Brief of the Case
In A.C.I.T. vs. Kiran Industries Pvt Ltd, the Ahmedabad Tribunal following its co-ordinate bench decision and relying upon the decision of Hon’ble High Court (T&AP) held that excise duty component need not to be included in valuation of inventory if the assessee is following exclusive method of accounting. Further in the absence of accounting standards notified by the Central Government, the assessee can follow the accounting standards and guidance note issued by the ICAI.
Fact of the Case
Assessee is a company engaged in the business of manufacturing of dyed yarn, knitted fabrics and dying of fabrics on job work basis. The Case of the assessee was sought to be re-opened u/s 148 for the reason that the unutilized CENVAT credit was not taken into consideration while working out the closing stock and thus considering value of closing stock as understated, the A.O. framed the assessment u/s 143(3) r.w.s. 147 by making addition of Rs.18,84,923/- to the closing stock u/s 145A of the Act. On an appeal, CIT(A) granted substantial relief to the assessee reducing the addition to Rs.5,03,187/- revising the computation of adjustment to be made u/s 145A. Aggrieved by the order, the revenue filed the appeal before the Tribunal and assessee filed cross objection to the appeal.
Grounds of Appeal by the Revenue
On the facts and circumstance of the case and in law, the Ld. CIT(A)-I, Surat has erred in restricting the addition of Rs.18,84,923/-made as per provisions of Section 145A to Rs.5,03,187/- without appreciating the fact that the amount pertains to raw material which was required to be added to the total income by the assessee, as per the provisions of Section 145A, which it failed to do.
Ground raised by the Assessee in the C.O.
On the facts and in circumstances of the case as well as law on the subject, the learned CIT(A) has erred in partly confirming the action of assessing officer in sustaining the addition to the extent Rs. 5,03,187/- put of total addition of Rs.18,84,923/- u/s. 145A of the Act.
Contention of Revenue
Ld. D.R. supported the order of A.O.
Contention of Assessee
Ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that since Assessee was following exclusive method of accounting for CENVAT and which was as per the Guidance Note issued by the Institute of Chartered Accountant of India and by not including the excise duty, there was no effect on the profitability of the Assessee. He further placed reliance on the decision of Ahmedabad Tribunal in the case of Asiatic Industries (in ITA NO. 753/A/2011 order dated 07.08.2014 and the order of Mumbai Tribunal in the case of Hawkins Cookers Ltd. in ITA No.7195/Mum/2008 order dated 22nd April, 2010 and therefore submitted that in the present case no addition was called for.
Held by the Tribunal
The Tribunal held that the issue in the present case is with respect to inclusion of excise duty to the value of closing stock. The assessee’s submission that it follows the exclusive method of accounting for excise for the valuation of closing stock has not been controverted by the revenue by placing any contrary material on record. The Tribunal further found that on a similar issue, the Co-ordinate Bench of Tribunal in the case of Asiatic Industries had decided the issue in favour of the Assessee wherein the tribunal itself relied upon the view of co-ordinate bench in the case of Snehal Pharma Chem. In that case the Co-ordinate Bench of Tribunal Held that “we find that there is submission of the assessee before the authorities below that while the entire amount of excise duty realized on sales was included in the sale amount but out of entire amount of excise duty paid on purchases, only that portion of such excise duty paid which was utilized by way of MODVAT, had been included in the value of purchases and the balance amount of Modvat credit which could not be utilized in the present year was shown in the balance sheet as an amount receivable and this portion of Rs.l1,25,3427- was not included in the value of purchases. Ld. D.R. could not controvert these submissions of the assessee made by the assessee before the authorities below. Once it is accepted that these submissions of the assessee are correct, it means that excise duty paid but not included in the purchases was shown in the balance sheet as excise duty receivable and therefore, there cannot be a reason to make any addition in the income of the assessee because even if we include such excise duty receivable in the value of closing stock, the same is also required to be included in the value of purchases and it will have no impacts on the profits of the assessee.” This view was supported by the decision of Hon’ble ITAT Ahmedabad in the case of ITA 1358/Ahd/2009. The operative part indicating observation of the Hon’ble ITAT is reproduced herein as under: “At the time of hearing, both the parties agreed that the issue is now squarely covered by the decision of Hon’ble Jurisdictional High Court in the case of ACIT Vs. Narmada Chematur Petrochemicals Ltd. 327 ITR 369 (Guj.), wherein following was held:
“Held, dismissing the appeal, that Tribunal was justified in excluding the excise duty at the time of valuation of the closing stock of finished goods at the end of the accounting period because: (b).. The assessee was following the mercantile system of accounting but it was not the case of the assessing Officer that the Assessing Officer was not in a position to deduce true profits of the year under consideration. Such duty of Central excise if added to enhance the value of closing stock would result in enhanced opening stock on the first day of the next accounting period, namely, April 1, 1997. So the next year’s profits would get depressed accordingly, over a period of time the whole exercise would even out, in other words, be revenue natural. At the same time while disturbing the value of the closing stock the assessing authority could not change the method of accounting regularly employed.”
The Tribunal further found that on the issue of Guidance Notes and Accounting Standards issued by the Institute of Chartered Accountant of India, the High Court of Telengana and Andhra Pradesh High Court in the case of CIT vs. Pacts Securities and Financial Services Ltd. (2015) 374 ITR 681 (T & A.P) at para 13 has noted that the merely because the Central Government has not notified in the Official Gazette “accounting standards” to be followed by any class of assessees or in respect of any class of income, it cannot be stated that the Accounting Standards prescribed by the Institute of Chartered Accountants of India or the Accounting Standards reflected in the “guidance note” cannot be adopted as an accounting method by an Assessee. It further held that notwithstanding the fact that the opinion of the Chartered Accountants of India was expressed in the ‘guidance note”, which had not attend a mandatory status, would not be a ground to discard the books of accounts of the Assessee or the method of accounting followed.
In view of the aforesaid facts and following the decisions of the Co-ordinate Bench cited and the decision of Hon’ble High Court hereinabove, the Tribunal was of the view that no addition on account of unutilized CENVAT Credit was called for in the present case. Thus the appeal of Revenue was dismissed and the C.O of Assessee was allowed.
Income Tax Department has now notified “Income Computation and Disclosure Standard II relating to valuation of Inventories” w.e.f 01.04.2015 provides that Cost of inventories shall comprise of all ‘costs of purchase’, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.