Vildirect: IncomeTax-caselaws-2006-VIL-360-ITAT-MUM

2006-VIL-360-ITAT-MUM

Equivalent Citation: [2007] 11 SOT 295 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 7203 (MUM.) OF 2002

Date: 24.05.2006

CROYDON CHEMICAL WORKS LTD.

ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 6(2), MUMBAI

BENCH

R.K. GUPTA AND V.V.S.N. MURTHY, JJ.

JUDGMENT

V.V.S.N. Murthy, Accountant Member. - This is an appeal filed by the assessee against the order of CIT(A) arising out of the assessment order passed under section 143(3) for the assessment year 1999-2000. The first ground urged is that CIT(A) erred in upholding the stand of the Assessing Officer in adding an amount of Rs. 10,49,854 being unutilised MODVAT credit for the purpose of valuation of closing stock. Alternatively, it is urged that CIT(A) further erred in not directing the Assessing Officer to increase the value of opening stock of the subsequent assessment year i.e., 2000-01 by a similar amount.

2. Facts of the case are that assessee filed return of income for assessment year 1999-2000 on 31-12-1999 declaring a total income of Rs. 30,46,760. In the assessment proceedings under section 143(3), Assessing Officer observed that assessee had debit balance of Rs. 10,49,854 in the MODVAT account and called for assessee’s explanation as to why the unutilised MODVAT credit should not be added to the closing stock as this amount pertains to the cost of raw material. In reply it was stated by assessee, that purchase and stock of raw material and packing materials on which MODVAT credit is available are accounted by the company in the books, net of MODVAT i.e., the Profit and Loss Account would include only the cost of raw material and packing material excluding excise duty paid on it. Without prejudice to the contention that MODVAT credit availed but not utilised as on 31-3-1999 is not liable for inclusion as a part of total income, it was urged that the unutilised MODVAT credit as on 1-4-1998 i.e., at the commencement of previous year amounting to Rs. 17,12,961 be allowed to the assessee in computation of income consistent with the stand taken by the Assessing Officer in the past, the same being added to the income while concluding assessment for 1998-99.

3. Assessing Officer disagreed with the contentions of assessee and observed that section 145A has been introduced with effect from 1-4-1999 which states as under :

"Notwithstanding anything to the contrary contained in section 145 the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head ‘Profits and gains of the business or professional’ shall be :

(a )........

(b)Further adjusted to include the amount of any tax, duty, cess (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 date of valuation.

Explanation.—For the purpose of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payments notwithstanding any right arising as a consequent to such payment."

4. Assessing Officer further observed that these provisions have been introduced with effect from 1-4-1999. They make it clear that the valuation of stock should include any tax, duty, cess or fee paid or incurred by the assessee to bring the goods to place of its location and condition as on date of valuation. The other contention of assessee that the unutilised MODVAT credit as on 1-4-1998 amounting to Rs. 17,12,961 may be allowed to be set off against the unutilised MODVAT credit as on 31-3-1999, the same was not accepted by the Assessing Officer, stating that the addition of Rs. 17,12,961 made during the assessment proceedings for assessment year 1998-99 has been deleted by the CIT(A) and relying on the decision of jurisdictional High Court in the case of Melmould Corpn. v. CIT [1993] 202 ITR 789¹ (Bom.), wherein it has been held that the change has to be effected by adopting the new method for valuing the closing stock which will, in its turn become the value of opening stock of the next year. If instead, a procedure is adopted for changing the value of opening stock also, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of opening stock of that year and so on. He further observed that, as per the above decision, a new method of valuation of stock is to be adopted, it has to be done in the case of valuation of closing stock only. The valuation of opening stock for the same year cannot be altered. Section 145A has been introduced with effect from 1-4-1999 and the assessment year under consideration fall under the newly introduced provisions of section 145A. He further observed that if the decision in the above case is read with the provisions of section 145A, it becomes clear that the alteration has to be made only to the valuation of closing stock. Based upon the above discussion, he rejected the contention of the assessee and made an addition of Rs. 10,49,854 to the income returned by the assessee of Rs. 30,46,760.

5. CIT(A) observed that, as per the provisions of section 145A, the valuation shall be first in accordance with the method of accounting regularly employed by the assessee and further it will be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to its place as on the date of valuation. It means that the valuation of raw materials as well as finished goods will be done as per the provisions of section 145A of the Act which has been made operative with effect from 1-4-1999 applicable from the assessment year 1999-2000. The provisions of section will apply in spite of the provisions of section 145 and further adjustments will be made to the method of accounting and those adjustments shall be made 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 on the date of valuation. CIT(A) also relied on the decision of hon’ble Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384¹ wherein it has been held by the hon’ble jurisdictional High Court that section 145A is applicable only from 1-4-1999. Therefore, the additions made on account of MODVAT credit till assessment year 1998-99 have been covered by this decision of the hon’ble Bombay High Court where additions were directed to be deleted. CIT(A) held that the provisions in section 145A of the Act being applicable and that, therefore, MODVAT is now to be included in the value of closing stock. While observing so, the CIT(A) has upheld the action of Assessing Officer in confirming the addition Rs. 10,49,854 to the value of closing stock.

6. AR submitted as follows : Even as per the provisions of section 145A, MODVAT credit need not be considered for the purpose of valuation of closing stock. AR strongly urged that the ratio of the hon’ble jurisdictional High Court in the case of Indo Nippon Chemical Co. Ltd. (supra) as upheld by the hon’ble Apex Court in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275², still applies to the facts in assessee’s case, even after the introduction of the provisions of section 145A. AR filed before us a Note containing workings in respect of the above claim and also relied on ‘Guidance Note’ issued by the Institute of Chartered Accountants of India, in support of the submissions that MODVAT credit is not liable to be considered for credit in respect of the entire purchases though not consumed.

7. DR strongly relied on the orders of lower authorities and the provisions of section 145A.

8. We have considered the arguments of both the sides, perused the material on record and the orders of lower authorities. We are of the view that as per the provisions of newly introduced section 145A, inventory has to be valued by including the element of tax, duty, cess or fee etc. There were two alternative methods that were prevalent up to 31-3-1999 being, one inclusive and the other is exclusive. In the inclusive method, the element of tax, duty, cess or fee was always included as an element of cost. In the exclusive method which was in force up to 31-3-1999 the element of tax, duty, cess or fees etc., were excluded. With effect from 1-4-1999, the element of tax, duty, cess or fee should always be treated as a part of the cost and the inclusive method has to be only adopted. It is in this direction that the aforesaid amendment had been made by the Finance (No. 2) Act, 1998 by introducing section 145A. The closing stock of the earlier year which is accepted by the department should be taken as the opening stock of the year under consideration and any change as a result of the provisions of section 145A is only upon the closing stock. There is no ambiguity in the provisions of section 145A of the Act.

9. Alternative contention of the assessee is that opening stock valuation should also be changed. Firstly it is evident from the facts that the addition made in respect of MODVAT credit for the immediately previous assessment year in respect of closing stock has been deleted which was the reason why Assessing Officer rejected the same treatment in respect of opening stock in this assessment year, in which we find no infirmity. An alternative ground has also been urged that the closing stock of this assessment year should be directed to be considered as the opening stock for the next assessment year, which issue only being consequential in nature and not being in respect of this assessment year, does not require any separate adjudication. However, assessee is open to apply before the Assessing Officer to get rectification of the order for subsequent year by substitution of the closing stock of this assessment year as the opening stock, in view of the amended provisions of section 145A, which are applicable from this assessment year onwards.

10. It has been held by the "J" Bench of ITAT in the case of M/s. The West Coast Paper Mills Ltd. in [I.T.A. Nos. 3187 & 3750/M/03, dated 3-4-2006] as follows :

"In order to ensure that the values of the opening stock and closing stock the correct value, an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the Legislature proposed to introduce section 145A right from the assessment year 1986-87, which seeks to recognise and make it compulsory to value the stock in an inclusive method as against the prevailing practice of the valuing the same by exclusive method. When the said retrospective amendment was objected very strongly by the tax payer, the amendment was made prospective in nature and was made applicable from the assessment year 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, whereas in the subsequent year whatever valuation is put to the closing stock will surface as opening stock and thereby a debit to that year’s profit and loss account. In other words, the changed method will have neutral tax effect over the years. Only the method of valuation of the closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year, the debit to this year’s profit and loss account by means of addition to the opening stock will reduce the taxable income and will only result in not applying the provisions of section 145A of the Act in the year in question. The provisions, in our view, as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchases and inventory. It will not have an impact on the closing stock carried forward because what can be debited to this year’s profit and loss account is the closing stock of the earlier year. There can be no exception to the rule that the closing stock of the earlier year will have to be necessarily the opening stock of this year. The change in the method of valuation of the closing stock as a result of section 145A has an overriding effect on section 145 relating to method of accounting itself. In other words, notwithstanding what is contained in section 145, the provisions of section 145A shall prevail. The sum and substance of that intent can only be achieved by making an addition to the value of the closing stock by its element of tax, duty, cess or fee, etc., and not by altering the opening stock. Whenever the assessees changed their method of accounting from one recognised method to another recognised method, there is bound to be tax effect in the year of change. But, over the year it is tax neutral. On the same analogy, when the Legislature has imposed a new system of valuing the closing stock it is bound to have an impact in that year, but becomes neutral in nature in the subsequent years. We, therefore, do not find any infirmity in the order of the CIT(A) on this issue and confirm the same."

Following the above order of ITAT and in view of our above observations, we dismiss the grounds urged on this issue, both on the substantial ground and on the alternative ground.

11. The only other ground is in respect of confirming the action in charging of interest under section 234C of Rs. 43, as a result of the disallowance made during the assessment, on the ground that the same has been charged with the reference to the assessed income but not the returned income, as per the provisions of the said section. Since this ground requires action at the level of Assessing Officer regarding the computation of interest under section 234C as per the provisions of the said section, we direct the Assessing Officer to charge such interest only if there is shortfall in the returned income, under which only such liability is attracted under section 234C. Accordingly, this ground is treated as allowed only for statistical purposes.

12. In the result, appeal of the assessee is treated as partly allowed only for statistical purposes.

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