TMI Blog2009 (9) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the value of the closing stock by corresponding MODVAT element. The total increase in the value of closing stock and therefore, the increase in the Gross Profit in the inclusive method can be worked as under. Total MODVAT Credit corresponding to the raw material or finished goods, etc. in the closing stock Excess of MODVAT Credit over the Excise payable on the sales made during the relevant precious year. Therefore, in the assessee s case also the income would be affected by any adjustment to the closing stock and opening stock. With regard to the adjustment to the closing stock as made by the Learned Assessing Officer the same appears to be in the fully justified in view of the specific provisions of section 145A. Therefore, as discussed while explaining the example above, the net addition required to be made to the closing stock and therefore, to the Gross profit would come to ₹ 26,95,884(Rs.26,23,036 Rs.1,27,152). However, as the Learned AO is going to carry out the adjustment on account of value of the opening stock for this assessment year after completing the reopened assessment for Assessment Year 1999-2000, he may keep the above position in mind and wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nda Power Equip Ors.[ 2007 (1) TMI 86 - HIGH COURT, DELHI] , wherein it was held that where surplus funds are parked with the bank and interest is earned thereon, it can only be categorised as income from other sources and not as profits and gains of business or profession ; interest earned on fixed deposits made for the purposes of availing credit facilities from the bank also does not have an immediate nexus with the export business and does not qualify for deduction u/s. 80HHC. However, where interest income is treated as business income, the amount of interest to be reduced in terms of cl. (baa) of Explanation to s. 80HHC is the net interest, i.e. gross interest less expenditure incurred for the purpose of earning such interest. The Learned Departmental Representative also agreed with the submissions of the Learned Authorised Representative of the Assessee. We therefore, set aside the orders of the lower authorities restore this matter back to the file of Learned AO to decide issue afresh in the light of the observation made hereinabove after allowing proper opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purposes. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erspective. 4. Levy of interest under section 234A/B/C of the Act is not justified. 5. Initiation of penalty proceedings under section 27(1)(c) of the Act is not justified. 6. At the time of the hearing, Learned Authorised Representative of the Assessee submitted that he is not pressing ground no.1 and Ground no.3 of the appeal. Hence, they are dismissed as not pressed. 7. Ground no.2 of the appeal is directed against adding of ₹ 24,29,893/- in Assessment Year 1999-00 and 28,23,036/- in the Assessment Year 2000-01 being the amount of excise duty MODVAT to the value of closing stock under section 145A of the Act. 8. Ground no.2 of the additional ground relates to allowing deduction for excise duty paid on closing stock before the due date of filing the return of income under section 43B of the Act. 9. Since, the facts and issue involved in the above grounds are common, they are considered and decided together as under. 10. The brief facts of the case are that the assessee, a registered firm, carried on business of manufacturing, trading as well as exporting of Synthetic Organic Pigment Dyes Chemicals From Annexure-1 to Para 12B of the Audit Repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock was to be worked out as under. In respect of stock of raw material = value of stock of raw material excluding MODVAT X ratio in respect of stock of finished goods = stock of finished goods excluding MODVAT X ratio A X ratio m . In respect of work in progress = stock of work in progress excluding MODVAT X (1+A)/2 X ratio m . The appellant had shown the closing stock of raw material at ₹ 1,54,03,983/- and the work in progress at ₹ 1,18,61,250/-. In view of the above formula , the AO worked out the increase in the value of closing stock on account of MODVAT element as under:- =(15403983 + 11861250 (1+ 0.73)/2X A +0X A )X ( m = 11%) =(15403983 + 11861250 X 0.865) X ( m =11%)=Rs.29,99,176/- =(25663964) X ( m = 11%) = ₹ 28,23,036/- As against this the assessee had shown the increase in the closing stock on account of inclusive method at ₹ 16,36,885/-. The AO therefore, observed that the profit to the extent of ₹ 11,84,151/- (Rs.28,23,036/- - ₹ 16,38,885/-) remained to be accounted for on account of modified provisions of accounting under section 145A of the I.T.Act. For working out the addition, the Learned Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the closing stock of the assessee was to be valued excluding the MODVAT element, the profit of the assessee would not have changed if the assessee had considered the inclusive method. In the later case, the closing stock would have been valued after including the corresponding MODVAT element. It is, therefore, explained that as the method adopted by the assessee had not resulted into any reduction in the income of the assessee, there was no justification in the Learned Assessing Officer making addition of ₹ 11,84,151/-. It is therefore, contended that the addition should be deleted. 12. The Learned Commissioner of Income Tax(Appeals) after considering the submissions of the assessee observed that any increase in the value of closing in one year would result in certain additions in the relevant Assessment Year. However, as this closing stock would become the opening stock for the next succeeding Assessment Year, this addition to the income would result in similar reduction of income in the said succeeding Assessment Year. Therefore, if an over all view is taken, any adjustments of this nature ultimately would not amount to any net increase or decrease of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase of Raw material 1000 200 1 200 By sales 1500 180 1680 Manufacturing Exp. Gross Profit 800 800 Gross profit 380 /2380 By closing stock 600 100 700 /2380 EXCLUSIVE METHOD Trading and Manufacturing A/c. Particulars Amount (Rs.) Particulars Amount (Rs.) Purchase of raw material 1000 By sales 1500 Manufacturing Exp. 800 Gross Profit 300 By closing stock 600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, the Learned Assessing Officer cannot be faulted for computing the value of increase in the closing stock in this manner. In view of the above discussion, the addition made by the Learned Assessing Officer to the total income of the assessee on this account is confirmed in principle. It may be pointed out that the addition on account of MODVAT element corresponding to the raw material and work in progress shown in the closing worked out to ₹ 28,23,036/- as computed by the AO also. Therefore, from this figure the AO could not reduce ₹ 16,38,885/- as done by him. This is so because this amount is shown to be the increase in the closing stock value worked out by the assessee if they had used inclusive method . However, as the assessee was following exclusive method explained above, this figure of ₹ 16,38,885/- was not the actual increase in the value of the closing stock but just a calculation if the assessee had followed inclusive method . Therefore, this amount of ₹ 16,38,885/- was not required to be reduced from the addition of ₹ 28,23,036/-. When this was discussed with the Ld. Counsel for the assessee he also admitted that though in principle t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated by the Department does not arise out of the facts of the case. Accordingly, this appeal is dismissed summarily. It further submitted that the above decision of the Madhya Pradesh high court has been followed by the Ahmedabad Benches of the Tribunal in Asst. Commissioner of Income-tax, Navsari Circle Vs. M/s. Naran Lala Pvt. Ltd. in ITA No.686/Ahd/2006 order dated 20.3.2009., and M/s. Chemicals Dyestuff Industries Vs. CIT-II,Baroda ITA. No.1077/Ahd/2009 order dated 19.6.2009. 14. The Learned Authorised Representative of the Assessee relied on the decision of Ahmedabad Bench of the Tribunal in the case of Deputy Commissioner of Income-Tax, Baroda ,Circle-1, Baroda Vs. Gujarat FluoroChemicals Ltd. ITA No. 3472/Ahm/2002 dated 28.09.2006, wherein it was held that : 145A. Notwithstanding anything to the contrary contained in section 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, du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in which the liability to pay such sum was incurred only in the previous year in which such sum is actually paid. Proviso to section.43B relaxes these provisions and permits an assessee to make the payment on or before the due date of furnishing of the Income Tax Return under section 139(1) of the Act. The fact relating to the payment of Excise Duty in respect of finished goods is not available on record. We, therefore, direct the Learned Assessing Officer to allow the deduction to the assessee in respect of the Excise Duty incurred relating to the finished goods. If the Excise Duty is paid by the assessee before the duty date of filing of the Income tax Return. Thus, we are of the view that the Excise Duty incurred on the finished goods manufactured by the assessee and laying in the stock should form part of the value of the closing stock of the finished goods but at the same time the assessee should be allowed deduction in respect of the liability so incurred provided the assessee has made the payment for the said Excise duty before the due date of filing of the Income Tax Return for the impugned Assessment Year. Thus, this order of the Learned Commissioner of Income Tax(Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the dispute is regarding valuation of closing stock in view of the insertion of provisions of section 145A of the Act. The Learned Assessing Officer observed that the assessee has not included the element of excise duty which was paid by the assessee on his purchases of raw material. In view of non inclusion of this excise duty in respect of which Modvat Credit was available to the assessee, according to the Learned Commissioner of Income Tax(Appeals), income of ₹ 26,95,884/- was understated by the assessee. On the other hand the claim of the assessee is that by inclusion of this excise duty in the closing stock there will no effect in the profit as the corresponding amount will also be then included in the purchases. The assessee in support of the above argument relied upon the view expressed by the Institute of Chartered Accountants of India in its guidelines, wherein it was explained that following of either inclusive method of accounting or exclusive method of accounting will not have any effect on the profit disclosed by the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has utilised amount of ₹ 180/- out of amount of ₹ 200/- of excise duty paid on purchase against the excise duty liability of ₹ 180 on sales. However, this utilization of ₹ 180/- was allowed to the assessee in respect of stock which was not used for manufacturing also to the extent of ₹ 80/-. The Learned Commissioner of Income Tax(Appeals) ignored the fact that if in future the closing stock is not utilised for manufacturing, then the Modvat Credit utilised would be reversed and the assessee would be further liable to pay ₹ 80/- to the Government. In a nutshell the Learned Commissioner of Income Tax(Appeals) arrived at a wrong conclusion because of not considering the assessee s liability for utilization of Modvat Credit in respect of unconsumed raw material. The issue can be looked into from yet another angle. Section 145A requires revaluation of not inventory alone but also requires revaluation of purchase and sales. On revaluation of purchase by including the amount of excise duty in respect of which Modvat Credit is available to the assessee, the purchase of the assessee will increase resulting in corresponding decrease in the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of AO in calculating the deduction under section 80IA first and then calculating the deduction under section 80HHC after excluding deduction claimed under section 80IA from the gross total income of the appellant. Both these deductions ought to have been grated on the same amount of gross total income. 22. At the time of the hearing, both the parties agreed before us that this ground of appeal is covered against the assessee by decision of the Tribunal in the case of Assistant Commissioner Of Income Tax vs. Rogini Garments Ors. ITAT, CHENNAI D SPECIAL BENCH (2007) 108 ITD 49 (Chennai)(SB), wherein it was held that in view of the specific restriction provided under s. 80-IA(9), relief under s. 80-IA should be deducted from profits and gains of business before computing relief under s. 80HHC. Therefore, this ground of the appeal of the assessee is dismissed. 23. Ground no.4 of the appeal in Assessment Year 2000-01 reads as under: 4. The Ld. CIT(A) has erred in law and on facts in confirming the action of AO in reducing interest income of ₹ 8,24,331/- from the profits of the business for the purpose of calculating deduction under section 80HHC of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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