TMI Blog1992 (6) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition. 12. Now the events leading up to the addition may have to be stated a little elaborately since the issue was debated at length before us. The assessee, in the course of manufacture of paints is liable to pay excise duty on the final product manufactured, viz., paint. In order to manufacture the paint, it purchases raw material, which are also subject to excise duty which is paid by the assessee. Now in the long term fiscal policy introduced by the Govt. of India, in December, 1985, ways and means of reducing the escalating effect of paying excise duty on both paints, viz., at the point of purchase of inputs and at the point of manufacture of the final product, were explored. The Finance Minister had introduced a system called MODVAT system whose basic object was the shifting of the effective burden of excise taxation away from the inputs and on the final products. In other words the object and effect of MODVAT system was to reduce the spiralling effect which the payment of excise duty on both points had on the price of the final product. In short, the system worked like this. Since the manufacturer pays the excise duty on the raw materials which are called inputs, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umptions :--- (a) Inputs purchased --- 100 units at Rs. 10 per unit. (b) Excise duty paid on inputs Rs. 2 per unit. (c) 60 units of inputs are consumed to manufacture 50 units of final product. (d) Excise duty payable on final product is Rs. 3 per unit. (e) 40 units of inputs remained at stock at the end of the year. (f) 50 units manufactured are sold in the year. Now, the journal entries to be based under the exclusive method of accounting would be as under :--- (1) Purchases (100 x 10) Dr. Rs. 1000 Rs MCR A/c (100 x 2) Dr. 200 To Sundry Creditors or Bank A/c or cash A/c .... 1200 (2) Excise Duty paid (50 x 3) Dr. Rs. 150 To MCR A/c 150 (being final excise duty on 50 units manufactured at Rs. 3 per unit) The Profit Loss A/c and MCR A/c would be as under :--- Profit Loss A/c Units Rate Rs. Units Rate Rs. To purchases 100 10 1000 By Sales 50 20 1000 To Excise Duty 50 3 150 By Raw Materials 40 10 400 To Gross profit 250 in stock --------- -------- 1400 1400 -------- ------- MCR A/c To Sundry 200 By Excise duty 150 creditors (Inputs) (utilisation) By Balance c/d .... 50 ------- ------ 200 200 ------- ------ 14. The above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . C. Sen, the learned departmental representative supported the order of the departmental authorities and also reinforced the same with a short note submitted at our instance. His point was that the MODVAT element of excise duty has got to be taken into account while valuing the closing stock of raw materials and work in process even if the methodology of valuation adopted by the assessee is accepted. He drew our attention to this aspect of the matter which was highlighted by the ITO at page 7 of the assessment order. He also invited our attention to the decision of the Supreme Court in the assessee's own case as CIT v. British Paints India Ltd. [1991] 188 ITR 44 especially to the observation at page 45 (head-note) wherein the Supreme Court discouraged the practice of shifting the profit of one year to another year on the ground that it would be an incorrect method of computing profits. He further pointed out that the ITO had already made the adjustments to the value of the opening stock and only after making such adjustments has arrived at the addition of Rs. 35.11 lakhs and, therefore, no further adjustment as suggested by Dr. Pal was required or justified. He also made a point t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore open to them to say that the method followed by the assessee in respect of accounting for MODVAT excise duty is wrong or unsound. As was held by the Supreme Court in Challapalli Sugar Ltd.'s case, the view of the ICAI on a particular method of accounting treatment to be given in the accounts represents the accepted commercial view. This decision has been cited and followed by the Madras High Court in Sivakami Mills Ltd.'s case and by the Andhra Pradesh High Court in Nagarjuna Steels Ltd. We have, therefore, to proceed on the footing that the method of accounting followed by the assessee in respect of MODVAT excise duty is one which is accepted in the commercial world. The next step would, therefore, be to examine the validity of the conclusion of the departmental authorities that if MODVAT excise duty is not debited to the P L A/c the accounts would show a distorted picture calling for an addition to the value of the closing stock. Now, it is no more a subject of controversy that whatever be the method of accounting employed by the assessee, the closing stock must be valued and brought to account in order to arrive at the true profit of the business. This position has for lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g off the MODVAT credit) is also being debited to the P L A/c. This approach immediately puts one on guard, but a closer look at the argument, in the backdrop of all the facts of the case reveals, if we may say so, a fallacy. A manufacturer of excisable goods becomes liable to pay excise duty the moment the goods are manufactured. The excise duty on the goods manufactured constitutes a proper deduction against the receipts, as part of the cost of goods sold. Under the MODVAT scheme, the credit a manufacturer receives on payment of excise duty on the raw materials or inputs goes towards reducing the cost of the goods. In fact, this is the object of introducing the scheme as we have seen earlier. Now, under the alternative method suggested by the ICAI the excise duty paid on raw materials is debited as part of the cost of goods in the P L A/c. Under this method, known as the " inclusive " method, the closing stock has, therefore, got to be loaded with the excise duty element, falling in line with the principle of " balancing ". The illustration given earlier can now be worked out under the " inclusive " method as under :--- Purchases (100 x 12) Dr. 1200 To Sundry Creditors or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But in the absence of any such case of the ITO we are not able to accept the plea of Sri Sen about the assessee getting a double benefit. 18. The other objection sought to be raised by Sri Sen that the ITO has already made adjustments to the value of the opening stock and, therefore, there was no question of balancing the addition made to the value of the closing stock by corresponding increase of the value of the purchases as suggested by Dr. Pal cannot also be upheld. The objection of Dr. Pal was not that the value of the opening stock has to be correspondingly increased. In fact, the objection was that if the MODVAT excise duty element paid by the assessee during the relevant accounting year is to be included as part of the closing stock of the year of account then the balance has to be maintained by correspondingly increasing the total of the debit side by the MODVAT excise duty paid on inputs during the year of account. Dr. Pal's contention was raised only as an alternative contention that in case the addition is sustained, the Income-tax authorities should be directed to enhance the debit side of P L A/c by a like amount representing the MODVAT excise duty paid on inputs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said letter the assessee had requested the ITO not to enhance the value of the stocks as per the pre-determined formulae given in the proforma supplied by the ITO merely in order to arrive at a higher amount of taxable profit. The fact that the assessee had furnished the figures which, incidentally, have been accepted in toto by the ITO, does not mean that he has accepted or agreed to the addition. If it were to be so, it would have been quite unnecessary for the ITO to discuss the issue at length and be at pains to justify the addition on various grounds. 21. For these reasons we delete the addition of Rs. 35.11 lakhs made to the value of the closing stock. 22. Ground No. 16 is against the disallowance of Rs. 30,000 out of the total law charges of Rs. 2,64,204. The disallowance is seen to have been made on a routine manner without any specific reason. The assessee has furnished the details of the law charges at pages 22 to 25 of the paper book No. 3 filed before us. We have scrutinised the same and we do not see any basis or ground made out for the disallowance. It is, therefore, deleted. This ground is allowed. 23. Ground Nos. 17 to 24 relate to the following two claims :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are, therefore, of the opinion that the departmental authorities were not justified in not granting the benefits of the allowance under sections 32AB and 80HHC to the assessee. This issue is decided in favour of the assessee. In the view we have taken that the requirement that the audit certificate should be filed along with the return of income is not mandatory but merely directory, we are not deciding the alternative argument put forth by Dr. Pal based on the proviso to section 32AB(4) that the assessee being a company subject to audit under the Companies Act is not bound by the requirement under the main provision that the audit certificate should be filed along with the return of income. 24. In ground No. 25 the assessee questions the disallowance of Rs. 84,594 under Rule 6B on account of expenses incurred on gifts and presentation articles. We, however, find that the CIT (Appeals) has held that even in the audit report filed along with the return of income the amount to be disallowed has been stated as Rs. 82,687 and that the CIT (Appeals) has confirmed this amount and deleted the balance of Rs. 1907. Since the tax audit report itself shows that the amount to be disallowed ..... 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