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TMI Blog2009 (9) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the closing stock by corresponding MODVAT element. The total increase in the value of closing stock and therefore, the increase in the Gross Profit in the inclusive method can be worked as under. Total MODVAT Credit corresponding to the raw material or finished goods, etc. in the closing stock Excess of MODVAT Credit over the Excise payable on the sales made during the relevant precious year. Therefore, in the assessee s case also the income would be affected by any adjustment to the closing stock and opening stock. With regard to the adjustment to the closing stock as made by the Learned Assessing Officer the same appears to be in the fully justified in view of the specific provisions of section 145A. Therefore, as discussed while explaining the example above, the net addition required to be made to the closing stock and therefore, to the Gross profit would come to 26,95,884(Rs.26,23,036 Rs.1,27,152). However, as the Learned AO is going to carry out the adjustment on account of value of the opening stock for this assessment year after completing the reopened assessment for Assessment Year 1999-2000, he may keep the above position in mind and work out the final figure of add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I] , wherein it was held that where surplus funds are parked with the bank and interest is earned thereon, it can only be categorised as income from other sources and not as profits and gains of business or profession ; interest earned on fixed deposits made for the purposes of availing credit facilities from the bank also does not have an immediate nexus with the export business and does not qualify for deduction u/s. 80HHC. However, where interest income is treated as business income, the amount of interest to be reduced in terms of cl. (baa) of Explanation to s. 80HHC is the net interest, i.e. gross interest less expenditure incurred for the purpose of earning such interest. The Learned Departmental Representative also agreed with the submissions of the Learned Authorised Representative of the Assessee. We therefore, set aside the orders of the lower authorities restore this matter back to the file of Learned AO to decide issue afresh in the light of the observation made hereinabove after allowing proper opportunity of hearing to the assessee. Thus, this ground of appeal is allowed for statistical purposes. In the result, both the appeals of the assessee are partly allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... alty proceedings under section 27(1)(c) of the Act is not justified." 6. At the time of the hearing, Learned Authorised Representative of the Assessee submitted that he is not pressing ground no.1 and Ground no.3 of the appeal. Hence, they are dismissed as not pressed. 7. Ground no.2 of the appeal is directed against adding of ₹ 24,29,893/- in Assessment Year 1999-00 and 28,23,036/- in the Assessment Year 2000-01 being the amount of excise duty MODVAT to the value of closing stock under section 145A of the Act. 8. Ground no.2 of the additional ground relates to allowing deduction for excise duty paid on closing stock before the due date of filing the return of income under section 43B of the Act. 9. Since, the facts and issue involved in the above grounds are common, they are considered and decided together as under. 10. The brief facts of the case are that the assessee, a registered firm, carried on business of manufacturing, trading as well as exporting of Synthetic Organic Pigment Dyes & Chemicals From Annexure-1 to Para 12B of the Audit Report under section 44AB filed by the assessee with the return of income, it was noticed by the AO that in Assessment Year 1999-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in respect of stock of finished goods = stock of finished goods excluding MODVAT X ratio "A" X ratio "m". In respect of work in progress = stock of work in progress excluding MODVAT X (1+A)/2 X ratio "m". The appellant had shown the closing stock of raw material at ₹ 1,54,03,983/- and the work in progress at ₹ 1,18,61,250/-. In view of the above formula , the AO worked out the increase in the value of closing stock on account of MODVAT element as under:- =(15403983 + 11861250 (1+ 0.73)/2X "A"+0X "A")X ("m" = 11%) =(15403983 + 11861250 X 0.865) X ("m" =11%)=Rs.29,99,176/- =(25663964) X ("m" = 11%) = ₹ 28,23,036/- As against this the assessee had shown the increase in the closing stock on account of inclusive method at ₹ 16,36,885/-. The AO therefore, observed that the profit to the extent of ₹ 11,84,151/- (Rs.28,23,036/- - ₹ 16,38,885/-) remained to be accounted for on account of modified provisions of accounting under section 145A of the I.T.Act. For working out the addition, the Learned Assessing Officer did notice that any adjustments in the value of opening stock would change the addition to this account. However, according to the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the assessee had considered the inclusive method. In the later case, the closing stock would have been valued after including the corresponding MODVAT element. It is, therefore, explained that as the method adopted by the assessee had not resulted into any reduction in the income of the assessee, there was no justification in the Learned Assessing Officer making addition of ₹ 11,84,151/-. It is therefore, contended that the addition should be deleted. 12. The Learned Commissioner of Income Tax(Appeals) after considering the submissions of the assessee observed that any increase in the value of closing in one year would result in certain additions in the relevant Assessment Year. However, as this closing stock would become the opening stock for the next succeeding Assessment Year, this addition to the income would result in similar reduction of income in the said succeeding Assessment Year. Therefore, if an over all view is taken, any adjustments of this nature ultimately would not amount to any net increase or decrease of the profit when considered for a few number of years taken together. However, now in view of the provisions of section 145A introduced from Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (Rs.) Purchase of raw material 1000 By sales 1500 Manufacturing Exp. 800 Gross Profit 300 By closing stock 600 2100 2100 EXCISE A/C. Particulars Amount (Rs.) Particulars Amount (Rs.) Modvat 200 By Excise on sales 180 C/F. (Taken to balance sheet) 20 200 200 In the exclusive method the balancing figure is taken to the balance sheet only and it is not taken to the profit & Loss Account. Therefore, as could be seen the Gross profit in the "Inclusive Method" is higher on account of the increase in the value of the closing stock by corresponding MODVAT element. The total increase in the value of closing stock and therefore, the increase in the Gross Profit in the "inclusive method" can be worked as under:- Total MODVAT Credit corresponding to the raw material or finished goods, etc. in the closing stock -Excess of MODVAT Credit over the Excise payable on the sales made during the relevant precious year. In the above example, this works out as under:- 100-20=80 Therefore, in the assessee's case also the income would be affected by any adjustment to the closing stock and opening stock. With regard to the adjustment to the closing stock as made by the Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the balance sheet of the assessee as on 31.03.2000, excess of MODVAT credit over the excise payable on the sales made during the relevant previous year is shown at ₹ 1,27,152/-. Therefore, as discussed while explaining the example above, the net addition required to be made to the closing stock and therefore, to the Gross profit would come to ₹ 26,95,884(Rs.26,23,036Rs.1,27,152). However, as the Learned Assessing Officer is going to carry out the adjustment on account of value of the opening stock for this assessment year after completing the reopened assessment for Assessment Year 1999-2000, he may keep the above position in mind and work out the final figure of addition on this account considering the total increase in the value of closing stock for the Assessment Year under consideration at ₹ 26,95,884/- only. This Ground of appeal is disposed off accordingly. 13. The Learned Authorised Representative of the Assessee submitted that to the extent the goods had not left the premises of the assessee no excise duty should be included in the closing stock and where the goods have left the premises of the assessee and excise duty is included in the closing stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.] 5. The said section has been inserted by the Finance Act, 1998 w.e.f. 01.04.1999, i.e., it is applicable from Assessment Year 1999-2000, i.e. the impugned assessment year. The CBDT vide its Circular No.772 dated 27.12.1998 being Explanatory Notes on provisions relating to the Direct Taxes in Finance (No.2) Act, 1998 vide para 52.2 (235 ITR 74 (St)) highlighted the purpose of introducing section 145A by stating that "in order to ensure that the value of opening and closing reflect the correct value a new section 145A is inserted." From the perusal of sec.145A(b) it is apparent that this section requires that the valuation of purchase and sale of goods and inventory should be further adjusted so as to include the amount of any tax duty, cess, or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. There is no dispute that the Excise is incurred the moment the goods are manufactured. Therefore, the Excise Duty incurred, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n." 15. The Learned Authorised Representative of the Assessee submitted that whenever any adjustment is made in the valuation of inventory, this will affect both the opening as well as the closing stocks. He relied on the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income tax vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45 : (2008) 297 ITR 77 (Del) : (2008) 168 TAXMAN 27 wherein it was held that in the present case, there is no question of any double benefit being given to the assessee. Para 23.13 of the Guidance Note issued by the ICAI on tax audit under s. 44AB itself makes it clear that whenever any adjustment is made in the valuation of inventory, this will affect both the opening as well as the closing stocks. It is also to be noted that if any adjustment is required to be made by a statute (as for example s. 145A), effect to the same should be given irrespective of any consequences on the computation of income for tax purposes. Sec. 145A begins with a non obstante clause, and therefore, to give effect to s. 145A, if there is a change in the closing stock as on 31st March, 1999, there must necessarily be a corresponding adjustment made in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid by the assessee before the due date of furnishing of return of income under section 139(1) of the Act. The above view was also expressed by this Bench of the Tribunal in the case of The Deputy Commissioner of Income Tax, Circle-1, Baroda Vs. Gujarat Fluoro-Chemicals Ltd. in ITA No.3742/AHD/2002 Assessment Year 1999-00 order dated 28.09.2006. In our considered opinion, the lower authorities have not properly appreciated the effect of section 145A of the Act. The Learned Commissioner of Income Tax(Appeals) by way of an illustration concluded that there will be a difference in the profit on following inclusive and exclusive method of accounting for excise duty. In the illustration cited in the order, the Learned Commissioner of Income Tax(Appeals) found the difference at ₹ 80/-. According to the Learned Commissioner of Income Tax(Appeals) in the inclusive method in the illustration, the assessee's profit worked out to ₹ 380/- whereas in the exclusive method, the assessee's profit comes to ₹ 300/-. Thus, there was a difference of ₹ 80/- in the profit. We on a closer look at the illustration find that the difference has occurred due to an error by the Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption to this theory is that when the Modvat value is less than the cost then effectively unrealised loss is allowed as a deduction to the assessee on the well settled principles. In the instant case, the lower authorities were not justified in revaluing only closing stock so as to include the amount of excise duty paid on purchase without revaluing the corresponding purchases. We have gone through the guidelines explained by the ICAI and find ourselves in agreement therewith that there will not be any effect on the profit of loss arrived at either by following inclusive method of accounting or exclusive method of accounting for excise duty. The only effect will be that the excise duty payable on closing stock of finished goods will be to the extent not deposited with the government before the due date of furnishing of return will be added to the income of the assessee in view of provision of Section 43B of the Act. In view of the discussion made hereinabove, in our considered opinion, there will be no effect in the taxable profit of the assessee by including the amount of excise duty paid on purchases in the value of closing stock of raw material, whether as raw material or as for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner Of Income Tax vs. Shri Ram Honda Power Equip & Ors. (2007) 289 ITR 475 (Del) , wherein it was held that where surplus funds are parked with the bank and interest is earned thereon, it can only be categorised as income from other sources and not as "profits and gains of business or profession"; interest earned on fixed deposits made for the purposes of availing credit facilities from the bank also does not have an immediate nexus with the export business and does not qualify for deduction under s. 80HHC. However, where interest income is treated as business income, the amount of interest to be reduced in terms of cl. (baa) of Explanation to s. 80HHC is the net interest, i.e. gross interest less expenditure incurred for the purpose of earning such interest. The Learned Departmental Representative also agreed with the submissions of the Learned Authorised Representative of the Assessee. We therefore, set aside the orders of the lower authorities restore this matter back to the file of Learned Assessing Officer to decide issue afresh in the light of the observation made hereinabove after allowing proper opportunity of hearing to the assessee. Thus, this ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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