Decided on September 19,2008



A.L. Gehlot, A.M. - (1.) THIS appeal filed by the revenue is directed against the order of the learned Commissioner (Appeals)-XXIX, Mumbai, passed on 23-7-2005 for the assessment year 2004-05 wherein it has raised a solitary ground, which reads as under: On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 14,53,767 to the closing stock on account of inclusion of excise duty in view of the provision of Section 145A.
(2.) During the assessment proceedings, the assessing officer while examining the provisions of Section 145A noticed that the assessee did not give the effect of excise duty for valuation of the closing stock to the extent of Rs. 14,53,767. The assessing officer accordingly increased the valuation of closing stock to that amount of Rs. 14,53,767. Before the Commissioner (Appeals), it was submitted by the assessee that the assessee has followed a method of accounting, there is in fact, no impact on the profit and loss account of the company on giving effect of Section 145A. The assessee produced the working before the Commissioner (Appeals) which is as under: JUDGEMENT_12190_TLIT0_20080.htm The Commissioner (Appeals) deleted the addition made by the assessing officer following their earlier order for assessment year 2003-04, wherein it was held that there is No. effect on the profit, therefore, addition is not required to be made. We haye-heard the learned representatives of the parties and record perused. First of all we see the meaning of MODVAT. Modified Value Added Tax (MODVAT) es a procedure whereby manufacturer can utilize credit for input duty against duty payable on final products. Durty credit taken on input is of the nature of set off available against the excise duty payable on the final products. In the case of MODVAT what happens practically is that say "A" manufactures a product X and ex- factory price of such a product is Rs. 140 (inclusive of excise duty Rs. 20) and such product X is used as input by another manufacturer B for the purposes of manufacturing of product Y ex-factory price of which is Rs. 200 (inclusive of excise duty Rs. 30), then B will pay excise duty to the time of Rs. 10 only taking credit for the duty paid by A. The MODVAT account always has a debit balance. 3.1 Section 145A has been enacted by the Finance (No. 2) Act, 1998 with effect from 1-4-1999. The Section 145A reads as under: 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, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation-For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. 3.2 The adjustments provided in this Section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as follows: (a) Any tax, duty, cess 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 beadded to the inventories, if not already added while valuing the inventory in the accounts. 3.3 The Institute of Chartered Accountants of India on insertion of section145A issued guidance Note on Tax Audit under Section 44AB of the Act explaining the statutory requirements to give the effect of Section 145Awhich are as under: 23.9 The statutory required under Section 145A can be explained by the following example: JUDGEMENT_12190_TLIT0_20081.htm The input output ratio of raw material to finished goods is 1:1 I. Duty paid on inputs may, be debited to a separate account, e.g., MODVAT credit receivable account. As and when the MODVAT credit is actually utilized against payment of excise duty on final products appropriate accounting entries will be required to adjust the excise duty paid out of 'MODVAT credit receivable account' to the account maintained for payment/provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of input duty. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of input duty. This method is hereinafter referred to as 'exclusive method'. II. In the second alternative, the cost of inputs may be recorded at the total amount paid to the supplier inclusive of input duty. To the extent the MODVAT credit is utilized for payment of excise duty on final products, the amount could be credited to a separate account, i.e., MODVAT credit availed account. Out of the MODVAT credit availed account, the amount of MODVAT credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. This method is hereinafter referred to as 'inclusive method'. The effect of Section 145A is to reflect the figures on 'inclusive method'. Following two illustrations explain the above propositions. The profit and loss account on 'exclusive method' would be as under: JUDGEMENT_12190_TLIT0_20082.htm The profit and loss account on 'inclusive method' which is also in accordance with the provisions of Section 145A would be as under : JUDGEMENT_12190_TLIT0_20083.htm 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 1-4-1999. Further, in the Guidance Note on Accounting for MODVAT the second method (inclusive method) has been withdrawn with effect from accounting year commencing from 1-4-1999. 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). JUDGEMENT_12190_TLIT0_20084.htm The computation of total income would appear as under: JUDGEMENT_12190_TLIT0_20085.htm 3.4 From above illustration we noticed that if an assessee has followed the above procedure as laid down by The Institute of Chartered Accountants of India and tax auditor reported this aspect in Clause 12(b) in Form 3CD of tax audit report, in such case the point remained to examine is allowably of amount of excise duty which has been adjusted in closing stock of finished goods. No doubt the excise duty adjusted to the closing stock is an allowable revenue expenses. The addition of entire balance in MODVAT account is 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 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 Rs. 60 added in the valuation of closing 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 Section are satisfied. 3.5 In case where there is no actual payment but adjustable against MODVAT account, 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 of Dy. CIT v. Glaxo SmithKline Consumer Healthcare Ltd., (2007) 107 ITD 343 wherein 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 simple 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 under Section 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 account. On the basis of ratio laid down by the ITAT Special Bench, Chandigarh in the case of Glaxo Smithkline Consumer Healthcare Ltd. (supra), it is to be presumed that the assessee exercises his option to set off MODVAT account against excise liability, which amounts to payment of excise duty and accordingly the assessee is entitled to deduction under Section 43B. The above presumption is based on legal fiction created by Section 145A of the Act. However, to avoid double deduction the assessee should ensure that there will be no double adjustment of MODVAT account firstly at the time of giving effect to Section 145A and secondly at the time of final exercise option for adjustment of MODVAT account. In this regard burden is on the assessee. 3.6 In the case under consideration, the contention of the assessee is that the assessee has given effect to Section 145A in accordance with above discussion. The learned Authorised Representative in support of that filed a chart and demonstrated accordingly. Such detailed working is also given in tax audit report as required in Clause 12(b) of Form 3CD. But above submissions of learned Authorised Representative and deduction under Section 43B in accordance with above discussion are subject to verification, therefore, we send the matter back to the file of the assessing officer for limited purpose to verify the facts of the case of assessee in the light of above discussion and calculate the amount of addition, if any, accordingly.
(3.) IN the result, the appeal of the revenue is treated as allowed for statistical purposes.;

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