2013 (10) TMI 606 - AT - Income Tax

Section 145A of the Income Tax Act Valuation of closing stock, inclusive of excise duty or exclusive of it Effect of valuation on the profit of the company Held that - the proper manner in which the correct profit in terms of section 145A could be determined is by scrupulously following the mandate of section 145A - 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 only state the same at actual cost, even as advocated by AS-2 by ICAI. Again, this only would state the current asset, which it represents, at its proper value, i.e., in the balance sheet, and at which the same is to be carried forward to the following year - Only a correct statement of the current assets and liabilities, i.e., which are not on capital account, in the balance-sheet, would enable reflection of the correct operating results for the relevant accounting period. Toward this, only the booking of profit (against excess recovery of excise duty) would enable an agreement of the outstanding balance in the UCC a/c with the excise component in the closing inventories, so that the accounts whether maintained on gross or net basis, reflect the current asset in respect of excise paid thereon at the same, correct value - Further, it is only this, reckoning the profit on excess recovery as the difference between the profit per the two statements prepared on net and gross basis, that would state the UCC a/c at the correct value of the current asset represented by it, where the accounts are maintained on net basis, bringing the profit per the two methods at par. Thirdly, the provision becomes tax-neutral only when duty is paid on value addition, else not, in view of the non obstante provision of s.43B, which has to be given effect to In any case, cannot be a ground for not observing the method of accounting that yields correct profits or operating results. Further, even where the accounting treatment provides correct results, the provision of s. 43B would have to be given due effect. The same cannot be defeated by non-booking the statutory liability in respect of excise in accounts, even if payable in due course, understating simultaneously the corresponding asset/s, to contend non-difference in operating results - In final analysis, the tax neutrality of the net method is subject to it being established, with the non obstante provision of s. 43B, which in fact obtains irrespective of the method of accounting followed. The total expenditure on telephone and internet expenses as claimed is at Rs.1.56 lakhs The A.O. 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% - Held that - 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 assessee - Disallowance effected only on the ground of it s being personal or non-business in nature, the said disallowance would not stand to be impacted by the mere fact of charge of FBT The disallowance not to be impacted.

Summary

Issues Involved:
1. Addition due to unutilized Cenvat credit under Section 145A of the Income Tax Act.
2. Disallowance of telephone expenses due to personal use by partners.

Issue 1: Addition due to unutilized Cenvat credit under Section 145A of the Income Tax Act

The first issue, being agitated by the assessee, is in respect of an addition effected in the sum of Rs.10,39,886/- under Section 145A of the Act by the Assessing Officer (A.O.) in view of unutilized Cenvat credit, which stands sustained by the first appellate authority at Rs.7,00,109/-, allowing the assessee relief for Rs.3,39,777/-.

The assessee contended that it follows the inclusive method of accounting, as mandated by Section 145A, which should be tax-neutral and not result in any enhancement or change in income. The CIT(A) allowed partial relief by adjusting the valuation of the closing stock inclusive of excise duty. However, the CIT(A) sustained the addition for the balance Rs.7 lacs, reasoning that the unutilized Cenvat credit account reflects the excise duty component on raw materials, semi-finished goods, and finished goods in stock.

The tribunal observed that the CIT(A) did not allow relief for unutilized MODVAT credit per se but directed adjustments where excise duty was included in the valuation of the closing stock. The tribunal emphasized that Section 145A is an accounting prescription consistent with accepted accounting principles, which require the inclusion of excise duty in the valuation of inventories to determine the correct profit. The tribunal clarified that the assessee was not following the inclusive method as prescribed by Section 145A, as evidenced by the accounting treatment of excise duty in a separate 'Unutilized Cenvat Credit account' (UCC a/c).

The tribunal concluded that the correct profit in terms of Section 145A could only be determined by valuing all constituents of the trading account at gross values inclusive of excise duty. The tribunal directed the modification of the operating statement to reflect the correct profit, emphasizing that the excise component in the closing stock should be included, and the balance in the UCC account should not be used as a surrogate measure of the excise component in inventories.

The tribunal also noted that the proper manner of determining the correct profit under Section 145A involves valuing the opening and closing stock, purchases, and sales at gross values inclusive of excise duty. The tribunal emphasized the need for accurate accounting entries to reflect the current assets and liabilities correctly. The tribunal held that the assessee's accounts were not in accordance with Section 145A and directed the necessary adjustments to determine the correct profit.

Issue 2: Disallowance of telephone expenses due to personal use by partners

The second issue concerns the disallowance of Rs.18,655/- out of the telephone expenses of Rs.37,311/- on account of personal use by partners. The A.O. disallowed 50% of the expenses as they were incurred on telephone lines installed at the residences of the partners, and the assessee could not substantiate that the expenses were for business purposes.

In appeal, the assessee argued that the telephone expenses also suffered Fringe Benefit Tax (FBT) under Section 115WB(2) of the Act, and no disallowance should be made. The CIT(A) rejected this argument, stating that the disallowance was under Section 37(1) for personal use by partners, while FBT is for expenses deemed incurred for employees' benefit. The CIT(A) confirmed the disallowance, and the assessee appealed to the tribunal.

The tribunal noted that the FBT is a different levy and applies to expenses incurred for employees' benefit, not for personal use by partners. The tribunal found no merit in the assessee's argument and confirmed the disallowance, emphasizing that the personal use of telephone expenses by partners warranted the disallowance under Section 37(1).

Decision:

The tribunal concluded that the assessee's appeal is partly allowed for statistical purposes. The tribunal directed the necessary adjustments to determine the correct profit under Section 145A and confirmed the disallowance of telephone expenses due to personal use by partners.

Order pronounced on this 29th day of May, 2013