1992 (7) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 58,79,694 in the valuation of the closing stock.
2. Valuation method of closing stock net of MODVAT credit.
3. Legal and accounting principles concerning MODVAT credit.

Summary of Judgment:

Issue 1: Addition of Rs. 58,79,694 in the valuation of the closing stock
The assessee, engaged in manufacturing fragrances and industrial perfumes, disputed the addition of Rs. 58,79,694 to the closing stock valuation. The Assessing Officer (AO) added this amount, arguing that the excise duty paid on inputs should be included in the closing stock valuation, as per Supreme Court decisions in *Chowringhee Sales Bureau (P.) Ltd. v. CIT* and *McDowell & Co. Ltd. v. CTO*. The AO noted that the assessee's method of reducing the cost of inputs by MODVAT credit resulted in undervaluation of the closing stock.

Issue 2: Valuation method of closing stock net of MODVAT credit
The assessee argued that the cost of inputs should be reduced by the MODVAT credit, which is directly related to the excise duty paid. The assessee's method was supported by the Institute of Chartered Accountants of India's guidelines. However, the AO and CIT(A) disagreed, stating that MODVAT credit should not be reduced from the cost of raw materials and should be included in the closing stock valuation.

Issue 3: Legal and accounting principles concerning MODVAT credit
The Tribunal considered the legal provisions of the MODVAT scheme, introduced to reduce the cascading effect of excise duty on inputs. It was held that the credit for excise duty paid on inputs accrues when the inputs are used in manufacturing excisable goods. The Tribunal found that the assessee's right to MODVAT credit crystallizes upon the use of inputs in manufacturing, and until then, it remains an ambulatory right. Therefore, the cost for the purposes of closing stock valuation must include excise duty paid on inputs.

Conclusion:
The Tribunal concluded that while the assessee's accounting method might be acceptable in accountancy, legally, the closing stock must be valued inclusive of excise duty paid. However, it was noted that if the closing stock value is increased by the excise duty element, the purchase cost must also reflect the full cost, including excise duty. This means that the net effect on income remains the same, and no addition to the income is warranted. Consequently, the addition of Rs. 58,79,694 made by the AO was deleted, and the assessee's appeal was allowed on this ground.