TMI Blog2008 (8) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... y credit taken on input is of the nature of set off available against the excise duty payable on the final products. It may be pointed out that the 'inclusive method' is not permitted by AS-2 which is made mandatory from accounting year beginning on or after 1st April, 1999. Further, in the Guidance Note on Accounting for Modvat the second method (inclusive method) has been withdrawn with effect from accounting year commencing from 1st April, 1999. In view of the above, the adjustments u/s. 145A will have to be made in all cases where 'exclusive method' is followed. We noticed that if an assessee has followed the procedure as laid down by the ICAI and tax auditor reported this aspect in cl. 12(b) in Form 3CD of tax audit report, in such case the point remained to examine is allowability of amount of excise duty which has been adjusted in closing stock of finished goods. No doubt the excise duty adjusted to the closing stock is an allowable revenue expenses. The addition of entire balance in Modvat account is not proper because the nature of this account is personal account, an item of assets side of the balance sheet which always have a debit balance. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER A.L. GEHLOT, A.M. : This appeal filed by the assessee is directed against the order of R learned CIT(A)-XII, Mumbai, passed on 6th Nov., 2003, for the asst. yr. 1999-2000. 2. The grounds of appeal raised by the Revenue read as under : 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of ₹ 29,39,872 made by the AO under s. 145A of the IT Act, 1961. Without prejudice to the generality of the ground, the learned CIT(A) erred in concluding that the only effect of s. 145A was that value of inventory of finished goods and raw materials had to be increased by the amount of tax, duty, etc. when in fact, the section requires that purchases, sales and inventories should be valued inclusive of tax, duty, etc. 2. Without prejudice to the above ground, the learned CIT(A) further erred in not accepting the contention of the appellant that unutilized Modvat credit of ₹ 18,04,587 relatable to the stock as on 1st April,1998 merited to be excluded from ₹ 29,39,872 added to the total income by the AO. 3. Briefly the facts of the case are that during the assessment proceedings the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loading of the finished goods and the raw materials by the amount of tax, duty, etc., in the closing stock. That alone constitute the closing stock of work-in-progress and finished goods and thus the inventory of the appellant. Under the circumstances, when, as a result of s. 145A, which was brought on the statute to tide over the complications arising as a result of the decision of the jurisdictional High Court in the case of Indo Nippon Chemicals Co. Ltd. (supra), I am inclined to agree with the findings of the AO that the amount represented by the unutilized Modvat credit has to be taxed in the year under consideration. Ground No. 1 is thus decided against the appellant subject to my findings in ground No. 3 below. 2.4 In ground No. 2, the appellant has without prejudice to ground No. 1 submitted that the AO erred in not adjusting the unutilized Modvat credit of ₹ 18,04,587 relatable to the value of stock at the beginning of the year against ₹ 29,39,872 added to the value of closing stock. In this connection, I find that the provisions of s. 145A were brought on the statute w.e.f. 1st April, 1999 and the inventory for the purpose of determining the income chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head 'Profits and gains of business or profession' shall be' (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation : For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. 5.2 The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as follows : (a) Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw materials, stores, etc.), if not already added in the books of account. (b) Any tax, duty, cess or fee actually paid or incurred on sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for payment of excise duty on final products, the amount could be credited to a separate account, i.e., Modvat credit availed account. Out of the Modvat credit availed account, the amount of Modvat credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. This method is hereinafter referred to as 'inclusive method'. The effect of s. 145A is to reflect the figures on 'inclusive method'. Following two illustrations explain the above propositions. The P L a/c on 'exclusive method' would be as under : Item Particulars Unit Rate Amt. Amt. Item Particulars Unit Rate Amt. (a) Opening stock 10 10 100 (h) By sales 60 25 1,500 (b) Purchase of raw material 90 10 900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (t) By closing stock of finished goods 20 23 460 Total 100 12 1,200 (l) Less closing stock 20 12 240 (m) Less Modvat credit 80 2 160 (n) Raw material consumed 80 10 800 (o) To manufacturing cost 80 10 800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 180 5. Increase in closing stock of raw material on inclusion of excise duty (l-c) 40 6. Increase in closing stock of finished goods on inclusion of excise duty (t-i) 60 7. Increase in excise duty on closing stock of finished goods as a result of its inclusion in closing stock of finished goods (q) 60 8. Accounting of Modvat credit availed and utilized on raw materials consumed in payment of excise duty on finished goods accounted on the basis of raw material consumed (m) 160 Total 440 440 The computation of total income would appear as under : Rs. Rs. Rs. Profit as per P L a/c on the basis of exclusive method (see para 23.10) 300 Add : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filing the return of income on production of evidence as provided under s. 43B. Therefore, in the above illustration if the assessee has paid ₹ 60 added in the valuation of closing stock of finished goods before due date of filing the return deduction for the same can be separately claimed in the computation of income under s. 43B, if other conditions of that section are satisfied. 5.5 In case where there is no actual payment but adjustable against Modvat account whether the assessee is entitled to claim deduction under s. 43B. For this purpose we would like to refer the decision of Tribunal Special Bench, Chandigarh in the case of Dy. CIT vs. Glaxo Smithkline Consumer Healthcare Ltd. (2007) 110 TTJ (Chd)(SB) 183: (2007) 107 ITD 343(Chd)(SB) wherein it was held that the Modvat balance as such does not amount to payment. The balance becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the balance against the central excise liability and not before. It is to note that the issue pertaining to simple adjustment of balance in Modvat account was before the Tribunal Special Bench, Chandigarh. While giving effect of s. 145A, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon orders of Revenue authorities. He has also relied upon following decisions : (i) West Coast Paper Mills Ltd. vs. Asstt. CIT (2006) 105 TTJ (Mumbai) 344 : (2006) 286 ITR 252 (Mumbai)(AT); (ii) CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC); (iii) J.B. Chemicals Pharmaceuticals Ltd. vs. Addl. CIT (2006) 10 SOT 362 (Mumbai); (iv) ITA No. 7751/Mum/2004, dt. 28th Jan., 2008; (v) Dy. CIT vs. Glaxo Smithkline Consumer Healthcare Ltd. (supra). 7. We have heard the learned representatives of the parties, record perused and gone through decisions cited. In this connection, it is worthwhile to note that the memorandum and CBDT circular explaining the provisions of s. 145A inserted by the Finance (No. 2) Act, 1998 states as follows : Computation of value of inventory The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which Modvat credit is available has been the matter of considerable litigation. In order to ensure that the value of opening and closing stock (bold for emphasis) reflect the correct value, it is proposed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that we are to follow the above judgment of the High Court. Since we follow the judgment of the Delhi High Court therefore the decisions of Tribunal relied upon by the learned Departmental Representative does not help to Revenue. The judgment of the apex Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. (supra), cited by the learned Departmental Representative is distinguishable on facts as the said case decided by the apex Court considering the facts of that case. The apex Court in that case held that adopting gross method for purchases and net methods for unconsumed stock at the end of year is not permissible. 7.3 On consideration of s. 145A, above memorandum and CBDT circular explaining the provisions of s. 145A and above judgment of the Delhi High Court we noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also irrespective of any consequences on the computation of income for tax purposes. We further noticed that s. 145A starts with the non obstante clause notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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