Tax Case Appeals against the order of the Income Tax Appellate Tribunal, Chennai A Bench, dated 27.09.2004 passed in I.T.A.Nos. 922,923/Mds/96 and 156/Mds/97 for assessment years 1991-92, 1992-93, 1993-94.
(Judgment of the Court was made by CHITRA VENKATARAMAN,J)
1. The above Tax Case (Appeals) are at the instance of the Revenue against the order of the Tribunal relating to assessment years 1991-92, 1992-93, 1993-94 respectively. The above Tax Case (Appeals) are admitted on the following substantial questions of law:-
"1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that the sale proceeds of the exim scrips are eligible for the exemption under Section 10B?
2. Whether in the facts and circumstances of the case, the Tribunal was right in allowing the expenditure on gift articles as deduction as per rule 6B?
3. Whether in the facts and circumstances of the case, the Tribunal was right in excluding the value of the customs duty from the closing stock?"
2. As far as the first question of law is concerned, viz., exemption on the sale proceeds of the exim scrips under Section 10B, learned counsel for the assessee as well as learned Standing Counsel for the Revenue submitted that the issue is covered against the assessee by reason of the Apex Court decision reported in  317 ITR 218 LIBERTY INDIA v. CIT as well as by the decision of this Court reported in  259 ITR 403 C.I.T. v. MENON IMPEX P. LTD. Consequently, the order of the Tribunal to that extent stand set aside. The question is answered in favour of the Revenue and against the assessee.
3. As far as deduction granted on gift articles as per Rule 6B is concerned, a perusal of the order of the Assessing Authority relating to assessment years 1991-92, 1992-93, 1993-94, shows that the Assessing Authority disallowed the deduction as per rule 6B on a sum of Rs.28,946/-, Rs.35,352/- and Rs.10,976/- respectively. The assessee claimed that going by the negligible character of the expenses, it was evident that what was given as gift on festival days was not by way of advertisement expenses to call for disallowance in this case. Learned counsel for the assessee placed reliance on the decision of the Karntaka High Court reported in  285 ITR 365 MOTOR INDUSTRIES CO. LTD v. DEPUTY CIT.
4. Per contra, learned standing counsel for the Revenue placed reliance on the decision of this Court reported in  245 ITR 719 C.I.T v. JEEVANDAS LALJEE AND SONS. A perusal of the decision of this Court reported in  245 ITR 719 C.I.T v. JEEVANDAS LALJEE AND SONS shows that the assessee therein claimed a sum of Rs.11,838/- as cost of gifts made on the occasion of the marriage of the daughter of the Chairman of the company with whom the assessee was having business relationship and the cost of personal gifts on festive occasions to others. This Court pointed out that the term 'business', however widely construed, cannot include expenditure on making personal gifts, yet , this Court observed that though it is difficult to draw a line with precision demarcating business from personal relationships, nevertheless, it has to be drawn some where and the marriages within the family of business associates, friends and relatives cannot be regarded as occasions requiring an assessee carrying on business to make gifts as a matter of commercial expediency and claim the same as business expenditure. This Court further pointed out that the gifts made by an assessee carrying on business, on such occasion would be similar to that of any other person, who makes a gift on such occasion to his friends or relatives or official superiors or colleagues, such gifts being made out of taxed income.
5. The decision of the Karntaka High Court reported in  285 ITR 365 MOTOR INDUSTRIES CO. LTD v. DEPUTY CIT, refers to expenditure on gift articles such as leather articles, nylon bags, umbrellas, glass jugs, for presentation as courtesy to dignitaries and business associates. These articles carried the name of the assessee. Accepting the case of the assessee that advertising a product involves an intention and several factors including the person to whom it is presented, how it is presented and when it is presented, presentation of an article with the name of the company to a dignity or a VIP, would not, by itself, amount to an advertisement unless sufficient material is forthcoming with regard to the details of advertising nature. Considering the amount involved as hardly Rs.1,60,000/- and considering the nature of the articles presented, the Karnataka High Court held that the claim could not be termed as advertisement expenses.
6. As far as the present case is concerned, as already seen, considering the expenditure and that the presentation of a small gift on the occasion of festival season, per se, would not amount to advertisement. We have no hesitation in rejecting the Revenue's plea, thereby confirming the view of the Tribunal in respect of second question of law.
7. As regards the third question of law, the Tribunal upheld the assessee's case in excluding the value of the customs duty from the closing stock, apparently for the reason that the assessee had adopted new method both as regards the opening stock as well as on the closing stock. A perusal of the order of the Assessing Authority shows that the assessee had claimed that it had paid the excise duty at the time of purchase of raw material. For making use of the modvat facility granted by the Government, for the first time, the assessee chose to claim modvat benefit against its actual liability for excise duty arising on manufacture of goods. In that process, the assessee valued its closing stock without including the duty component paid by it at the time of purchase of raw material. The Assessing Authority, however, rejected the plea of the assessee since such method of not allocating cost of duty paid at the time of purchase would adversely affect the value of closing stock. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals).
8. The Commissioner of Income Tax (Appeals) noted that the assessee had paid a sum of Rs. 1 crore and odd towards the customs duty on raw materials lying in the closing stock during the relevant accounting year. The Assessing Officer made computation by disallowing the claim made under Section 43B of the Income Tax Act. Having done this, as far as the valuation of the closing stock is concerned, the first Appellate Authority pointed out that as per the method of accounting followed by the assessee, it did not include excise duty and modvat credits as part of cost in profit and loss account. The Appellate Authority pointed out that the assessee had been following the uniform procedure of excluding the cost of excise duty and customs duty. For the relevant previous year, the total excise duty collections on final products were much more than the modvat credit availed. The entire excise duty paid on input items purchased was set off against the excise duty on final products. In the circumstances, the first Appellate Authority concurred with the assessee's contention in respect of the above three years.
9. On appeal before the Tribunal, following the decision of the Special Bench of the Tribunal in the case of ITO v. FOOD SPECIALITIES LTD  49 ITD 21 and after the insertion of Section 43B in the Income Tax Act, 1961, customs duty that is allowed under Section 43B could not be included as part of the closing stock of raw materials that remained unutilised in the year, the Tribunal upheld the claim of the assessee. The Tribunal applying the decision of the Apex Court reported in CIT v. INDO NIPPON CHEMICALS CO. LTD  261 ITR 275, rejected the Revenue's plea. Aggrieved by this, the Revenue is on appeals before this Court.
10. As far as the inclusion of excise and customs duty as part of the value of the closing stock is concerned, learned standing counsel for the Revenue placed reliance on the decisions of this Court reported in  320 ITR 257 CIT v. INDIA PISTONS LTD and  259 ITR 631 SOUTHERN ASBESTOS CEMENT LTD v. CIT to contend that the excise duty element and the customs duty paid on the raw materials would form part of the value of the closing stock.
11. Per contra, learned counsel appearing for the assessee however placed reliance on the decision of the Apex court reported in  261 ITR 275 CIT v. INDI NIPPON CHEMICALS CO., LTD. A perusal of the decision of this Court reported in  320 ITR 257 CIT v. INDIA PISTONS LTD shows that there the assessee had the imported goods lying with the Customs warehouse and was yet to be cleared. Referring to the decision of this Court reported in  243 ITR 512 CIT v. ENGLISH ELECTRIC CO. OF INDIA LTD, this Court pointed out that the liability for payment of excise duty arises at the point of manufacture. However, by including the liability therein into the closing stock, the result would be to the extent of regarding it as a part of the assets held by the assessee in the form of higher value assigned to the closing stock. So too would be the position as regards the customs duty payable in respect of goods which are under bond.
12. Referring to the decision of  259 ITR 631 SOUTHERN ASBESTOS CEMENT LTD v. CIT this Court pointed out that the facts therein related to import of asbestos fibre which was cleared on payment of customs duty. Thus, in the case of  259 ITR 631 SOUTHERN ASBESTOS CEMENT LTD v. CIT, the customs duty and other expenses incurred to bring the goods to the factory of the assessee was included in the cost of asbestos fibre. As far as the facts that existed in  320 ITR 257 CIT v. INDIA PISTONS LTD was concerned, the decision reported in  259 ITR 631 SOUTHERN ASBESTOS CEMENT LTD v. CIT would have no relevance, since the imported goods therein were yet to be cleared from the customs and remained in the bonded warehouse and the manufactured goods were also very much available within the assessee's factory and they were not cleared by payment of excise duty. In view of the different fact situation, this Court held that the excise duty could not be included in the value of closing stock.
13. As far as the decision of the Apex Court reported in CIT v. INDO NIPPON CHEMICALS CO. LTD  261 ITR 275, is concerned, the Apex Court pointed out that the assessee therein was liable to excise duty on the goods manufactured by them. Under the modvat scheme, the assessee got credit for the excise duty already paid on the raw materials purchased by them and utilised in the manufacture of excisable goods. On the sale of manufactured goods, the proportionate part of the modvat credit was set off against their excise duty liability. The assessee adopted the net method. The Apex Court pointed out that the method was also adopted while valuing the unconsumed raw materials and the work in progress at the end of the year. The Apex Court affirming the decision of the High Court pointed out that on the sole ground that the modvat credit was an irreversible credit available to manufactures upon purchase of duty paid raw material, the same would not amount to income which was liable to be taxed under the Act. Thus, on the facts that the assessee was under the facility of modvat scheme, the Apex Court held that it was not permissible for the Assessing Officer to adopt the gross method for valuation of raw materials at the time of purchase and the net method for valuation of stock on hand.
14. As far as the present case is concerned, admittedly, the assessee had availed modvat credit in respect of the excise duty paid on the raw materials and on the final product on which excise duty was payable. So too, in respect of customs duty paid on the determined value, the Revenue does not dispute the fact that the assessee had been consistently adopting the method of accounting on net valuation method on the closing stock.
15. Guided by the decision of the Apex Court herein, on the admitted facts, we have no hesitation in affirming the order of the Tribunal. The Tax Case Appeal is dismissed to that extent.
16. Going by the questions raised and the relief granted, except question No.1, question Nos. 2 and 3 stands rejected. The Tax Case appeal is partly allowed. No costs.