2008 (8) TMI 904 - AT - Income Tax

Modvat Credit - Adjustment under Section 145-A - Meaning of ''Modvat'' - Variation in excise duty paid by procuring raw materials and discharge of excise duty liability on non-finished goods - whether entire balance whatever in the Modvat account is to be added to closing stock while giving effect to the s. 145A of the Act - effect of the s. 145A to opening stock - Assessee submitted 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. AO did not accept submissions because there was no addition of unutilized Modvat credit to the closing stock of the assessee in the earlier year - accordingly made the addition - CIT(A) decided the issue against the assessee. HELD THAT - Modvat is a procedure whereby manufacturer can utilize credit for input duty against duty payable on final products. Duty credit taken on input is of the nature of set off available against the excise duty payable on the final products. It may be pointed out that the 'inclusive method' is not permitted by AS-2 which is made mandatory from accounting year beginning on or after 1st April, 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 Further, in the Guidance Note on Accounting for Modvat the second method (inclusive method) has been withdrawn with effect from accounting year commencing from 1st April, 1999. In view of the above, the adjustments u/s. 145A will have to be made in all cases where 'exclusive method' is followed. We noticed that if an assessee has followed the procedure as laid down by the ICAI and tax auditor reported this aspect in cl. 12(b) in Form 3CD of tax audit report, in such case the point remained to examine is allowability 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 have a debit balance. It may be noted that after making the addition to the closing stock u/s 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 u/s 43B. The contention of the assessee is that the assessee has given effect to the s. 145A. The ld AR in support of that filed a chart and demonstrated accordingly. Such detailed working is also given in tax audit report as required in cl. 12(b) of Form 3CD. But submissions of ld AR and deduction u/s 43B in accordance with discussion are subject to verification therefore, we send the matter back to the file of the AO for limited purpose to verify the facts of the case of assessee. If the AO finds that the assessee has given effect to s. 145A and also deduction u/s. 43B is made as per discussion, the addition made by him u/s 145A may be deleted. Thus, the grounds of appeal raised by the assessee in this regard are treated as allowed for statistical purposes. Now we take the second aspect of the matter. The ld AR submitted that effect of the s. 145A to opening stock is also to be given - On consideration of s. 145A and CBDT circular explaining the provisions of s. 145A and judgment of the Delhi High Court in CIT vs. Mahavir Aluminium Ltd. 2007 (11) TMI 41 - HIGH COURT OF DELHI . we noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also irrespective of any consequences on the computation of income for tax purposes. We further noticed that s. 145A starts with the non obstante clause notwithstanding anything to the contrary contained in s. 145 . Therefore, to give effect to s. 145A, the opening stock as on 1st April, 1998 will have to be increased by any tax, duty, cess or fee actually paid or incurred with reference to such stock if the same has not been added for the purpose of valuation in the accounts. The AO is directed to give the effect of s. 145A as per discussion. In the result, the appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of Rs. 29,39,872 under Section 145A of the IT Act, 1961.
2. Exclusion of unutilized Modvat credit of Rs. 18,04,587 from the addition.

Issue-wise Detailed Analysis:

1. Addition of Rs. 29,39,872 under Section 145A of the IT Act, 1961:

The primary issue revolves around the addition of Rs. 29,39,872 made by the Assessing Officer (AO) under Section 145A of the Income Tax Act, 1961. The AO observed an unutilized Modvat credit of Rs. 29,39,872 at the end of the year and noted that the assessee followed the exclusive method for Modvat accounting, based on ICAI recommendations. The assessee argued that the profit remains unchanged regardless of whether the inclusive or exclusive method is used, and thus, the effect on Modvat credit at the end of the financial year is nil. The assessee further contended that if the unutilized Modvat credit is to be added to the income, it should be the difference between the opening and closing Modvat credit.

The AO rejected these submissions, pointing out that there was no addition of unutilized Modvat credit to the closing stock in the previous year. Consequently, the AO added Rs. 29,39,872 to the income. The CIT(A) upheld this addition, stating that Section 145A, introduced from 1st April 1999, mandates the inclusion of tax, duty, etc., in the valuation of purchases, sales, and inventories. The CIT(A) emphasized that the decision in CIT vs. Indo Nippon Chemicals Co. Ltd., which pertained to a period before Section 145A was enacted, did not apply to the current assessment year (1999-2000).

2. Exclusion of unutilized Modvat credit of Rs. 18,04,587 from the addition:

The second issue concerns the assessee's contention that the unutilized Modvat credit of Rs. 18,04,587, related to the stock as of 1st April 1998, should be excluded from the Rs. 29,39,872 added by the AO. The CIT(A) rejected this argument, stating that the provisions of Section 145A were introduced from 1st April 1999, and the inventory for determining income chargeable under the head "profits and gains" includes only the closing stock of finished goods and raw materials. As this was the first year of applying Section 145A, the addition was made without allowing a deduction for the unutilized Modvat credit of the previous year.

Tribunal's Observations and Decision:

The Tribunal examined whether the entire balance in the Modvat account should be added to the closing stock under Section 145A and whether the effect of Section 145A should be applied to both the closing and opening stock.

1. Entire Balance in Modvat Account:

The Tribunal explained that Modvat is a procedure allowing manufacturers to utilize input duty credit against duty payable on final products. Section 145A, effective from 1st April 1999, requires adjustments to include any tax, duty, cess, or fee paid or incurred in the valuation of purchases, sales, and inventories. The ICAI issued guidelines for giving effect to Section 145A, emphasizing the "inclusive method."

The Tribunal noted that if the assessee followed the ICAI guidelines and reported this in the tax audit report, the addition of the entire balance in the Modvat account is not proper. The nature of the Modvat account is personal, appearing on the asset side of the balance sheet with a debit balance. The Tribunal highlighted that after adding excise duty to the closing stock under Section 145A, the assessee could claim a separate deduction for excise duty paid before the due date for filing the return under Section 43B, provided other conditions are met.

The Tribunal referred to the Special Bench decision in Dy. CIT vs. Glaxo Smithkline Consumer Healthcare Ltd., which held that Modvat balance amounts to payment only when set off against excise liability. The Tribunal presumed that giving effect to Section 145A implies the assessee exercised this option, allowing deduction under Section 43B. To avoid double deduction, the assessee must ensure no double adjustment of the Modvat account.

2. Effect on Opening Stock:

The Tribunal considered the memorandum and CBDT circular explaining Section 145A, which emphasized that both opening and closing stocks should reflect the correct value, including any tax, duty, cess, or fee paid or incurred. The Tribunal followed the Delhi High Court's decision in CIT vs. Mahavir Aluminium Ltd., which held that corresponding adjustments must be made in the opening stock to avoid double deduction.

The Tribunal directed the AO to verify if the assessee gave effect to Section 145A and allowed deduction under Section 43B. If verified, the addition of Rs. 29,39,872 should be deleted. The Tribunal also directed the AO to apply Section 145A to the opening stock as of 1st April 1998.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to verify the assessee's compliance with Section 145A and Section 43B and to apply Section 145A to both the opening and closing stock.