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TMI Blog1992 (7) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase, according to the assessee, was the net of this right. The MODVAT credit is directly relatable to the cost of inputs. The case of the revenue, on the other hand, is that the excise duty paid by the assessee on the purchase of the inputs was a part of the cost of purchase, as per the decistions of the Supreme Court in the case of Chowinghee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 and, therefore, the closing stock must necessarily include the element of excise duty. 3. The assessee has given the following facts and submissions, vide its letter dated 11-12-1990 addressed to the Assessing Officer : " (i) On the purchase of raw material the Excise duty credit available at the applicable rate is recorded in Excise duty PLA A/c. (ii) The MODVAT credit is available on the condition that the goods purchased should be explicitly used for manufacturing of excisable goods. In the event such goods are not manufactured and are alternatively sold, the MODVAT credit will have to be reversed. (iii) The MODVAT credit is not an income but is a basic relief in double charging of excise duty. (iv) MODVAT credit is direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem as followed by the assessee, in the opinion of the Assessing Officer, was that the aggregate debits to the manufacturing account on account of cost of inputs and excise duty paid remaining the same, the profits were reduced and understated due to undervaluation of the closing stock. The correct system, according to him, should have been to debit the cost of raw materials and inputs purchased on the basis of actual price paid at the purchase stage without tampering them with the MODVAT credit available. This, he stated, was to reflect the entries regarding any or all transactions as they occurred without modifying them so as to reflect the benefits arising out of the operation of any Act or Rule. He further stated that the effect of the adjustment required to be made under any law and rule should also be reflected in the accounts distinctly and separately without merging the same in some other accounts, which if done, might not convey any distortion in the particular account debited or credited, but definitely and surely distorts the end result, i.e., the profits. 4. Thereafter, he has given a hypothetical example and concluded that the closing stock and the resultant gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Col.1-Col.2) Rs. 26,23,91,376 4. (a) Closing stock value of raw material net of MODVAT as taken by the assessee, Rs. 4,37,19,545 (b) Closing stock value of semi-finished goods Rs. 20,90,398 5. Gross value of closing stock of raw materials and semi-finished goods. 295339300 x (43719545 + 2090398) -------------------------------- 262391376 Rs. 5,15,62,200 6. The MODVAT content in the gross value of closing stock (Col. No. 5-Col. No. 4 (a+b) Rs. 57,52,253 On the basis as indicated above, the gross value of closing stock of packing material is arrived at as under B Gross value of closing stock of packing materials : 12722962 Rs. 12,08,411 -------- x 1080970 11381180 (Where gross cost of purchase is Rs. 1,27,22,961 and net value of purchase after adjusting MODVA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving true results, should be accepted by the revenue. He then referred to in great details the Guidance Note, on Accountancy Treatment for MODVAT issued by the Research Committee of the Institute of Chartered Accountants of India and submitted that the assessee had followed one of the two systems suggested by the Institute. In these circumstances, he submitted that there could be no scope for the revenue not to accept the same. Relying on the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 and that of the Tribunal in the case of Goodlass Nerolac Paints Ltd. v. IAC [1985] 13 ITD 270 (Bom.), he submitted that the guidelines issued by the Research Committee of the Institute of Chartered Accountants of India should be given due credence. He, then referred to the decision of the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 and submitted that there could be no profit in valuation of the closing stock, because, if the value of the closing stock is increased in one year, the same has to be allowed in the subsequent year as the opening stock. He further submitted that if the stocks are valued at rates which are gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Chowringhee Sales Bureau (P.) Ltd.'s case and McDowell Co. Ltd.'s case referred to by the Assessing Officer in his order. He then referred to the various provisions of MODVAT Scheme to support his contention that the right of credit vests in the assessee on the use of the input and not right from the inception, i.e., the date of purchase. Relying upon the judgment of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 the learned Departmental Representative submitted that if the assessee was following a wrong system, that cannot be a ground for its acceptance in the subsequent years. As regards the contention of the assessee regarding double taxation, the learned Departmental Representative submitted that there was no such question in the present case as the closing stock is allowed as the opening stock in the subsequent year. The alternate claim for adjustment of the opening stock of this year was also objected to by him as the value of the closing stock of the earlier year has been taken as the value of the opening stock of this year and since the closing stock of the earlier year has not been disturbed, according to him, the opening stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proper method and, in any event, it was not a method which was recognised by the principles of accountancy and sanction by the commercial practice. Adopting same reasons we hold accordingly in this case also that proportionate excise duty paid on inputs would be a part of value of closing stock of such inputs. 10. The assessee's plea, however, is that MODVAT credit is similar to duty draw back and rebate, as per the Guidance Note on Accounting Treatment for MODVAT, published by the Research Committee of the Institute of Chartered Accountants of India and, therefore, the credit requires a reduction from the cost of purchase and only the net amount was the cost of the inputs to the assessee. In accountancy it might be, and it is true, but the legal effect of the credit has to be, judged with reference to Rule 57A to 57J of the Central Excise Rules, 1944. as they apply to finished excisable goods, and Rule 57K to 57-0, as they apply to raw materials used in the excisable goods. Modified Value Added Tax Scheme, popularly known as MODVAT Scheme, was proposed by the Finance Minister in the Finance Bill. 1986, realising the vexatious question of taxation of inputs and its cascading e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be available for packaging materials, consumables paints, though these are not strictly raw materials. Items, outside these chapters availing proforma credit and benefits of set off under any erstwhile schemes would be allowed to continue to get the relief to the extent the revised tariff headings permit. However, the MODVAT scheme and the erstwhile schemes to the extent they are continued, will be mutually exclusive. 118. The MODVAT scheme will be in force from 1st March, 1986. Manufacturers who fulfill the requirement will be able to avail of proforma credit in respect of the permissible goods which have suffered duty of excise from 1st February, 1986 and are either in the stocks or are received by the manufacturer on or after 1st March, 1986. 119. As stated earlier, the introduction of MODVAT scheme will result in considerable reduction in the costs of final product and, therefore, to retain the collection of excise duties at the earlier level, the rates of duties on the final product have been suitably adjusted. After accounting for the set off, the duty rates have been rounded to the nearest step in the new duty structure. While all care has been taken to work out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of duty under bond for export, provided that the waste, if any, arising in the course of such operation is also returned to the said factory. (b) for the purpose of manufacture of intermediate products necessary for the manufacture of the final products and return the said intermediate products to his factory for further use in the manufacture of the final product or remove the same without payment of duty under bond for export, provided that the waste, if any, arising in the course of manufacture of such intermediate products is also returned to the said factory : Provided that the said waste need not be returned to the said factory if the appropriate duty of excise leviable thereon has been paid. (3) Credit of specified duty allowed in respect of any inputs may be utilised towards payment of duty of excise,--- (i) on any of the final products in or, in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under sub-rule (1) of rule 57G ; or (ii) on the waste, if any, arising in the course of manufacture of the final products ; or (iii) on the inputs themselves if such inputs have been permitted to be cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the manufacturer, to another site, to transfer the credit in the account aforesaid to such factory of the same manufacturer." Rule 57H makes a provision for granting credit even before obtaining the dated acknowledgment of the declaration by the Assistant Collector in certain circumstances. Rule 57-I makes provision for the recovery of the credit wrongly availed of or utilised in an irregular manner. It reads as under : " (1)(i) Where credit of duty paid on inputs has been taken on account of an error, omission or misconstruction, on the part of an officer or a manufacturer, or an assessee the proper officer may, within six months from the date of such credit, serve notice or the manufacturer or the assessee who has taken such credit requiring him to show cause why should not be disallowed to such credit and should not be recovered from him : Provided that where such credit has been taken on account of wilful mis-statement, collusion or suppression of facts on the part of a manufacturer or an assessee, the provisions of this clause shall have effect as if for the words ' six months ' the words ' five years ' were substituted. (ii) The proper officer, after consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an assessee's right to such credit crystallizes when he produces the excisable goods and till then, it is only an ambulatory right. Purchase of inputs and payment of excise duty thereon only initiates an assessee's right to claim. It is a starting point and enables an assessee to get that right. It vests in him only when he fulfills the condition of manufacturing the excisable goods. On the purchase of the inputs, he becomes entitled to the right of credit, of course, an instantaneous credit which is given to him equivalent to the excise duty paid on inputs but that is a payment due towards the excise duty payable by the assessee on the manufacture of the final products. We, therefore, do not find any force in assessee's contention that the credit vested in the assessee on the purchase of the inputs (sic) was in the nature of rebate in course of the purchase. On the contrary, we find force in the contention of the learned Departmental Representative that credit accrues to the assessee only upon the moment it use the inputs in the manufacture under the Excise Law and for the aggregate amount at the end of the previous year under the Income-tax Law. Consequently, the cost for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the closing stock. As the assessee had shown closing stock less by Rs. 57.52 lac. both offset the effect of cacti other. Judge it by what the transaction that they should have been. The excise duty of full amount of Rs. 329.17 lac is to be charged to the cost. MODVAT credit available to be shown as income would be Rs. 271.95 lac, the balance is to be shown in the closing stock. What the assessing officer did was that he had increased the closing stock by Rs. 57.52 lac but forgot that this much amount the assessee was to be given credit of, because by not charging to profit loss account the MODVAT credit shown by the assessee is more by this amount. If the closing stock is increased by the element of excise on inputs, an equivalent amount has to be reduced from this year's income and transferred to the next year in which the inputs are used. In other words, in the next year, the opening stock would be more by Rs. 57.52 lac and the assessee would be showing income on account of MODVAT credit of an equivalent amount in that year. The net result in both the years is the same. If one includes Rs. 57.52 lac in the closing stock, the same amount is to be allowed as cost of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e duty included in the closing stock -- once by decreasing the amount from the cost of inputs and not allowing the same as a deduction ; and again by including the same in the value of closing stock. Revenue's contention that there would be no double taxation in this case as the increase in the closing stock would be allowed as opening stock in the subsequent year, has no force. It amounts to ignoring the fact that in this year it results in double taxation, as explained above. By allowing the closing stock as opening stock does not obliterate the effect of double taxation in this year. It is true that the closing stock is valued less by Rs. 57.52 lac, but at the same time, the assessee had claimed no excise duty paid on the purchase of the inputs lying in the closing stock. An equivalent amount has to be allowed as purchase cost of inputs and the net effect in the income of the assessee would be nil. Taking all the aforesaid into consideration, we are of the opinion that there is no case for making any addition. The addition of Rs. 58,79,694 made and sustained by the departmental authorities to the income of the assessee is, accordingly, deleted. The assessee succeeds on this grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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