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TMI Blog2008 (8) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in not accepting the contention of the appellant that unutilized Modvat credit of ₹ 18,04,587 relatable to the stock as on 01.04.1998 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 AO noticed that there was an unutilized Modvat credit of ₹ 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 cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osing stock. In this connection, I find that the Provisions of section 145A were brought on the statute with effect from 1.4.99 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 section 145A, without allowing deduction for unutilized Modvat credit of the immediately previous year which according to the Appellant is ₹ 18,04,587/-. Ground No. 2 is thus decided against the appellant." 4. The learned AR reiterated the submissions which were made before the revenue authorities and submitted that entire unutilized modvat credit was not related to closing stock. The AR submitted that the assessee has already given effect of section 145A in the books of account of assessee following guidelines in this regard issued by the Institute of Chartered Accountants of India. On the other hand, the learned DR reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 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 Institute of Chartered Accountants of India on insertion of section 145A issued guidance Note on Tax Audit u/s 44AB of the Act explaining the statutory requirements to give the effect of section 145A' which are as under:- "23.9 The statutory required under section 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 row material 20 10 2 Closing stock of finished goods 20 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock of finished goods 20 23 460 (i) Less closing stock 20 12 240 (m) Less MOD VAT 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) excise duty on closing stock of finished goods 30 3 60 (r) To gross profit 300 Total 2140 Total 2140 23.11 It may be pointed out that the 'inclusive method' is not permitted by AS2 which is made mandatory from accounting year beginning on or after 01.04.1999. Further, in the Guidance Note on Accounting for MODVAT the second method (inclusive method) has been withdrawn with effect from accounting year commencing from 01.04.1999. In view of the above, the adjustments under section 145A will have to be made in all cases where 'exclusive method' is followed. 23.15 When the exclusive method is followed in the accounts, the adjustments to be made under section 145A can be explained by the following illustrations which is required to be reported under clause 12(b). Sl. No. Particulars (Rs.) Increase in profit (Rs.) Decrease in profit 1 Increase in cost of opening stock on inclusion of excise duty on which MO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not proper because the nature of this account is personal account, an item of assets side of the Balance Sheet which always having 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 section 145A is to be given. It may be noted that after making the addition to the closing stock under section 145A, it will be possible to claim a separate deduction for excise duty actually paid after the year end but before the due date for filing the return of income on production of evidence as provided under section 43B Therefore, in the above illustration if the assessee has paid ₹ 60 added in the valuation of closings 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 section 43B, if other conditions of that sections are satisfied. 5.5 In case of where there is no actual payment but adjustable against MODVAT a/c whether the assessee is entitled to claim deduction under section 43B. For this purpose we would like to refer the decision of ITAT Special Bench, Chandigarh in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 AR submitted that effect of the section 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 Alluminium Ltd.,168 Taxman 27 (Delhi). The DR on the other hands relied upon orders of revenue authorities. He has also relied upon following decisions:- i. West Coast Paper Mills Ltd v ACIT 286 ITR 252 (AT) ii. CIT V Indo Nippon Chemicals Co. Ltd 261 ITR 275(SC) iii. J.B.Chemicals and Pharmaceuticals Ltd .V Add.CIT, 10 SOT 362(Mum) iv. ITA No. 7751/M/04 - order dated 28.1.2008 v. Dy.CIT V Glaxo Smithkline Consumer Healthcare Ltd 107 ITD 343 (CHD) (SB). 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 section 145A inserted by the Finance (No.2) Act Bill, 1998 states as follows: "Computation of value of inventory The issue relating to whether the value of closing stock of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Taxman 27 (Delhi)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 judicial proprietary demands 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 Ld DR does not help to revenue. The Judgment of the Apex court in the case of CIT V Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC) cited by the Ld DR 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 section 145A above Memorandum and CBDT circular explaining the provisions of section 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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