2008 (8) TMI 933 - AT - Income Tax

Summary

Issues Involved:
1. Addition under Section 145A of the Income Tax Act, 1961.
2. Adjustment of unutilized Modvat credit from the closing stock.
3. Inclusion of Modvat credit in the valuation of opening stock.

Issue-Wise Detailed Analysis:

1. Addition under Section 145A of the Income Tax Act, 1961:

The primary issue is whether the entire balance in the Modvat account should be added to the closing stock while applying Section 145A. The Assessing Officer (AO) added Rs. 29,39,872/- to the closing stock, representing unutilized Modvat credit. The CIT(A) upheld this addition, stating that Section 145A mandates the inclusion of tax, duty, etc., in the valuation of purchases, sales, and inventories. The CIT(A) referenced the Supreme Court decision in Indo Nippon Chemicals Co. Ltd. but noted that it pertained to a period before Section 145A was enacted. The Tribunal agreed that Section 145A requires adjustments to include tax, duty, etc., but emphasized that the entire Modvat balance should not be added as it represents a personal account item on the asset side of the balance sheet.

2. Adjustment of unutilized Modvat credit from the closing stock:

The assessee argued that if unutilized Modvat credit is added to income, it should be the difference between opening and closing Modvat credit. The CIT(A) rejected this, stating that Section 145A, effective from 1.4.1999, requires the closing stock to include tax, duty, etc., without adjusting for unutilized Modvat credit from the previous year. The Tribunal noted that if the assessee follows the exclusive method of accounting, adjustments under Section 145A should be made, and any excise duty added to closing stock can be claimed as a deduction under Section 43B if paid before filing the return. The Tribunal remanded the issue to the AO for verification of compliance with Section 145A and Section 43B.

3. Inclusion of Modvat credit in the valuation of opening stock:

The assessee contended that adjustments under Section 145A should also apply to the opening stock. The Tribunal referred to the Delhi High Court's judgment in CIT vs. Mahavir Aluminium Ltd., which held that adjustments must be made to both opening and closing stock to avoid double deduction. The Tribunal directed the AO to adjust the opening stock as per Section 145A, ensuring that any tax, duty, etc., paid or incurred is included in the valuation. The Tribunal emphasized that Section 145A overrides Section 145 and requires consistent adjustments to both opening and closing stock.

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 adjust the opening stock as per the provisions of Section 145A. The decision ensures that both opening and closing stock reflect the correct value, including any tax, duty, etc., paid or incurred.