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TMI Blog2008 (8) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the appellant that unutilized Modvat credit of Rs. 18,04,587 relatable to the stock as on 1st April,1998 merited to be excluded from Rs. 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 AO noticed that there was an unutilized Modvat credit of Rs. 29,39,872 at the end of the year. The AO further noticed that the assessee was following exclusive method for Modvat accounting on the basis of the recommendation of ICAI. It was submitted on behalf of the assessee before the AO that the guidelines issued by the institute clearly show that in both i.e., inclusive and exclusive methods for Modvat, the profit remains unchanged and therefore the effect on Modvat credit available at the end of the financial year is nil. It was further submitted on behalf of the assessee that even if the unutilized Modvat credit is to be added to the income, it should be the difference between the opening Modvat and closing Modvat available at the beginning and end of the year respectively. The AO did not accept submissions because there was no addition of unutilized Modvat credit to the closing stock of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e beginning of the year against Rs. 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 chargeable under the head profits and gains means only the inventory of work-in-progress or finished goods at the end of the year. Therefore, what is envisaged here is the loading of the closing stock of finished goods and raw materials by the tax, duty, etc. This being the first year, therefore, addition has to be made taking in view the newly introduced provisions of s. 145A, without allowing deduction for unutilized Modvat credit of the immediately previous year which according to the appellant is Rs. 18,04,587. Ground No. 2 is thus decided against the appellant." 4. The learned Authorised Representative reiterated the submissions which were made before the Revenue authorities and submitted that entire unutilized Modvat credit was not related to closing stock. The Authorised Representative submitted that the assessee has already given effect of s. 145A in the books of account of assessee following guidelines in this regard issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 sale of goods should be added to the sales, if not already added in the books of account. (c) Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts. 5.3 The ICAI on insertion of s. 145A issued Guidance Note on Tax Audit under s. 44AB of the Act explaining the statutory requirements to give the effect of s. 145A which are as under : "23.9 The statutory requirement under s. 145A can be explained by the following example : Particulars Qty. Rate excluding excise duty Rate of excise duty Opening stock 10 10 2 Raw material purchased 90 10 2 Other manufacturing cost 80 10 ' Finished goods manufactured 80 ' ' Sales of finished goods 60 25 3 Closing stock of raw material 20 10 2 Closing stock of finished goods 20 20 3 The input-output ratio of raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' which is also in accordance with the provisions of s. 145A would be as under : Item Particulars Unit Rate Amt. Amt. Item Particulars Unit Rate Amt. (j) Opening stock 10 10 120 (s) By sales 60 28 1,680 (k) Purchase of raw 90 12 1,080 (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 (p) To excise duty on finished goods 60 3 180 (q) To excise duty on closing stock of finished goods 20 3 60 (r) To GP 300 Total 2,140 Total 2,140 23.11 It may be pointed out that the 'inclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w materials (Rs. 2 per unit on 90 units) 180 (3) Excise duty on sales (paid or incurred as per s. 145A) 180 380 (-) 380 60 Less : 60 Profit 300" 5.4 From above illustration we noticed that if an assessee has followed the above 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. Question of allowable/disallowable arises only in respect of excise duty expenditure where the assessee follows exclusive method of accounting and effect of the s. 145A is to be given. It may be noted that after making the addition to the closing stock under s. 145A, it will be possible to claim a separate deduction for exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has given effect to the s. 145A in accordance with above discussion. The learned Authorised Representative in support of that filed a chart and demonstrated accordingly. Such detailed working is also given in tax audit report as required in cl. 12(b) of Form 3CD. But above submissions of learned Authorised Representative and deduction under s. 43B in accordance with above discussion are subject to verification therefore, we send the matter back to the file of the AO for limited purpose to verify the facts of the case of assessee in the light of above discussion. If the AO finds that the assessee has given effect to s. 145A and also deduction under s. 43B is made as per above discussion, the addition of Rs. 29,39,872 made by him under s. 145A may be deleted. Thus, the grounds of appeal raised by the assessee in this regard are treated as allowed for statistical purposes. 6. Now we take the second aspect of the matter. The learned Authorised Representative submitted that effect of the s. 145A to opening stock is also to be given. He relied upon the decision of Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45: (2008) 168 Taxman 27(Del). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de in accordance with the method of accounting regularly employed by the assessee and such valuation shall be 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." 7.2 The CBDT has clarified that with a view to put an end to this point of litigation, both the opening and closing stock should reflect the correct value and that is why s. 145A was inserted to the statute book. It is further stated that the valuation shall be 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. The Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (supra) has held that corresponding adjustment must be made in opening stock subject however, to a condition that such adjustment should not result in double deduction for same expenditure. The Delhi High Court judgment is the only High Court judgment available on the issue. In such circumstance the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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