TaxTMI 
TaxTMI 
2008 (8) TMI 933
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....e ground, the learned CIT(A) further erred in not accepting the contention of the appellant that unutilized Modvat credit of Rs. 18,04,587 relatable to the stock as on 01.04.1998 merited to be excluded from Rs. 29,39,872/- added to the total income by the AO." 3. Briefly the facts of the case are that during the assessment proceedings the AO noticed that there was an unutilized Modvat credit of Rs. 29,39,872/- at the end of the year. The AO further noticed that the assessee was following exclusive method for Modvat Accounting on the basis of the recommendation of ICAI. It was submitted on behalf of the assessee before the AO that the guidelines issued by the Institute clearly show that in both i.e. inclusive and exclusive methods for Modvat, the profit remains unchanged and therefore the effect on Modvat credit available at the end of the financial year is NIL. It was further submitted on behalf of the assessee that even if the unutilized Modvat credit is to be added to the income, it should be the difference between the opening Modvat and closing Modvat available at the beginning and end of the year respectively. The AO did not accept submissions because there was no addition o....
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....d to the value of closing stock. In this connection, I find that the Provisions of section 145A were brought on the statute with effect from 1.4.99 and the inventory for the purpose of determining the income chargeable under the head profits and gains means only the inventory of work in progress or finished goods at the end of the year. Therefore, what is envisaged here is the loading of the closing stock of finished goods and raw materials by the tax, duty etc. This being the first year, therefore, addition has to be made taking in view the newly introduced provisions of section 145A, without allowing deduction for unutilized Modvat credit of the immediately previous year which according to the Appellant is Rs. 18,04,587/-. Ground No. 2 is thus decided against the appellant." 4. The learned AR reiterated the submissions which were made before the revenue authorities and submitted that entire unutilized modvat credit was not related to closing stock. The AR submitted that the assessee has already given effect of section 145A in the books of account of assessee following guidelines in this regard issued by the Institute of Chartered Accountants of India. On the other hand, the le....
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....lly 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 be added to the inventories, if not already added while valuing the inventory in the accounts. 5.3 The Institute of Chartered Accountants of India on insertion of section 145A issued guidance Note on Tax Audit u/s 44AB of the Act explaining the statutory requirements to give the effect of section 145A' which are as under:- "23.9 The statutory required under section 145A can be explained by the following example: Particulars Qty Rate excluding excise duty Rate of excise duty Opening Stock 10 10 2 Raw material purchased 90 10 2 Other manufacturing cost 80 10 - Finished goods manufactured 80 - - Sales of finished goods 60 25 3 Closing stock of row material 20 10 2....
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.... 0 (g) To gross profit 300 Total 1900 Total 1900 The profit and loss account on 'inclusive method' which is also in accordance with the provisions of section 145A would be as under: Item Particulars Unit Rate Amt. Amt. Item Particulars Unit Rate Amt. (i) Opening Stock 10 10 120 (k) Purchase of raw material 90 12 1080 (s) By sales 60 28 1680 Total 100 12 1200 (t) By closing stock of finished goods 20 23 460 (i) Less closing stock 20 12 240 (m) Less MOD VAT credit 80 2 160 (n) Raw material consumed 80 10 800 (o) ....
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.... (m) 160 Total 440 440 The computation of total income would appear as under:- Rs. Rs. Rs. Profit as per profit and loss account on the basis of exclusive method (see paragraph 23.10) 300 Add: Adjustments required under section 145A 1) Excise duty on sales (Rs. 3/- per unit for 60 units. 180 2) Excise duty on closing stock of raw materials (Rs. 21- per unit for 20 units) 40 3) -Excise duty on closing stock of finished goods (Rs. 3/- per unit for 20 units) 60 4) MODVAT credit utilized on consumption of raw materials (Rs. 21- per unit for 80 units) 160 440 740 Less: 1) Excise duty on opening stock of raw material (Rs. 21- per unit for 10 units 20 2) Excise duty on purchase of raw materials (Rs. 21- per unit on 90 units) 180 3) Excise duty on sales (paid or incurred as per section 145A) 380 (-) 380....
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....imle 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 u/s 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 of ITAT Special Bench Chandigarh in the case Dy. CIT vs Glaxo Smithkline Consumer Healthcare Ltd. 107 ITD 343(CHD) (SB). it is to be presumed that the assessee exercises his option to set off MODVAT a/c against excise liability, which amounts to payment of excise duty and accordingly the assessee is entitled to deduction u/s 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 the section 145A and secondly at the time of final exercise option for adjustment of MODVAT account. In this regard burden is on the assessee. 5.6 In the c....
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....as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will accordingly apply in relation to assessment year 1986-87 and subsequent years. [Clause 45]" 7.1 Circular No. 772, dated 23.12.1998 issued by the CBDT refers to the method of accounting and in Para 52.1 thereof, it is mentioned that whether the value of the closing stock of the inputs must necessarily include the element for which MODVAT credit is available, has been a matter of considerable litigation over the years. Para 52.2, which reads as under;- '52.2 consistent with the other provisions of the Act, with a view to put end to this point of litigation and in order to ensure that the value of opening and closing stock reflect the correct value, a new section 145A is inserted. This section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed by the assessee and....