmental Representative that decision of Supreme Court in the case of Vazir Sultan Tobacco Co. (supra) is distinguishable on the ground that it was a case of special excise duty while in the case of Wallace Flour Mills (supra), it was a case of basic excise duty. The schemes of both the excise duty were identical. The only distinguishing feature was that special duty was leviable on the goods manufactured on or after 1-3-1978. It is because of this feature, it was held by the Supreme Court that goods manufactured prior to 1-3-1978, did not become exigible to duty merely on the ground that it was removed from the place of manufacturing after 1-3-1978.
19. There is also no force in the contention of learned Senior Departmental Representative that liability of the excise duty should be added to the cost of closing stock inasmuch as the excise duty is a post-manufacturing expense. Reference can be made to the Supreme Court judgment in the case of Saraswati Industrial Syndicate v. Union of India, AIR 1975 SC 460. Since, assessee is entitled to value the closing stock at cost or market value, whichever is lower, of question of including the excise duty liability in the cost of closing stock of finished goods does not arise.
20. In view of the above discussion, it is held that the claim of assessee could not be rejected by the revenue. Admittedly, the goods manufactured by assessee were excisable goods on the date of manufacture. Therefore, taxable event fell during the year under consideration and consequently, liability to pay excise duty accrued to the assessee. Since, the assessee was admittedly following the mercantile method of accounting and had made the necessary provision in the books of accounts, it was entitled to deduction of the same from the profits of the year under consideration despite the fact, it was discharged in subsequent year. Since the rate of duty was same on the date of manufacture as well as on the date of removal, there would be no difference in the quantification of the same. Since, admittedly, the duty was actually paid before the date of filing of the return, claim of assessee was also not affected by the provisions of section 43B. Accordingly, the order of Commissioner (Appeals) is set aside on this issue and the addition confirmed by him is hereby deleted. This would dispose ground Nos. 4 & 5.
(Only paras 1 to 20 have been marked fit for publication by the Tribunal, hence paras 21 to 34 are not reproduced-Ed)