2009 (9) TMI 1008 - AT - Income Tax

Valuation of closing stock u/s 145A - Deduction for excise duty MODVAT - additional ground deduction for excise duty paid on closing stock before the due date of filing the return of income u/s 43B - HELD THAT - In the present case It is contended that as per the guidelines issued by institute of Chartered Accountant s of India an assessee can have either inclusive method for accounting entries with regard to MODVAT or exclusive method . It is explained that in the inclusive method the purchase of raw material debited in the books of accounts is inclusive of the corresponding MODVAT element. It is submitted that if an assessee is following this method then the closing stock has to be valued inclusive of MODVAT element. In the exclusive method the balancing figure is taken to the balance sheet only and it is not taken to the profit Loss Account. Therefore as could be seen the Gross profit in the Inclusive Method is higher on account of the increase in the value of the closing stock by corresponding MODVAT element. The total increase in the value of closing stock and therefore the increase in the Gross Profit in the inclusive method can be worked as under. Total MODVAT Credit corresponding to the raw material or finished goods etc. in the closing stock Excess of MODVAT Credit over the Excise payable on the sales made during the relevant precious year. Therefore in the assessee s case also the income would be affected by any adjustment to the closing stock and opening stock. With regard to the adjustment to the closing stock as made by the Learned Assessing Officer the same appears to be in the fully justified in view of the specific provisions of section 145A. Therefore as discussed while explaining the example above the net addition required to be made to the closing stock and therefore to the Gross profit would come to Rs. 26, 95, 884(Rs.26, 23, 036 Rs.1, 27, 152). However as the Learned AO is going to carry out the adjustment on account of value of the opening stock for this assessment year after completing the reopened assessment for Assessment Year 1999-2000 he may keep the above position in mind and work out the final figure of addition on this account considering the total increase in the value of closing stock for the Assessment Year under consideration at Rs. 26, 95, 884/- only. This Ground of appeal is disposed off accordingly. In the instant case the lower authorities were not justified in revaluing only closing stock so as to include the amount of excise duty paid on purchase without revaluing the corresponding purchases. We have gone through the guidelines explained by the ICAI and find ourselves in agreement therewith that there will not be any effect on the profit of loss arrived at either by following inclusive method of accounting or exclusive method of accounting for excise duty. The only effect will be that the excise duty payable on closing stock of finished goods will be to the extent not deposited with the government before the due date of furnishing of return will be added to the income of the assessee in view of provision of Section 43B. In view of the discussion made hereinabove in our considered opinion there will be no effect in the taxable profit of the assessee by including the amount of excise duty paid on purchases in the value of closing stock of raw material whether as raw material or as forming part of work-in progress or finished goods. We therefore set aside the orders of the lower authorities on this issue in both the year under appeal and allow the grounds of appeal of the assessee. Deduction u/s 80HHC - after excluding deduction claimed u/s 80IA from the gross total income - At the time of the hearing both the parties agreed before us that this ground of appeal is covered against the assessee by decision of the Tribunal in the case of Assistant CIT vs. Rogini Garments Ors. 2007 (4) TMI 122 - ITAT CHENNAI wherein it was held that in view of the specific restriction provided u/s. 80-IA(9) relief u/s. 80-IA should be deducted from profits and gains of business before computing relief u/s 80HHC. Therefore this ground of the appeal of the assessee is dismissed. Reducing interest income from the profits - deduction u/s 80HHC - At the time of the hearing Ld. Counsel for the assessee submitted that his only prayer in the above ground of appeal is that netting off of interest should be allowed to the assessee in view of the decision of the Hon ble Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip Ors. 2007 (1) TMI 86 - HIGH COURT DELHI wherein it was held that where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources and not as profits and gains of business or profession ; interest earned on fixed deposits made for the purposes of availing credit facilities from the bank also does not have an immediate nexus with the export business and does not qualify for deduction u/s. 80HHC. However where interest income is treated as business income the amount of interest to be reduced in terms of cl. (baa) of Explanation to s. 80HHC is the net interest i.e. gross interest less expenditure incurred for the purpose of earning such interest. The Learned Departmental Representative also agreed with the submissions of the Learned Authorised Representative of the Assessee. We therefore set aside the orders of the lower authorities restore this matter back to the file of Learned AO to decide issue afresh in the light of the observation made hereinabove after allowing proper opportunity of hearing to the assessee. Thus this ground of appeal is allowed for statistical purposes. In the result both the appeals of the assessee are partly allowed.

Summary

Issues Involved:
1. Reopening of assessment proceedings under Section 147.
2. Addition of excise duty MODVAT to the value of closing stock under Section 145A.
3. Deduction for excise duty paid on closing stock before the due date of filing the return under Section 43B.
4. Calculation of deductions under Sections 80IA and 80HHC.
5. Reduction of interest income from business profits for Section 80HHC deduction.
6. Levy of interest under Sections 234A/B/C.
7. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Reopening of Assessment Proceedings under Section 147:
The assessee challenged the reopening of assessment proceedings under Section 147, claiming it was without jurisdiction and not permissible. However, this ground was not pressed by the assessee during the hearing and was dismissed.

2. Addition of Excise Duty MODVAT to Closing Stock under Section 145A:
The assessee argued against the addition of Rs. 24,29,893/- and Rs. 28,23,036/- for the respective assessment years, contending that their accounting method (exclusive method) did not affect the profit. The Tribunal noted that Section 145A mandates including excise duty in the valuation of inventory. The Tribunal upheld the AO's method of valuing closing stock inclusive of excise duty, but corrected the computation to Rs. 26,95,884/- after considering the excess MODVAT credit over excise payable.

3. Deduction for Excise Duty Paid on Closing Stock under Section 43B:
The assessee sought deduction for excise duty paid on closing stock before the due date of filing the return. The Tribunal, referencing the Madhya Pradesh High Court's decision, directed that excise duty should not be included in the closing stock if the goods had not left the premises. If included, the deduction should be allowed if the payment was made before the due date, following the Gujarat Fluoro-Chemicals Ltd. case.

4. Calculation of Deductions under Sections 80IA and 80HHC:
The assessee contended that both deductions should be calculated on the gross total income without excluding the Section 80IA deduction. The Tribunal, referencing the Rogini Garments case, dismissed this ground, affirming that Section 80IA deduction should be excluded before computing Section 80HHC deduction.

5. Reduction of Interest Income from Business Profits for Section 80HHC Deduction:
The assessee argued for netting off interest income for the Section 80HHC deduction. The Tribunal agreed, directing the AO to allow netting off of interest income following the Delhi High Court's decision in Shri Ram Honda Power Equip.

6. Levy of Interest under Sections 234A/B/C:
The assessee did not present arguments on this issue. The Tribunal held that charging of interest is consequential and disposed of this ground accordingly.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as premature, as the penalty proceedings were only initiated and not concluded.

Conclusion:
The appeals were partly allowed. The Tribunal upheld the addition of excise duty to closing stock but corrected the amount. It allowed netting off of interest income for Section 80HHC deduction and provided directions for excise duty treatment under Section 43B. Other grounds were either dismissed or considered premature.