TMI Blog2008 (8) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... ention 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 credit to the closing stock of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind 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 relied upon the orders of the AO and CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (h) By sales 60 25 1500 (b) Purchase of raw material 90 10 900 (i) By closing stock of finished goods 20 20 400 Total 10 10 1000 (c) Less closing stock of raw material 20 10 200 (d) Raw material consumed 80 10 800 (e) To manufactu ring cost 80 10 800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 440 440 The computation of total income would appear as under:- Rs. Rs. Rs. Profit as per profit and loss account on the basis of exclusive method (see paragraph 23.10) 300 Add: Adjustments required under section 145A 1) Excise duty on sales (₹ 3/- per unit for 60 units. 180 2) Excise duty on closing stock of raw materials (₹ 21- per unit for 20 units) 40 3) -Excise duty on closing stock of finished goods (₹ 3/- per unit for 20 units) 60 4) MODVAT credit utilized on consumption of raw materials (₹ 21- per unit for 80 units) 160 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case Dy. CIT V Glaxo Smithkline Consumer Healthcare Ltd. 107 ITD 343 (CHD) where in 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 simle adjustment of balance in MODVAT account was before the ITAT Special Bench, Chandigarh. While giving effect of section 145A, the adjustment of balance in MODVAT account was not before the ITAT Special Bench Chandigarh. In cases where there are statutory compellation u/s 145A to give adjustment in closing stock, in such cases it has to presume that the assessee has exercised his option to set off against MODVAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will accordingly apply in relation to assessment year 1986-87 and subsequent years. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Section 145A starts with the non-obstante clause Notwithstanding anything to the contrary contained in section 145 . Therefore, to give effect to section 145A, the opening stock as on 1.4.98 will have to be increased by any tax, duty, cess or fee actually paid or incurred with reference to such stock if the same has not been added for the purpose of valuation in the accounts. The AO is directed to give the effect of section 145A as per above discussion. 8. In the result, the appeal of the assessee is allowed for statistical purposes. Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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