AI Drafter 
TaxTMI 
TaxTMI 
1997 (12) TMI 653
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring the year under report, weighted average cost has been ascertained after considering duty draw-back received. Due to this change, the value of inventory of raw-materials. Finished Goods and work-in-progress has decreased in aggregate by about Rs. 24.14 lacs, resulting in increase of loss by that amount." The Assessing Officer observed that the assessee did not explain how the old method gave a wrong valuation and how the new method set right the mistake in the mode of valuation adopted in earlier years. He mentioned that the assessee cannot be permitted to change mode of valuation arbitrarily to suit his own purposes and accordingly, made the addition of Rs. 24,14,000 which, as per Note extracted hereinabove, is the under-valuation on the basis of new method. 3. The CIT(A) mentioned that there is a bona fide change in the method of valuation inasmuch as the change effected in this year has been followed in subsequent years. The only difference between the method of valuation in earlier years and the method adopted for the current year is that proforma credit received from the Excise authorities has been reduced for valuing the closing stock whereas in earlier years such r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing stock valuation also and this may be seen at Annexure-1 of his paper book. It is extracted as under : Old Method New Method Qtty. Price Value Qtty. Price Value Opening Stock 100 20 2000 100 20 2000 (as per old method) Add : Raw materials purchased incl. Excise 1st consignment 150 21 3150 150 21 3150 2nd consignment 250 19 4750 250 19 4750 Total items in 500 9900 500 9900 stock Less : Proforma 0 0 0 0 0 400 &nb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pect of both the items so far as the valuation of closing stock is concerned is same. What is to be seen is whether the method of valuation of closing stock adopted by the assessee is in conformity with the accepted accounting standards. Before this issue is examined the accounting entries made by the assessee, as described by the learned Counsel for the assessee before us, may also be noted. The assessee debited input of raw materials a/c along with Excise duty paid thereon. Subsequently when proforma credit was received, he credited the amount to raw materials a/c and so, reduced the cost of raw materials consumed. Then the proforma credit receivable a/c is credited or adjusted against the Excise duty paid on finished goods a/c. In this context the issue is whether the method of valuation of closing stock adopted by the assessee as per the new method given in hypothetical example by the learned Counsel for the assessee and reproduced hereinabove is valid or not. We find that there are two alternative and equally acceptable methods for treatment of MODVAT and valuation of closing stock. We are of the view that the same two methods are applicable for the proforma credit and valuati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed and correspondingly undervalued the closing stock. To our mind these two mistakes, i.e., deficit debit to raw materials consumed a/c and deficit credit to closing stock a/c cancel out and in this sense the assessee has substantially followed the alternative two methods given in Annexure-C to the Guidance Note of Institute of Chartered Accountants of India. In other words though the assessee has not strictly followed the accounting method as recommended by the Guidance Note, there is no revenue effect in the method adopted by the assessee. Further, the revenue has not disturbed the method of valuation of closing stock adopted by the assessee in subsequent years. We also find that the decisions cited by the learned Counsel for the assessee both before us and the CIT(A) support the contention of the assessee that a bona fide change in the method of valuation of closing stock is permissible and in such circumstances in the light of decision of jurisdictional High Court in the case of Melmould Corpn. (supra) even the value of opening stock need not be disturbed. The only issue to be examined is whether the method of valuation adopted by the assessee is in conformity with the accep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re is no accounting of double income, firstly, as set-off adjusted as reduction in the cost of input and, secondly, as credit taken in the profit and loss account by inclusion of input duty as part of value of inventory of the input. An illustration of both the above methods is given in Annexure C. ANNEXURE C AIllustrations of Accounting for MODVAT Credit The illustrations are based on the following assumptions : (i)There are no opening stocks. (ii)100 units of raw materials are purchased at Rs. 10 per unit, plus Rs. 2 for excise duty, aggregating to Rs. 12. (iii)60 units of raw material are consumed in a process involving manufacture of a component. All the 60 units are sold in the year. The balance 40 units are manufactured and sold in the subsequent year. (iv)The manufactured components are sold at a price of Rs. 15 per unit. Excise duty is payable at 20% on the selling price, i.e., Rs. 3 per unit sold. (v)MODVAT credit is available on the raw material purchased and can be set-off against the excise duty payable on the final product. (vi)Conversion costs are ignored. lternative I [Refer Para 4.1(a)] Profit &....