Hawkins Cookers vs. ITO (ITAT Mumbai)
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 29,39,872/- made by the AO under section 145A of the Income Tax Act, 1961.
Without prejudice to the generality of the ground, the learned CIT (A) erred in concluding that the only effect of section 145A was that value of inventory of finished goods and raw materials had to be increased by the amount of Tax, Duty, etc. when in fact, the section requires that purchases, sales and inventories should be valued inclusive of Tax, duty etc.
2. Without prejudice to the above ground, the learned CIT(A) further erred in not accepting the contention of the appellant that unutilized Modvat credit of Rs. 18,04,587 relatable to the stock as on 01.04.1998 merited to be excluded from Rs. 29,39,872/- added to the total income by the AO.”
Briefly the facts of the case are that during the assessment proceedings the AO noticed that there was an unutilized Modvat credit of Rs. 29,39,872/- at the end of the year. The AO further noticed that the assessee was following exclusive method for Modvat Accounting on the basis of the recommendation of ICAI. It was submitted on behalf of the assessee before the AO that the guidelines issued by the Institute clearly show that in both i.e. inclusive and exclusive methods for Modvat, the profit remains unchanged and therefore the effect on Modvat credit available at the end of the financial year is NIL. It was further submitted on behalf of the assessee that even if the unutilized Modvat credit is to be added to the income, it should be the difference between the opening Modvat and closing Modvat available at the beginning and end of the year respectively. The AO did not accept submissions because there was no addition of unutilized Modvat credit to the closing stock of the assessee in the earlier year. He accordingly made the addition of Rs. 29,39,872/-. On appeal to the CIT(A), the CIT(A) decided the issue against the assessee.
And so the matter is before the ITAT MODVAT as explained by the ITAT: Modified Value Added Tax (MODVAT) is a procedure whereby manufacturer can utilize 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 excise duty payable on the final products. In the case of MODVAT what happens practically is that say “A” manufactures a product X and ex-factory price of such a product is Rs 140 (inclusive of excise duty Rs 20) and such product X is used as input by another manufacturer B for the purposes of manufacturing of product Y ex-factory price of which is Rs.200(inclusive of excise duty Rs. 30), then B will pay excise duty to the time of Rs 10 only taking credit for the duty paid by A. The MODVAT account always has a debit balance.
MODVAT Account: Exclusive Method: 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 utilized 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. This method is referred to as ‘exclusive method.”
MODVAT Account: Inclusive Method: In the second alternative, the cost of inputs may be recorded at the total amount paid to the supplier inclusive of input duty. To the extent the MODVAT credit is utilized for payment of excise duty on final products, the amount could be credited to a separate account, i.e. MODVAT credit availed account. Out of the MODVAT credit availed account, the amount of MODVAT credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. This method is referred to as ‘inclusive method”.The effect of section 145A is to reflect the figures on ‘inclusive method’.
The Tribunal observed, No doubt the excise duty adjusted to the closing stock is an allowable revenue expenses. The addition of entire balance in MODAT account is not proper because the nature of this account is personal account, an item on assets side of the Balance Sheet always having a debit balance. Question of allowable/disallowa ble arises only in respect of excise duty expenditure where the assessee follows exclusive method of accounting and effect of the section 145A is to be given.
It may be noted that after making the addition to the closing stock under section 145A, it will be possible to claim a separate deduction for excise duty actually paid after the year end but before the due date for filing the return of income on production of evidence as provided under section 43B.
In case of where there is no actual payment but adjustable against MODVAT a/c whether the assessee is entitled to claim deduction under section 43B. The Tribunal referred to the decision of ITAT Special Bench, Chandigarh in the case Dy. CIT V Glaxo Smithkline Consumer Healthcare Ltd. (2007-TIOL-284- ITAT-CHD- SB) where in it was held that the MODVAT balance as such does not amount to payment. The balance becomes equivalent to, the payment only at the point of time the assessee exercises his option to set off the balance against the central excise liability and not before.
In cases where there are statutory compulsion u/s 145A to give adjustment in closing stock, in such cases it has to presume that the assessee has exercised his option to set off against MODVAT Account. On the basis of ratio laid down by the ITAT Special Bench Chandigarh in the case Dy. CIT Vs Glaxo Smithkline Consumer Healthcare Ltd. (2007-TIOL-284- ITAT-CHD- SB), it is to be presumed that the assessee exercises his option to set off MODVAT a/c against excise liability, which amounts to payment of excise duty and accordingly the assessee is entitled to deduction u/s 43B. The above presumption is based on legal fiction created by section 145A of the Act. However, to avoid double deduction, the assessee should ensure that there will be no double adjustment of MODVAT account firstly at the time of giving effect to the section 145A and secondly at the time of final exercise option for adjustment of MODVAT account. In this regard burden is on the assessee.
In the case under consideration, the contention of the assessee is that the assessee has given effect to the section 145A. The AR in support of that filed a chart and demonstrated accordingly. Such detailed working is also given in tax audit report as required in clause 12(b) of form 3CD. But above submissions of AR and deduction under section 43B are subject to Verification.
So the Tribunal sent the matter back to the file of the AO for limited purpose to verify the facts of the case of assessee in the light of above discussion. If the AO finds that the assessee has given effect to section 145A and also deduction u/s 43B is made, the addition of Rs. 29,39,872/- made by him u/s 145A may be deleted. Thus, the grounds of appeal raised by the assessee in this regard are treated as allowed for statistical purposes.
The Second aspect: The AR submitted that effect of the section 145A to opening stock is also to be given;
The Tribunal noted the Memorandum and CBDT Circular explaining the provisions of section 145A inserted by the Finance (No.2) Act Bill, 1998 as follows:
“Computation of value of inventory
The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which MODVAT credit is available has been the matter of considerable litigation.
In order to ensure that the value of opening and closing stock (bold for emphasis) reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.
The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will accordingly apply in relation to assessment year 1986-87 and subsequent years.
Circular No. 772, dated 23.12.1998 issued by the CBDT refers to the method of accounting and in Para 52.1 thereof, it is mentioned that whether the value of the closing stock of the inputs must necessarily include the element for which MODVAT credit is available, has been a matter of considerable litigation over the years.
The CBDT has clarified that with a view to put an end to this point of litigation, both the opening and closing stock should reflect the correct value and that is why section 145A was inserted to the statute book. It is further stated that the valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), 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. The Delhi High Court in the case of CIT Vs. Mahavir Alluminium Ltd., has held that corresponding adjustment must be made in opening stock subject; however, to a condition that such adjustment should not result in double deduction for same expenditure. The Delhi High Court judgment is the only High Court judgment available on the issue.
On consideration of section 145A above Memorandum and CBDT circular explaining the provisions of section 145A and above Judgment of the Delhi High court, the Tribunal noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also irrespective of any consequences on the computation of income for tax purposes. The Tribunal further noticed that Section 145A starts with the non-obstante clause “Notwithstanding anything to the contrary contained in section 145”.
Therefore, to give effect to section 145A, the opening stock as on 1.4.98 will have to be increased by any tax, duty, cess or fee actually paid or incurred with reference to such stock if the same has not been added for the purpose of valuation in the accounts. The AO is directed to give the effect of section 145A as per above discussion.