TMI Blog2013 (10) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... nput duties/levies, would only state the same at actual cost, even as advocated by AS-2 by ICAI. Again, this only would state the current asset, which it represents, at its proper value, i.e., in the balance sheet, and at which the same is to be carried forward to the following year - Only a correct statement of the current assets and liabilities, i.e., which are not on capital account, in the balance-sheet, would enable reflection of the correct operating results for the relevant accounting period. Toward this, only the booking of profit (against excess recovery of excise duty) would enable an agreement of the outstanding balance in the UCC a/c with the excise component in the closing inventories, so that the accounts whether maintained on gross or net basis, reflect the current asset in respect of excise paid thereon at the same, correct value - Further, it is only this, reckoning the `profit' on excess recovery as the difference between the profit per the two statements prepared on net and gross basis, that would state the UCC a/c at the correct value of the current asset represented by it, where the accounts are maintained on net basis, bringing the profit per the two methods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessment year (A.Y.) 2007-08, vide order dated 30.10.2009. 2. The appeal raises, in effect, two issues, per its four grounds, which we shall take up in seriatim. The first issue, being agitated by the assessee per its ground nos. I and 2, is in respect of an addition effected in the sum of Rs.10,39,886/- uls.145A of the Act by the Assessing Officer (A.O.) in view of unutilized cenvat credit, which stands sustained by the first appellate authority at Rs.7,00,109/-, allowing the assessee relief for Rs.3,39,777/-. 2.1 Opening the arguments for and on behalf of the assessee, it was pleaded by the Id. AR, its counsel, that the assessee has valued its closing stock inclusive of all taxes. The assessee follows inclusive method of accounting, following the mandate of section 145A, which is, in fact, otherwise tax-neutral, so that it should not result in any enhancement or change in income. It is, in fact, on being satisfied on this count, i.e., inclusion of the excise duty in the valuation of the closing stock as at the year-end, that the Id. CIT(A) has allowed it relief to that extent, for which he would refer to pgs.11 47 of the assessee's paper-book (PB), reflecting the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.8.93 lacs by Rs.7 lacs. 2.2 The Id. DR, on the other hand, would rely on the orders by the authorities below, claiming that they have, in directing the further adjustment of the assessee's disclosed profit by the amount outstanding in the UCC account, only sought to follow the mandate of section 145A, and no more. There is, accordingly, no question of any relief to the assessee; the ld. CIT(A) having already allowed it relief to the extent the assessee could ostensibly show a double effect. 3.We have heard the parties, and perused the material on record. 3.1We firstly observe that the Id. CIT(A) has not allowed any relief to the assessee on account of unutilised MODVAT credit per se, but only directed adjustment as called for, where and to the extent excise duty stands included in the valuation of the closing stock. Further, he has, finding that the entire unutilised MODVAT credit of Rs. 10,39,986/-pertains to the current year; the opening balance in the said account being nil, directed the adjustment of the outstanding balance in the said account to the assessee's income inasmuch as the same is only the excise component on the raw-material, semi-finished goods and fini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting assumptions. The decision by the hon'ble apex court in the case of Chainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC) holds the field to date, and continues to be a guide post in the matter. Like-wise, the valuation of purchases and sales, which represents the other limb of sec. 145A, providing for the same at gross of all levies incident thereon, should also be revenue-neutral, following proper accounting principles. Firstly, the prescription (per s. 145A) is consistent with the actual state of affairs inasmuch as the levies, paid or recovered, form part of the trading cost or receipt of an enterprise, even as held by the apex court in, inter alia, Chowringhee Sales Bureau (P) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray Co. (P.) Ltd. v. CIT [ 19741 97 ITR 615 (SC), also clarifying that it is the nature and quality of the receipt (or payment) that is relevant in determining its taxability and not its accounting treatment. Secondly, this would enable the statement of the current assets and current liabilities at correct values. That is, even without insisting on the account head under which the gust' or `revenue' is to be booked in accounts, only when the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the actual profit, but as afore-stated enables and is consistent with its determination. The said enhancement with reference to s. 145A is itself an admission of some difference between the `book profit' and that in terms of s. 145A. Clearly, if the profits per the two statements are shown to be at par, which is admittedly not the case, there was no need or occasion to draw a separate, revised statement (Part A of Ann.2), as done by the assesse, whose accounts in fact reflect a profit of Rs. 5,53,073/- (Part B of Ann.2). In fact, as would be readily observed, the recording of the figures of excise on both the sides of the operating statement (Ann. 2B) is of no consequence as the assesse records the excise separately in the UCC a/c. The figures of excise on both the sides of the P L account cancel each other equally, rendering their statement/recording to no effect. The excise duty to be included in the valuation of the closing stock is not the balance in the UCC a/c (Rs. 10.40 lacs), which is done only with a view to balance the excise impact (i.e., on payment and recovery of excise) on profit, but that relatable to the closing stock. The revised statement (Ann. 2A), again, valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Cenvat credit account separately as a memoranda account, which in fact is required to be so maintained as the assessee's personal ledger account (PLA) with the excise department. Any direct payment of excise in case of excess recovery, where so, would be claimed as a direct expenditure through debit to the profit and loss account. The assessee, alternatively, could maintain its accounts on net (exclusive) basis, recording the payment or recovery of excise in the Cenvat account. Reporting of the profit for tax purposes under the Act in such a case though would have to be made by drawing a separate P L A/c in terms of section 145A, i.e., by including the excise component on all the constituents of the trading account. The assessee, as we have found, following the latter (exclusive) method, it would have to adopt the alternative course afore-said. In fact, the difference between the profit disclosed by the assessee's accounts and that per the statement drawn u/s 145A, would reveal the extent of profit' or loss' that the assessee has made or suffered, as the case may be, on account of payment and recovery of excise (as at Rs. 2/-per unit or Re. 0.40 per unit in the two examp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se on value addition (or the excess recovery aforesaid), reducing the the positive balance in PLA (UCC a/c) to that extent, as by Rs. 170/- in example # 1 (Ann. IA). However, such an adjustment in accounts, even if carried out, would be to no effect. This is as the excise duty against purchases would remain un-discharged to that extent. Also, this would necessitate booking of excise liability (on the value-addition) in accounts, preferably in total, or at least in the sum as incurred on such purchases. The liability, thus, gets stated in books, either way, rendering the argument of the excise liability being discharged through fresh purchases of excisable goods, to no effect. Coming back to our discussion on the profit u/s. 145A, even though payable in due course, prudence would suggest booking the provision against the liability to the credit of the Government in respect of excess recovery (or against subsequent purchases, if one may prefer to see it that way) with reference to the difference in the reported profits per the two separate statements of the P L A/c. To demonstrate (taking the figures of Ex. I at Annexure 1-A), an accounting entry of Rs.170/-, i.e., the profit com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we shall also advert to the decision by the apex court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC). The same clarifies that the assessee could validly follow any of the two - net or gross -methods of accounting for reporting taxable profits under the Act inasmuch as they lead to the same result and, thus, pass the test of s. 145. Its recent decision in the case of CIT v. Shri Ram Honda Power Equipment Ltd. (2013) 258 CTR (SC) 329, again considered suo motu by us, is again to the same effect. In fact, this is precisely what we have sought to emphasize from the beginning of our discussion, clarifying that subject to following correct accounting principles in recording the value of current assets and liabilities, the two methods are at par (refer paras 3.2 to 3.4 of this order). In that case, the assessee was setting off the proportionate part of the modvat credit (on raw material) against excise liability (on sales), while in the instant case the assessee is setting off the entire recovery of excise, i.e., including that on the value addition made. The practice has no sanction in accountancy. The determination of the proportionate part, i.e., the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at the correct values would lead to the correct profit in terms of s.145A, and the balance in the UCC a/c (for the time being) cannot be taken as a surrogate measure of the excise component in the inventories at that point of time. That is, the same, based as it is on excise rules, does not represent the unutilized credit available on goods held in stock. This is as it, in disregard of the accounting principles, allows full adjustment of the excise liability on the removal of goods, i.e., including the excise liability on the value addition, against excise paid on purchases, and, concomitantly, for such an adjustment even in respect of raw material not consumed but lying in stock. The UCC a/c, as being prepared, is thus not in consistence with the accounting principles. It is only the drawing of the operating statement in accordance with sec. 145A, valuing all the ingredients of the trading account at inclusive of excise (input levies) that would lead to the removal of these anomalies, bringing forth the correct profit. No separate accounting for the `profit' or `loss' embedded in the unutilised cenvat credit account, as warranted by mercantile book-keeping, would then be require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely on the basis that excise stands paid thereon. In fact, the tax audit report u/s. 44AB requires reporting of the unutilized credit of modvat available. The two, i.e., the accounts and the excise records, proceed independently, though are reconcilable. A periodic reconciliation is, in any case, recommended. Perhaps, only a provision in the excise law for direct payment of excise on value-addition or, equivalently, maintaining the balance in the PLA (UCC a/c) at par with the excise component on the inventories (Rs. 400/ in our example/Ann. IA), would restore parity between the two. In sum, we reiterate the primacy of s.145A; the excise rules being inconsistent with the tenets of accountancy. b) In our clear view, thus, the proper manner in which the correct profit in terms of section 145A could be determined is by scrupulously following the mandate of the said section. All the constituents of the manufacturing account that are subject to levy/incidence of excise (or any other tax for that matter) are to be loaded therewith. That the provision is tax-neutral is no argument for not observing the same, as the same (tax neutrality) would have to be established in each case with ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, to contend non-difference in operating results. The tribunal, in Raj Petro Specialities (P.) Ltd. v. Asst. CIT (in ITA Nos. 7260' 7261/Mum/2010 dated 15/3/2013) has clarified that ss. 43B and 145A, both non obstante provisions, are to be read in harmony and, further, explained that there was in fact no conflict or inconsistency between the two sections. In final analysis, the tax neutrality of the net method is subject to it being established, with the non obstante provision of s. 43B, which in fact obtains irrespective of the method of accounting followed, assuming a crucial significance when the liability in respect of all the levies as accrued are booked or accounted for c) Coming to the facts and figures of the case, the operating statement at gross values (Annexure 2-B) would need to be modified in the following manner, so as to bring it in conformity with section 145A: increase the value of the opening stock or YO and RMS by the amount of excise duty, if any, suffered thereon; state the closing stock of FG and RMS, similarly, at values inclusive of excise duty thereon, and not by adding the debit amount outstanding in the UCC A/c; and carry forward the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees. There is no correlation or interface between the two, so that one could not be deleted with reference to the other. The disallowance being thus confirmed, the assessee is in second appeal. 6. Before us, the case of both the parties was much the same, i.e., as before the authorities below. In addition, it was also argued by the Id. AR that the disallowance could not exceed 20%, i.e., the threshold limit of s. 115WC. 7. We have heard the parties, and perused the material on record. We do not, even as observed during hearing, find much merit in the assessee's case. The total expenditure on telephone and internet expenses as claimed is at Rs.1.56 lakhs. The A.O., however, effected the disallowance only in respect of the expenditure qua the telephones installed at the residences of the partners, i.e., Rs.0.37 lakhs, estimating the personal (non-business) user thereof at 50%. These facts being not in dispute, how we wonder could the charge of FBT, which is a different levy, and only in respect of the expenses incurred by the assessee as an employer for the benefit of his employees or deemed to have been so incurred, have any bearing in the matter. True, Rs.0.37 lakhs of the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X
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