1. This is an appeal by the assessee against the order of the CIT(A), for the assessment year 1989-90.
2. The first dispute in this appeal is against the addition of Rs. 58,79,694 in the valuation of the closing stock. The assessee-company is engaged in the manufacture of fragrances and industrial perfumes. It purchases raw material, consumable stores etc. (hereinafter referred to as 'inputs') and uses them in the manufacture of its final products and, in case certain stock of input is left out, it is shown in the closing stock. The method of the valuation of such closing stock as adopted by the assessee is cost. The dispute is with regard to the valuation of this closing stock. The assessee's case is that the cost of input was the price paid by the assessee, as reduced by the right of credit of excise duty paid and included therein (hereinafter referred to as 'MODVAT credit'). The cost of purchase, according to the assessee, was the net of this right. The MODVAT credit is directly rela table 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 Chowringhee 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 directly reduced from the purchase cost, and closing stock of raw materials is also valued at net of MODVAT Credit.
(v) The basic concept of accountancy requires that the valuation of closing stock should be made at cost. When MODVAT credit is reduced from the cost of purchase, the valuation of closing stock at net price is justified.
(vi) 'MODVAT credit is available only when raw materials are used in production'. The closing stock of finished goods and semi-finished goods are to be valued at net of MODVAT cost since the raw materials consumed has already suffered duty.
Disagreeing with the assessee, the Assessing Officer held that under the MODVAT scheme introduced with effect from 1-3-1986, credit was given to the industrial company for any duty of central excise, ad valorem duty etc., paid by the manufacturer on raw materials/inputs from the duty paid on final products; that the excise duty liability of the manufacturer in respect of its final products was reduced by the excise duly paid on its purchase of raw materials; that a statutory register under the Excise Duty Regulations Act was required to be maintained recording the raw materials purchased and MODVAT credit claimed; that the intent and purpose of this scheme was to reduce the cascading effect of excise duty on inputs on the end-products; that the effective outgo on account of excise duty payable on finished goods was considerably reduced on availing of the MODVAT credit available on the purchases made for the inputs; that as a result of such adjustments in the accounts, such as excise MODVAT Credit Account in the books, debit had to be made of net of excise duty (i.e., gross excise duty payable less the amount of MODVAT credit available) on the purchases of inputs made during the year. Noticing the fact that the assessee had reduced the gross sales amount by the amount of total excise duty payable before availing of credit of MODVAT, according to him, meant in effect that the gross amount of excise duty was debited to the account instead of debiting the net amount of excise duty payable. He further observed that the purchase cost of raw materials had been taken after reducing therefrom the amount of MODVAT credit available, as a result of which the closing stock valuation of raw material, semi-finished goods were undervalued by adopting net of MODVAT prices. The sum result of such system 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 profit were understated by the assessee. By the scheme of MODVAT what the Central Government has done, he observed, was that it had decided to give some relief in excise duty payable by the manufacturer and the relief has been correlated with the excise duty element of the inputs only for the sake of quantification. To put it in legal Jargon, he observed, it was co-related to excise duty element of inputs as a "modum aestimationis".
This fact, according to him, was further strengthened by the fact that in some cases, the MODVAT credit was larger than the excise duty element (in case of small scale industry manufacturers of inputs, it is 1 1/2 times of excise duty element). This, in his opinion, clearly indicated that the relief allowed under the name 'MODVAT Credit' was an independent relief quantifiable with reference to excise duty element of inputs.
5. Coming to the specifics, the Assessing Officer pointed out, the assessee had valued its closing stock of raw materials at Rs. 4,37, 19,545, goods in process at Rs. 20,90,398- all net of MODVAT. According to him, the value of closing stock of raw materials, packing materials and goods in process, which was adopted on the basis of net of MODVAT cost of such materials, was required to be corrected by reverting to the basis of gross cost of such materials so as to reflect the actual and untempered value of closing stock and the gross profit. Since the assessee had stated its inability to calculate separately excise duty elements for which MODVAT credit was taken as included in the raw materials, semi-finished goods and packing materials forming part of the closing stock inventory as on 31-3-1989, according to him, the portion of such ingredient excluded from the actual cost had to be considered on the proportionate basis in the same ratio as it bears to the gross cost of raw materials etc. In view of the above, the value of the closing stock of raw materials etc., was arrived at as under on the basis of gross cost of such materials :assessee- Rs. 4,37, 19,545(b) Closing stock value of semi-finished(Col. No. 5-Col. No. 4 (a+b) Rs. 57,52,253On the basis as indicated above, the grossof closing stock of packing material Rs. 1,27,441 (A + B) Rs. 58,79,694.
Thus, according to the Assessing Officer, the assessee had undervalued its closing stock of raw materials, semi-finished goods and packing materials by Rs. 58,79,694 and, therefore, this amount was added back to the income of the assessee.
6. In appeal, the CIT(A) upheld the order of the Assessing Officer by observing that he was in agreement with the Assessing Officer that there could be no two opinions that legally stated the MODVAT credit should not be reduced from the cost of raw materials; that the credit could be utilised only at the time of payment of excise duty and, therefore, there was force in the contention of the Assessing Officer that to that extent the value of unutilised raw materials, semi-finished goods and finished goods should be increased.
7. Sri Y.P. Trivedi, the learned counsel for the assessee, supporting the assessee's claim, submitted that the assessee's method of valuing the closing stock net of MODVAT was in accordance with both law and accountancy principles. The assessee was following mercantile system of accounting and, therefore, the cost of purchase was bound to be reduced by the right to MODVAT benefit- a benefit accruing to the assessee under the excise law. Such right, according to the learned counsel, accrued on the date of purchase as per the scheme introduced with effect from 1-3-1986 under the Excise Law. If net amount was the cost of the purchase of the assessee, the stock valuation net of MODVAT credit cannot be challenged. He also submitted that the assessee is following this system right from the beginning of the introduction of the MODVAT scheme with effect from 1-3-1986, and the department has not challenged the same in the earlier years. It is the prerogative of the assessee, he submitted, to adopt a system of accountancy including the valuation of the closing stock and unless that system is found defective or not capable of 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. LAC [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 gross of MODVAT taking the view that MODVAT accrues only on consumption of those inputs and at the same time if MODVAT (to the extent raw materials etc., lying in closing stock) is credited to purchase accounts, then there will be double taxation of the amount of MODVAT pertaining to raw materials etc., lying in closing stock. According to him, there is an anomalous situation raised in the above in the sense that for valuing closing stock, MODVAT is treated as not accrued but for crediting purchase account (thereby reducing the consumption) MODVAT is treated as accrued in the previous year. He further submitted that a similar action was attempted by the Commissioner of Income-tax, by initiating proceedings under Section 263 of the Act for the assessment year 1988-89, and, after considering the assessee's submissions, the matter was dropped vide order of the Commissioner of Income-tax, dated 21st March, 1991.
He then submitted that the same Commissioner has accepted similar claim in the appeal for the assessment year 1988-89 in the case of M/s.
Indian Smelting & Refining Co. Ltd. The learned counsel therefore, submitted that the addition made and sustained by the departmental authorities was unwarranted and requires to be deleted. Alternatively, he submitted that if the closing stock is disturbed, an increase in the opening stock should also be allowed to find out the net effect of the valuation on the profits for the year under consideration.
8. Sri Keshav Prasad, the learned Departmental Representative, on the other hand, supporting the orders of the departmental authorities, submitted, that the cost of purchase to the assessee was that the assessee had paid to the seller and that included excise duty charged by them. For this proposition, he relied upon the decision of the Third Member in the case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom.) and another decision of the Madras Bench 'B' of the Tribunal in the case of Southern Asbestos Cement Ltd. v. Dy. CIT[1991] 38 ITD 449. The right of credit, according to him, vests in the assessee when the goods are used and since the goods lying in stock were not used in the production of the end product, the assessee was not entitled to reduce the same from the value of the closing stock as it was being valued at cost. For this proposition he placed reliance on the aforesaid decisions of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd. 's case (supra) and McDowell & Co. Ltd. s case (supra), 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 stock of this year does not require any adjustment.
9. We have heard the parties and considered their rival submissions.
The assessee follows the cost method of valuation for its closing stock of inputs. The cost price to the purchaser is the sale price obtained by the seller. "Sale price", as held by the Supreme Court in the cases of Chowringhee Sales Bureau (P.) Ltd. (supra) and McDowell & Co. Ltd. (supra) is the consolidated price paid by a purchaser which include the excise duty and other statutory levies collected thereon. As per the Accounting Standard-2 (AS-2) on 'Valuation of Inventories' issued by the Institute of Chartered Accountants of India, "cost of purchase" consists of purchase price including duties and taxes, freight inwards and other expenditures directly attributable to acquisition, less trade discounts, rebates,duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase. It would not be out-of-place to state the quotation from the judgment of Supreme Court in the case of Challapalli Sugars Ltd. (supra) that the accounting standards accepted by the Institute of Chartered Accountants should be given due regard in the matter of accounting. On the aforesaid basis, it is clear that the excise duty paid by an assessee on the purchase of the input would form part of the cost and consequently, a part of the value of the closing stock of the left out inputs. In the case of Southern Asbestos Cement Ltd. (supra), the Tribunal observed that in a case where the closing stock is valued at cost, customs/excise duty paid must necessarily enter into the computation of the valuation of the closing stock. Any attempt to exclude from the value of the closing stock the duty component will distort the true profits of the assessee. In the case of Raymond Woollen Mills Ltd. (supra), the Third Member held that the cost price comprises the purchase price including import duties, transport and handling charges and any other directly attributable costs less trade discount and rebate plus such other expenses which have been incurred in the normal course of the business in bringing the products, finished or in progress, to its present location and condition. The assessee, in that case, has not included the proportionate custom duty paid while valuing the stock-in-trade and the Tribunal held that it was held that it was certainly not 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-O, 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 effect on the value of final products. The proforma credit scheme, prevailing under Rule 56A of the Central Excise Rules, 1944, was a first step towards that. It provided some relief but was restricted to the cases where the inputs and end products fell within the same Tariff Item. To allow the manufacturer to obtain instant and complete reimbursement of excise duty paid on inputs, MODVAT was launched by Notification No. 176/86-CE, dated 1-3-1986, to cover inputs and end products classifiable under the specified Chapters of Central Excise Tariff Act, 1985, by introducing Rules, 57A to 57P in the Central Excise Rules, 1944. The Finance Minister's speech provides the following basics of the Scheme : 114. The MODVAT scheme provides a transparency which discloses the full taxation on the product and its introduction is an important measure of cost reduction. Amount of excise duty payable depends upon the value of the final product and the rate of duty.
Introduction of MODVAT will decrease the cost of the final product considerably through the availability of instant credit of the duties paid on the inputs and consequential reduction of interest costs.
115. It would be noticed that the MODVAT scheme avoids the payment of duties on earlier duties paid. The payment of duty drawback will be swifter as the element of excise duty will be transparent. It will, therefore, benefit both the consumers and exporters.
116. However, in view of the novelty of the scheme, we have to hasten slowly and implement the MODVAt scheme in stages. As a first measure, I propose to introduce MODVAT scheme for a goods covered by 37 specified chapters of the Central Excise Tariff Act, 1985. The Scheme as a result would cover products of chemical and allied industries, paint and packaging materials, plastics, glass and glassware, rubber products, base metals and articles of base metals, machinery and mechanical appliances including electrical equipments, motor vehicles and certain miscellaneous manufactured products. This would simply that as long as the input and the final product are covered by the specified 37 chapters and the final product bears some duty of excise, credit of duty on the inputs covered by these chapters will be available.
117. The proforma credit given will cover both excise duty and additional duty of custom also known as countervailing duty. Set off will 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 the incidence of set off benefits, the scheme being a new one, Central Board of Excise and Customs would take corrective steps wherever anomalies are noted.
11. The actual provisions, as introduced by Notifications, are that Rule 57A of the Central Excise Rules, 1944, provides for the notification covering finished excisable goods entitled to the relief of duty paid on goods used for their manufacture. Rule 57B, provides for the credit of duty in respect of inputs obtained from small-scale manufacturers, whereas Rule 57C provides for non-allowance of the credit if the final product is exempt. Rule 57D provides for certain circumstances where credit of duty is not to be denied or varied. Rule 57E, on the contrary provides for the adjustment in duty credit resulting in payment of refund to, or recovery of more duty from the manufacturer or the importer. Rule 57F provides for the manner of utilisation of the inputs and the credit allowed in respect of duty paid thereon. It reads as under : (1) The inputs in respect of which a credit of duty has been allowed under Rule 57A may-- (i) be used in, or in relation to, the manufacture of final products for which such inputs have been brought into the factory, or (ii) be removed subject to the prior permission of the Collector of Central Excise from the factory for home consumption or for export on payment of appropriate duty of excise or for export under bond as if such inputs have been manufactured in the said factory : Provided that where the inputs are removed from the factory for home consumption on payment of duty of excise, such duty of excise shall in no case be less than the amount of credit that has been allowed in respect of such inputs under Rule 57A. (2) Notwithstanding anything contained in Sub-rule (1), a manufacturer may, with the permission of the Collector of Central Excise and subject to such terms and conditions and limitations as he may impose, remove the input as such, or after the inputs have been partially processed during the course of manufacture of final products, to a place outside the factory,-- (a) for the purposes of test, repairs, refining, reconditioning or carrying out any other operation necessary for the manufacture of the final products and return the same 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 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 cleared under Sub-rule (1) : Provided that the credit of specified duty in respect of inputs used in the final products cleared for export under bond or used in the intermediate products cleared for export in accordance with Sub-rule (2), shall be allowed to be utilised towards payment of duty of excise on similar final products cleared for home consumption on payment of duty and, where for any reason, such adjustment is not possible, by refund to the manufacturer subject to such safeguards, conditions and limitations as may be specified by the Central Government in the Official Gazette : Provided further that no such refund of credit of duty shall be allowed if the manufacturer avails of drawback allowed under the Customs and Central Excise Duties (Drawback) Rules, 1971, or claims rebate of duty under Rule 12A in respect of such duty.
(4) Any waste, arising from the processing of inputs, in respect of which credit has been taken may-- (a) be removed on payment of duty as if such waste is manufactured in the factory; or (b) be removed without payment of duty, where it belongs to such class or category of waste as the Central Government may from time to time by order specify for the purpose for being used in the manufacture of the class or categories of goods as may be specified in the said order, subject to the procedure under Chapter X being followed; or (c) be destroyed in the presence of proper officer on the application by the manufacturer, and if found unfit for further use, or not worth the duty payable thereon, the duty payable thereon being remitted : Provided that such waste may be destroyed by the manufacturer governed by Chapter VIIA after informing the proper officer in writing regarding the quantity of such waste and the date on which he proposes to destroy, at least seven days in advance and after observing all such conditions as may be prescribed by the Collector of Central Excise by a general or special order with regard to the manner of disposal of such waste.
(5) No part of the credit of duty allowed shall be utilised save as provided in Sub-rule (3).
(6) On an application made by a manufacturer, the Collector may, subject to such conditions and limitations as he may impose, permit a manufacturer having credit in his account in form R.G. 23A and lying unutilised on account of shifting of the plant or factory, belonging 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 57-1 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 considering the representation, if any, made by the manufacturer or the assessee on whom notice is served under Clause (0, shall determine the amount of such credit to be disallowed (not being in excess of the amount specified in the show-cause notice) and thereupon such manufacturer or assessee shall pay the amount equivalent to the credit disallowed, if the credit has been utilised or shall not utilise the credit thus disallowed.
(2) If any inputs in respect of which credit has been taken are not fully accounted for as having been disposed of in the manner specified in this section, the manufacturer shall upon a written demand being made by the Assistant Collector of Central Excise pay the duty leviable on such inputs within 10 days of the notice of demand.
Rule 57 J provides for the credit of duty in respect of inputs used in an intermediate product.
Almost similar provisions were made by another Notification dated 1-3-1987 (25/87-CE) for the credit of money in respect of certain raw materials used in the manufacture of certain excisable goods. These provisions are spread over from Rule 57K to 57P.12. MODVAT credit is available on the finished excisable goods on the manufacture of which the assessee uses the inputs and pays excise duty.
An instant credit is given to an assessee on furnishing of a declaration under Rule 57G, indicating the description of the final products manufactured and inputs intended to be used therein. This credit is to be utilised under Rule 57F(3) only 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; (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 cleared under Sub-rule (1). As provided under Rule 57F(5), the credit can be used for no purpose other than the purpose provided in Rule 57F(3). Any credit of duty paid on inputs which has been wrongly granted has to be taken back or disallowed under Rule 57-1. In other words, if the assessee did not use the inputs in the final products or where the final product is exempt from duty, any credit of excise obtained by an assessee on the purchase of the inputs has to be returned back. This clearly shows 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 the 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 the purposes of valuation of closing stock has to be inclusive of excise duty paid on the inputs.
13. But, that is not the end of the matter. If one increases the value of the stock by the element of the credit the purchase cost has to be taken at its full cost and the income of the MODVAT credit would be only of the amount relatable to the inputs which were used in the manufacture of the final products. The closing stock at the enhanced value would be taken as the opening stock of the next year and would be offset by the MODVAT credit of the excise duty accruing to the assessee in the next year on consumption of the inputs. This can be demonstrated by the actual figures as under:Particulars Transactions as Transactions as per assessee they should be - Cost price 458.09 458.09 - Excise Duty 57.52 2623.91 458.09 2953.38 787.56 Cost of inputs : 2165.82 2165.82 2623.91 2623.91 2953.38 2953.38 By not debiting the amount of excise duty to the cost of inputs, the assessee had booked income by giving credit of the entire amount of Rs. 329.47 lac which, in fact, should have been only of Rs. 271.95 lac as pertaining to consumption of inputs. In other words, the assessee had shown income more by a sum of Rs. 57.52 lac, which is the element of MODVAT credit to be included in the closing stock. As the assessee had shown closing stock less by Rs. 57.52 lac, both offset the effect of each other. Judge it by what the transactions as they should have been.
The excise duty of full amount of Rs. 329.47 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 inputs lying in closing stock. This is so far as the accounting results are concerned. They give the same results, whichever method is followed, but in law, as we have held above, the closing stock is to be valued at cost inclusive of excise duty paid and the assessee would be entitled to debit the entire amount of excise duty paid to the cost but has to show the credit of only that amount of excise duty on account of MODVAT credit which relates to the inputs used. In both the methods, there is no scope for making any addition to the income of the assessee. The department's contention that the excise on inputs is not to be allowed as cost of the inputs because the assessee had not claimed, cannot be accepted.
Two methods are suggested by the Institute of Chartered Accountants of India. The assessee follows one system. If the Department insists to adopt the second one, it cannot have recourse to any entries made in assessee's books on the basis of the first system of accounting. It should give legal effect to the second method as a whole. In any case, as held by the Supreme Court in the case of Kedarnath Jute Mfg. Co.
Ltd. v. CIT [1971] 82 ITR 363, whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.
14. The Department has also raised a contention that in this process, the assessee claimed deduction of the full amount of excise duty payable on the end product even though not paid and by not including the same in the valuation of the closing stock of the inputs the assessee has claimed double deduction. We do not find any force in this contention of the revenue. The assessee had given credit of the full amount of excise duty on inputs by not including the same in the cost of the inputs and, therefore, the excise duty payable on the end products has to be at its full amount. In effect, in this process, the assessee has claimed only the net amount, namely, the gross amount payable minus the excise duty on inputs as was reduced in the cost of purchase of inputs lying in the stock. On the contrary, if the department's theory is accepted, it would result in double taxation in the first year of change of the amount of the excise 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 ground.
15. In this view of the matter, we need not consider the alternate submission of the assessee that if the closing stock is increased, the income of the assessee should be computed by increasing the value of the opening stock on the same basis.
16. to 28. [These paras are not reproduced here as they involve minor issues].