TMI Blog1997 (12) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering duty draw-back received. Due to this change, the value of inventory of raw-materials. Finished Goods and work-in-progress has decreased in aggregate by about ₹ 24.14 lacs, resulting in increase of loss by that amount. The Assessing Officer observed that the assessee did not explain how the old method gave a wrong valuation and how the new method set right the mistake in the mode of valuation adopted in earlier years. He mentioned that the assessee cannot be permitted to change mode of valuation arbitrarily to suit his own purposes and accordingly, made the addition of ₹ 24,14,000 which, as per Note extracted hereinabove, is the under-valuation on the basis of new method. 3. The CIT(A) mentioned that there is a bona fide change in the method of valuation inasmuch as the change effected in this year has been followed in subsequent years. The only difference between the method of valuation in earlier years and the method adopted for the current year is that proforma credit received from the Excise authorities has been reduced for valuing the closing stock whereas in earlier years such reduction was not effected for purposes of valuing the closing st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 942,472.06 169,625.81 772,846.25 7. Less : Raw Materials 110,757.35 110.757.35 used for capital purposes 8. Raw materials consumed 89,547,695.28 56,626,953.47 32,920,741.81 9. Closing stock of raw materials 10,973,313.40 4,616,777.73 6,356,535.67 In the above table the non-PC units are units in respect of which no proforma credit was received and the PC units are those in respect of which proforma credit was received. The learned Counsel has also given a hypothetical example illustrating the change in the closing stock valuation also and this ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of items 500 19.8 9900 500 19 9500 in stock Stock consumed 425 19.8 8415 425 19 8075 Closing stock 75 19.8 1485 75 19 1425 Difference in closing stock 60 This difference is equivalent to ₹ 24.15 lakhs on page 18 of the annual accounts i.e , page 2 of the paper book. It may be observed that in the above hypothetical example the valuation of closing stock as per the valuation under old method is 1485 whereas under the new method it is only 1425 and this difference amounts to 60. This difference of 60 in the hypothetical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the new method given in hypothetical example by the learned Counsel for the assessee and reproduced hereinabove is valid or not. We find that there are two alternative and equally acceptable methods for treatment of MODVAT and valuation of closing stock. We are of the view that the same two methods are applicable for the proforma credit and valuation of closing stock in the context of proforma credit. The two methods for treatment of MODVAT are given in Guidance Note on Accounting Treatment for MODVAT issued by Institute of Chartered Accountants of India. The two methods and the relevant accounting entries as given in Para-4 of Guidance Note on Accounting Treatment for MODVAT and illustrations given in Annexure-C thereto are annexed hereto as Annexure A . 7. As the assessee had debited purchases of raw materials a/c with gross amount, i.e., the cost inclusive of Excise Duty, the assessee has not followed alternative one given in the Guidance Note either under the old method or under the new method given in the hypothetical example given in para 4 above. So, the assessee has followed substantially only alternative 2nd method given in Annexure-C to the Guidance Note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange in the method of valuation of closing stock is permissible and in such circumstances in the light of decision of jurisdictional High Court in the case of Melmould Corpn. (supra) even the value of opening stock need not be disturbed. The only issue to be examined is whether the method of valuation adopted by the assessee is in conformity with the accepted principles or not. We find that in the present case the method of accounting adopted by the assessee for valuation of closing stock is substantially in conformity with one of the methods suggested by the Institute of Chartered Accountants of India as we have tried to indicate hereinabove. In this view of the matter, we uphold the order of the CIT(A). 8. In the result, the appeal is dismissed. ANNEXURE A 4. Accounting Treatment 4.1 In the light of the above, it may be stated that the MODVAT is a procedure whereby manufacturer can utilise credit for input duty against duty payable on final products. Duty credit taken on input is of the nature of set-off available against the payment of excise duty on the final products. There are two alternative methods of treatment of MODVAT credit in accounts : (a)Duty paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15 per unit. Excise duty is payable at 20% on the selling price, i.e., ₹ 3 per unit sold. (v)MODVAT credit is available on the raw material purchased and can be set-off against the excise duty payable on the final product. (vi)Conversion costs are ignored. lternative I [Refer Para 4.1(a)] Profit Loss Account Units Rate Amount Units Rate Amount To Purchases of Raw Materials 100 10 1,000 By Sales 60 15 900 Less : Stock of Raw Materials 40 10 400 600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rate Amount To Purchase of Raw Materials 100 12 1,200 By Sales 60 15 900 Less : Stock of Raw Materials 40 12 480 Raw Materials Consumed 60 12 720 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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