TaxTMI 
TaxTMI 
2013 (10) TMI 606
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....essee relief for Rs.3,39,777/-. 2.1 Opening the arguments for and on behalf of the assessee, it was pleaded by the Id. AR, its counsel, that the assessee has valued its closing stock inclusive of all taxes. The assessee follows inclusive method of accounting, following the mandate of section 145A, which is, in fact, otherwise tax-neutral, so that it should not result in any enhancement or change in income. It is, in fact, on being satisfied on this count, i.e., inclusion of the excise duty in the valuation of the closing stock as at the year-end, that the Id. CIT(A) has allowed it relief to that extent, for which he would refer to pgs.11 & 47 of the assessee's paper-book (PB), reflecting the valuation of the closing stock at gross and net of excise at Rs.28.96 Lacs and Rs.25.56 lacs respectively. This is as not excluding the same would amount to a double addition in respect of the excise component in the purchase (acquisition) cost of raw material in stock as at the year-end. So, however, he would continue, the ld. CIT(A) has sustained the addition for the balance Rs.7 lacs. It needs to be appreciated that the amount outstanding as at the year-end as unutilized cenvat credit ....
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....ble effect. 3.We have heard the parties, and perused the material on record. 3.1We firstly observe that the Id. CIT(A) has not allowed any relief to the assessee on account of unutilised MODVAT credit per se, but only directed adjustment as called for, where and to the extent excise duty stands included in the valuation of the closing stock. Further, he has, finding that the entire unutilised MODVAT credit of Rs. 10,39,986/-pertains to the current year; the opening balance in the said account being nil, directed the adjustment of the outstanding balance in the said account to the assessee's income inasmuch as the same is only the excise component on the raw-material, semi-finished goods and finished goods in stock. In other words, in his view, the same represents the excise duty incurred on the purchase of raw material, so as to form part of its cost, whether the same is lying with the assessee as such, i.e., as raw-material, or in the form of semi-finished or finished goods as at the year-end (refer paras 2.2.3 and 2.2.4 of the impugned order). 3.2 Before we proceed to analyse the facts, we may briefly advert to the basics, being relevant in the exposition of the matter. ....
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....h the actual state of affairs inasmuch as the levies, paid or recovered, form part of the trading cost or receipt of an enterprise, even as held by the apex court in, inter alia, Chowringhee Sales Bureau (P) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray & Co. (P.) Ltd. v. CIT [ 19741 97 ITR 615 (SC), also clarifying that it is the nature and quality of the receipt (or payment) that is relevant in determining its taxability and not its accounting treatment. Secondly, this would enable the statement of the current assets and current liabilities at correct values. That is, even without insisting on the account head under which the gust' or `revenue' is to be booked in accounts, only when the same are charged to the operating statement where on revenue account, and current assets and current liabilities, in terms of eceivables/recoverable from, and liabilities to, constituents, etc., recorded at correct values, would the accounts reflect correct profit or loss. Thirdly, as we shall presently see, it is only the valuation of inventories at gross of all input levies, that would ensure correct disclosure of liabilities in its respect and, finally, payment of (say) excise-duty on ....
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....it of Rs. 5,53,073/- (Part B of Ann.2). In fact, as would be readily observed, the recording of the figures of excise on both the sides of the operating statement (Ann. 2B) is of no consequence as the assesse records the excise separately in the UCC a/c. The figures of excise on both the sides of the P&L account cancel each other equally, rendering their statement/recording to no effect. The excise duty to be included in the valuation of the closing stock is not the balance in the UCC a/c (Rs. 10.40 lacs), which is done only with a view to balance the excise impact (i.e., on payment and recovery of excise) on profit, but that relatable to the closing stock. The revised statement (Ann. 2A), again, values the closing inventory, and not also the opening as well as the purchases and sales at gross of excise, so as to be considered as per s 145A. As such, both the operating statements (Ann. 2A and 2B) are not consistent with s. 145A nor lead to the determination of the correct profit. 3.5 The balance in the UCC account, as sought to be clarified by the assessee through examples (refer Ann. 1A & 1B), only reflects the amount of excise-duty yet to be recovered (utilized), as through sa....
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....t. Reporting of the profit for tax purposes under the Act in such a case though would have to be made by drawing a separate P & L A/c in terms of section 145A, i.e., by including the excise component on all the constituents of the trading account. The assessee, as we have found, following the latter (exclusive) method, it would have to adopt the alternative course afore-said. In fact, the difference between the profit disclosed by the assessee's accounts and that per the statement drawn u/s 145A, would reveal the extent of profit' or 'loss' that the assessee has made or suffered, as the case may be, on account of payment and recovery of excise (as at Rs. 2/-per unit or Re. 0.40 per unit in the two examples cited). The assesse could book this profit or loss in accounts, which would then match the profit per its accounts, the book profit, with the profit disclosed uls.145A, following which, as clarified earlier, yields the correct, commercial profits. We also state of `loss' in addition to `profit', as the assessee could also incur `loss', as where the excise collected is on a lower sale value or the excise rate on the output itself is less, as in Example 3 cited by the assessee (PB ....
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....d on such purchases. The liability, thus, gets stated in books, either way, rendering the argument of the excise liability being discharged through fresh purchases of excisable goods, to no effect. Coming back to our discussion on the profit u/s. 145A, even though payable in due course, prudence would suggest booking the provision against the liability to the credit of the Government in respect of excess recovery (or against subsequent purchases, if one may prefer to see it that way) with reference to the difference in the reported profits per the two separate statements of the P & L A/c. To demonstrate (taking the figures of Ex. I at Annexure 1-A), an accounting entry of Rs.170/-, i.e., the profit component in the excise account (85 units @ Rs.2/- each), would increase the debit in the UCC A/c from Rs.230/- to Rs.400/-, i.e., the excise component in the closing stock of Rs.4,400/-, while at the same time inflating the profit as determined on net basis (Rs.1,700/-) to Rs.1,870/-. True, only the recording of the liability to the Government in the accounts would reveal correct profits, i.e., at Rs. 1700/-. Non-booking or non-recording the said liability amounts to deferring its re....
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....ed suo motu by us, is again to the same effect. In fact, this is precisely what we have sought to emphasize from the beginning of our discussion, clarifying that subject to following correct accounting principles in recording the value of current assets and liabilities, the two methods are at par (refer paras 3.2 to 3.4 of this order). In that case, the assessee was setting off the proportionate part of the modvat credit (on raw material) against excise liability (on sales), while in the instant case the assessee is setting off the entire recovery of excise, i.e., including that on the value addition made. The practice has no sanction in accountancy. The determination of the proportionate part, i.e., the excise paid on the input/s consumed in producing the relevant output (on the removal of which the liability to excise arises), is crucial to the validity of the accounting treatment. As demonstrated, only passing the correct accounting entries in case of excess or short recovery, in case of net method, would yield correct profit, as well as the statement of the current asset/liability as on the cut-off date at the correct value/s. It is only the difficulty in identifying the excess....
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....moval of goods, i.e., including the excise liability on the value addition, against excise paid on purchases, and, concomitantly, for such an adjustment even in respect of raw material not consumed but lying in stock. The UCC a/c, as being prepared, is thus not in consistence with the accounting principles. It is only the drawing of the operating statement in accordance with sec. 145A, valuing all the ingredients of the trading account at inclusive of excise (input levies) that would lead to the removal of these anomalies, bringing forth the correct profit. No separate accounting for the `profit' or `loss' embedded in the unutilised cenvat credit account, as warranted by mercantile book-keeping, would then be required as both the `profit' and `loss' get subsumed in the trading profit (loss) as reflected per the trading account prepared on inclusive basis; the UCC a/c becoming part of or in effect incorporated therein. In fact, booking the said `profit' or `loss', where accounts are maintained, as in the instant case, on exclusive basis, would adjust the outstanding in the UCC A/c, increasing or decreasing respectively the debit balance in the said account, so as to state it at its ....
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....ith the excise component on the inventories (Rs. 400/ in our example/Ann. IA), would restore parity between the two. In sum, we reiterate the primacy of s.145A; the excise rules being inconsistent with the tenets of accountancy. b) In our clear view, thus, the proper manner in which the correct profit in terms of section 145A could be determined is by scrupulously following the mandate of the said section. All the constituents of the manufacturing account that are subject to levy/incidence of excise (or any other tax for that matter) are to be loaded therewith. That the provision is tax-neutral is no argument for not observing the same, as the same (tax neutrality) would have to be established in each case with reference to the accounts as being maintained. This is as in practical situations, a one-to-one correspondence between input/s and outputs, as manifest and apparent in the examples of different trading scenarios assumed by the assesse, and adopted by us (for the sake of simplicity), is difficult to establish in real life manufacturing cases, where a variety of inputs, if not also outputs, obtain. Secondly, the closing inventory, loaded with all input duties/levies, would ....
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....e provision of s. 43B, which in fact obtains irrespective of the method of accounting followed, assuming a crucial significance when the liability in respect of all the levies as accrued are booked or accounted for c) Coming to the facts and figures of the case, the operating statement at gross values (Annexure 2-B) would need to be modified in the following manner, so as to bring it in conformity with section 145A: • increase the value of the opening stock or YO and RMS by the amount of excise duty, if any, suffered thereon; • state the closing stock of FG and RMS, similarly, at values inclusive of excise duty thereon, and not by adding the debit amount outstanding in the UCC A/c; and • carry forward the closing stock, so valued, as the value of the opening stock for computing the profits u/s. 145 r.w.s. 145A for the following year. The difference in the profit so reflected, and that per the statement drawn by excluding excise (Ann. 2-A), restating the closing stock also, thus, at Rs.25.56 lakhs, or at a profit of Rs.5.53 lakhs, would yield the profit or loss, as the case may be, embedded in the UCC A/c; its opening balance being nil. T....
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....We have heard the parties, and perused the material on record. We do not, even as observed during hearing, find much merit in the assessee's case. The total expenditure on telephone and internet expenses as claimed is at Rs.1.56 lakhs. The A.O., however, effected the disallowance only in respect of the expenditure qua the telephones installed at the residences of the partners, i.e., Rs.0.37 lakhs, estimating the personal (non-business) user thereof at 50%. These facts being not in dispute, how we wonder could the charge of FBT, which is a different levy, and only in respect of the expenses incurred by the assessee as an employer for the benefit of his employees or deemed to have been so incurred, have any bearing in the matter. True, Rs.0.37 lakhs of the total expenditure of Rs.1.56 lakhs being on telephone at the partners/s residences, the same could not be subject to FBT. This is for the reason that the same is, on account of the manner of its incurring, considered by the Revenue as toward personal purposes of the partners, i.e., for non-business purposes, while the FBT could only be in respect of the expenses incurred for the purposes of its business by the assesssee. Without do....