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TMI Blog1997 (12) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 ₹ 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 ₹ 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 reduction was not effecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 19 1425 Difference in closing stock 60 This difference is equivalent to ₹ 24.15 lakhs on page 18 of the annual accounts i.e, page 2 of the paper book. It may be observed that in the above hypothetical example the valuation of closing stock as per the valuation under old method is 1485 whereas under the new method it is only 1425 and this difference amounts to 60. This difference of 60 in the hypothetical example is equivalent to ₹ 24.14 lakhs referred to in Note 4 of the assessee's paper book extracted herein- above. The learned Counsel has also pleaded that the new method has been followed in subsequent years and has been accepted by the Department without demur. In support of the proposition that such a change in the method of valuation is permissible under law, the ld. Counsel for the assessee has relied on the following decisions : Melmould Corpn. v. CIT [1993] 202 ITR 789 (Bom.); CIT v. Dalmia Cement (Bharat) Ltd. [1995] 215 ITR 441/ 82 Taxman 255 (Delhi) and CIT v. Mopeds India Ltd. [1988] 173 ITR 347 (AP). 5. On the other hand, the learned DR pleaded that the assessee had not exported any goods and so, he is not entitled to any duty drawback and so t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As the assessee had debited purchases of raw materials a/c with gross amount, i.e., the cost inclusive of Excise Duty, the assessee has not followed alternative one given in the Guidance Note either under the old method or under the new method given in the hypothetical example given in para 4 above. So, the assessee has followed substantially only alternative 2nd method given in Annexure-C to the Guidance Note. As per this method the assessee should have reduced from the raw materials consumed account only Proforma credit availed against the raw materials consumed and valued the closing stock inclusive of proforma credit. However, the assessee has credited the entire proforma credit received during the year and not simply the proforma credit on the raw materials availed against the raw materials consumed. While doing so under both the old and new methods the assessee has adopted two different modes of valuation of closing stock, one under the old method and a different under the new method. Under the old method, the assessee valued the closing stock inclusive of proforma duty paid on inputs which led to over valuation of closing stock because what was credited to the trading accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treatment 4.1 In the light of the above, it may be stated that the MODVAT is a procedure whereby manufacturer can utilise 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 payment of excise duty on the final products. There are two alternative methods of treatment of MODVAT credit in accounts : (a)Duty paid on inputs may be debited to a separate account, e.g., MODVAT Credit Receivable Account. As and when the MODVAT credit is actually utilised against payment of excise duty on final products, appropriate accounting entries will be required to adjust the excise duty paid out of MODVAT Credit Receivable Account to the account maintained for payment/provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of input duty. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of input duty. The debit balance in MODVAT Credit Receivable Account should be shown on the asset side under the head 'Advances.' (b)In the second alternative, the cost of inputs may be recorded at the total amount paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dr. 200 1,200 To Sundry Creditors 1200 (Being the purchase of 100 units at ₹ 10 plus ₹ 2 for excise duty in respect of which the company is eligible to claim MODVAT credit) (b) Excise Duty Dr. 180 To MODVAT Credit Receivable Account 180 (Being the payment of excise duty out of MODVAT credit available to the company) Alternative II [Refer Para 4.1(b)] Profit & Loss Account Units Rate Amount Units Rate Amount To Purchase of Raw Materials 100 12 1,200 By Sales 60 15 900 Less : Stock of Raw Materials 40 12 480 Raw Materials Consumed 60 12 720 Less : MODVAT credit 60 2 120 60 10 600 To Excise Duty 60 3 180 To Gross Profit 120 900 900 The following entries will be passed : (i ) At the time when such credit is availed of and adjusted against the excise duty which becomes payable. Excise Duty paid Dr. ₹ 180 To MODVAT Credit Availed Account ₹ 180 (Being the payment of excise duty from the MODVAT credit available to the company) (ii ) At the year end, to the extent raw material items have been consumed in the production. MODVAT Credit Availed Account Dr. ₹ 120 To Materials Consumed ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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