Income Tax Appellate Tribunal - Mumbai
Herculas Pigment Industry, Mumbai vs Assessee on 30 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "H", MUMBAI
BEFORE SHRI B. R. MITTAL, J. M. AND SHRI SANJAY ARORA, A. M.
ITA No. 271/Mum/2012
Assessment Year: 2007-08
(Hercules Pigment Industry Income-tax Officer 20(1)-3,
C-3, 140/ 141, Ratnadeep, Mumbai
S. V. Road, Andheri West,
Mumbai-400 058 Vs.
[PAN: AAAFH 1146 G]
L (Appellant) (Respondent)
Appellant by Shri Mehul Shah
Respondent by Shri G. S. Bare
Date of hearing 02.04.2013
Date of Pronouncement 29.05.2013
0 R D E R
Per Saniay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-31, Mumbai ('CIT(A)' for short) dated 30.12.2011, partly
allowing the assessee's appeal contesting its assessment u/s.l43(3) of the Income Tax
Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2007-08, vide order
dated 30.10.2009.
2. The appeal raises, in effect, two issues, per its four grounds, which we shall take
up in seriatim. The first issue, being agitated by the assessee per its ground nos. 1 and 2,
is in respect of an addition effected in the sum of Rs.10,39,886/-- u/s.145A of the Act by
the Assessing Officer (A.O.) in view of unutilized cenvat credit, which stands sustained
by the first appellate authority at Rs.7,00,109/-, allowing the assessee relief for
Rs.3,39,777/--.
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Herecules Pigment Industry vs. ITO '
2.1 Opening the arguments for and on behalf of the assessee, it was pleaded by the 1d. --
AR, its counsel, that the assessee has valued its closing stock inclusive of all taxes. The
assessee follows inclusive method of accounting, following that mandate Of section l45A,
which is, in fact, otherwise tax-neutral, so that it should not result in any enhancement or
change in income. It is, in fact, on being satisfied on this count, i.e., inclusion of the
excise duty in the valuation of the closing stock as at the year~end, that the 1d. CIT(A) has
allowed it relief to that extent, for which he would refer to pgs.ll & 47 of the assessee's
paper--book (PB), reflecting the valuation of the closing stock at gross and net of excise at
Rs.28.96 lacs and Rs.25.56 lacs respectively. This is as not excluding the same would
amount to a double addition in respect of the excise component in the purchase
(acquisition) cost of raw material in stock as at the year-end.
So, however, he would continue, the 1d. CIT(A) has sustained the addition for the
balance Rs.7 lacs. It needs to be appreciated that the amount outstanding as at the year-
end as unutilized cenvat credit in the accounts is a different aspect of the matter, and need
not be confused with section 145A, which provision stands observed, so that no further
adjustment to the returned income is called for on that count. The difference, or an
absence of correlation between the two, i.e., the balance in the cenvat credit afc as at the
year-end (Rs.10.40 lacs) and the valuation of the inventory inclusive of excise and, thus,
in terms of section 145A, is exhibited by way of an example (Ex. 1), taking us to page 50
of the PB, which is reproduced by way of an annexure to this order (refer Ann. 1-A). The
unutilized cenvat credit account reflects a balance of L, i.e., the difference in the
duty paid (Rs.1,250/- = 125 x 10), and that recovered (Rs.l,020/-- = 85 x 12). However,
both the purchases and sales, as well as the closing stock, stand valued at gross of excise
duty, so that the profit stands correctly determined at Rs.1,870/-, in accordance with
section 145A, and no fiirther adjustment is called for on account of the outstanding
balance in the unutilised cenvat credit account (UCC a/c). The same, in fact, gets
included in the excise element of Rs.400/-- (40 x 10) in the value of the closing stock.
Rather, he would fI.1l'tl'1CI' continue, taking us to the statement of the assessee's profit and
loss account, on the basis of which profit stands reported and disclosed (Part A of
Annexure-2 to this order), that the assessee has, by admitting a profit at Rs.8 92 850/-, in
3 ITA No.2?' 1 / Mum/ 2012 (A.Y. 2007-08)
Herecules Pigment Industry vs. ITO
fact, disclosed and returned a higher profit by Rs.3 39 777/-- (Rs.8,92,850 --
Rs.5,53,073/refer Annexure 2-B/pg.64). This difference, it would be seen, matches with
the corresponding difference between the valuation of the closing stock at gross and net
of excise, i.e., at Rs.28,96.023/-- and Rs.2S,S6,246/-- respectively (PB pgs.11 «Se 47). Be
that as it may, there is no occasion or scope for further enhancing the disclosed profit of
Rs.8.93 lacs by Rs.7 lacs.
2.2 The ld. DR, on the other band, would rely on the orders by the authorities below,
claiming that they have, in directing the further adjustment of the assessee's disclosed
profit by the amount outstanding in the UCC account, only sought to follow the mandate
of section 145A, and no more. There is, accordingly, no question of any relief to the
assessee; the 1d. CIT(A) having already allowed it relief to the extent the assessee could
ostensibly show a double effect.
3. We have heard the parties, and perused the material on record.
3.1 We firstly observe that the 1d. CIT(A) has not allowed any relief to the assessee on
account of unutilised MODVAT credit per se, but only directed adjustment as called for,
where and to the extent excise duty stands included in the valuation of the closing stock.
Further, he has, finding that the entire unutilised MODVAT credit of Rs. l0,39,886/-
pertains to the current year; the opening balance in the said account being nil, directed the
adjustment of the outstanding balance in the said account to the assessee's income
inasmuch as the same is only the excise component on the raw-material, semi-finished
goods and finished goods in stock. In other words, in his view, the same represents the
excise duty incurred on the purchase of raw material, so as to form part of its cost,
whether the same is lying with the assessee as such, i.e., as raw-material, or in the form of
semi-finished or finished goods as at the year-end (refer paras 2.2.3 and 2.2.4 of the
impugned order).
3.2 Before we proceed to analyse the facts, we may briefly advert to the basics, being
relevant in the exposition of the matter. The issue is not, we may clarify, one of the
exclusive or inclusive method of accounting for the valuation of the purchases, sales, and
4 ITA No.27]/Mum/2012 (A.Y. 2007-08]
Herecules Pigment Industry vs. ITO '
inventories, as mandated by the non obstante provision of section 145A, but of correct --
determination of profit or the operating results for the accounting period under reference.
In other words, the valuation of inventories (and other trading parameters), is relevant
only for the reason and to the extent that the same enable determination of the correct
profit. The excise duty, or any other levy on input/s for that matter, is a part of its actual
cost, so that its inclusion in the cost of raw-material or work-in-progress (WIP) or
finished goods, ought not to lead to any variation in the quantum of actual profit, which is
to be arrived at or determined on the basis of accepted principles of commercial
accounting, which prescribe valuation of closing stock at actual cost. AS 2, the
Accounting Standard on 'Valuation of Inventories' issued by the Institute of Chartered
Accountants of India (ICAI) endorses the same; para 6 thereof reading thus:
'6. The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.'
Section 145A is in effect only an accounting prescription, statutorily mandated,
which is in consistence with the accepted accounting principles of valuation at cost or, in
the case of finished goods, at market value, where it is less than cost. The valuation of the
stock, thus, considered in its proper perspective, could never be a source of income or
profit and, if at all, as in case of declining realizable values, particularly where not
deemed temporary, could be a reason for reporting lesser profits, following the principles
of 'conservatism' and 'prudence', which, along with that of 'going concern', are
fundamental accounting assumptions. The decision by the hon'ble apex court in the case
of Cl/iainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC) holds the field to date, and
_ continues to be a guide post in the matter. Like--wise, the valuation of purchases and
sales, which represents the other limb of sec. 145A, providing for the same at gross of all
levies incident thereon, should also be revenue-neunal, following proper accounting
principles. Firstly, the prescription (per s. 145A) is consistent with the actual state of
affairs inasmuch as the levies, paid or recovered, form part of the trading cost or receipt
of an enterprise, even as held by the apex court in, inter alia, Chowringhee Soles Bureau
(P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray & Co. (P. ) Ltd. v. CIT
1-:7" 'FatII""-,;flM.%:3r:=-351-.' I rvgfi )
5 ITA No.271/ Mum/ 2012 (A. Y. 2007-08)
I-Ierecules Pigment Industry vs. ITO
[1974] 97 ITR 615 (SC), also clarifying that it is the nature and quality of the receipt (or
payment) that is relevant in determining its taxability and not its accounting treatment.
Secondly, this would enable the statement of the current assets and current liabilities at
correct values. That is, even without insisting on the account head under which the 'cost'
or 'revenue' is to be booked in accounts, only when the same are charged to the operating
statement where on revenue account, and current assets and current liabilities, in terms of
receivables/recoverable from, and liabilities to, constituents, etc., recorded at correct
values, would the accounts reflect correct profit or loss. T hirdly, as we shall presently see,
it is only the valuation of inventories at gross of all input levies, that would ensure correct
disclosure of liabilities in its respect and, finally, payment of (say) excise-duty on the
value-addition, for which only an enterprise is in effect liable.
3.3 The first thing, therefore, that we need to determine is if the assessee is following
inclusive method of accounting, as advocated by section 145A. This is as if it indeed is,
as contended by it, no further adjustment to its reported income could be made u/s. 145A,
as actually made and confirmed by the Revenue. On the other hand, if it is not so
following, the issue would be the adjustment/s to its income, if any, required to bring it in
conformity with the law. The second aspect of the matter would be the nature of the
balance outstanding in the unutilised MODVAT (Cenvat) credit account, and its
relationship, if any, with the valuation of the different factors of the trading account. This
is as the assessee claims the two to be unrelated or not relevant, while the Revenue infers
non--satisfaction of the condition of section 145A only on account of the same.
Analysis
3.4 A mere browse of Armexure-2 to this order (PB pg.64), Part A of which is the
statement of the assessee's profit and loss account, would make it abundantly clear that
the assessee is not following the prescription of section 145A. The excise duty paid on
purchases and that recovered on sales, is taken to a separate account, the 'Unutilized
Cenvat Credit account' (UCC ale), and it is this accounting treatment that is the source of
variation of the reported profit with that with reference to section 145A. The profit
f e 1:
5 I ITANo.271/Mum/2012(A.Y. 2007-08)
Herecules Pigment Industry vs. ITO 5
though is returned by valuing the closing stock of raw material at inclusive of excise, thus :
enhancing the book profit that would otherwise obtain (Rs. 553073) by the amount of
excise included therein (Rs. 339777). This is again not correct inasmuch as the raw
material is to be valued be at purchase cost, while the purchases themselves are not
accounted for at gross of excise. Sec. 145A does not aim at artificially enhancing the
actual profit, but as afore-stated enables and is consistent with its determination. The said
enhancement with reference to s. 145A is itself an admission of some difference between
the 'book profit' and that in terms of s. 145A. Clearly, the profits per the two
statements are shown to be at par, which is admittedly not the case, there was no need or
occasion to draw a separate, revised statement (Part A of Ann.2), as done by the assesse,
whose accounts in fact reflect a profit of Rs. 5,53,073/- (Part B of Arm.2). In fact, as
would be readily observed, the recording of the figures of excise on both the sides of the
operating statement (Ann. 2B) is of no consequence as the assesse records the excise
separately in the UCC a/c. The figures of excise on both the sides of the P&L account
cancel each other equally, rendering their statement/recording to no effect. The excise
duty to be included in the valuation of the closing stock is not the balance inthe UCC a/c
(Rs. 10.40 lacs), which is done only with a view to balance the excise impact (i.e., on
payment and recovery of excise) on profit, but that relatable to the closing stock. The
revised statement (Ann. ZA), again, values the closing inventory, and not also the
opening as well as the purchases and sales at gross of excise, so as to be considered as per
s. 145A. As such, both the operating statements (Ann. 2A and 2B) are not consistent with
s. 145A nor lead to the determination of the correct profit.
3.5 The balance in the UCC account, as sought to be clarified by the assessee through
examples (refer Ann. 1A & IB), only reflects the amount of excise--duty yet to be
recovered (utilized), as through sales and, where recovered in excess, to be paid to the
credit of the Central Government. The purport and function of the said account is,
therefore, different. The excess recovery of excise is not to be paid as and when collected,
or in a time bound manner thereafter, but only where the total recovery exceeds the total
amount paid, either directly or through purchases, at any given point of time. As such, till
7 ITA No.271/Mum/2012 (A.Y. 2007-08)
Herecules Pigment Industry vs. ITO
the time the duty paid (on excisable inputs) is not recovered or adjusted in full, as Rs.
1250/- in the cited example (Ann. l-A), no liability to pay any further duty to the
Government arises. Put differently, even though there is, going by the said example, an
excess recovery at the rate of R52 per unit, the same is not reflected as 'profit', which it
actually is, but gets reflected in the reduced balance in the unutilised cenvat credit a/c. As
this is a running account, continuing across years, which gets debited with every purchase
of excisable goods, and credited, similarly, on the removal of excisable goods, no duty is
payable (as per the excise rules) as long as there is a debit (positive) balance in this
account (as Rs. 230/- in Ann. IA), which also explains the purpose of maintaining the
same.
Further, it is difficult to establish a one--to--one correspondence between input/s and
output/s in manufacturing conditions, with some goods being in inventory at various
stages of processing at any given time. As such, it is not feasible or at least difficult to
isolate or determine the profit element embedded (as at Rs. 170/-, or @ Rs.2 per unit in
the example) in the UCC a/c, i.e., with reference to the accounts as being maintained.
What is, therefore, required is to record the purchases and sales and inventory - both
opening and closing, and of all varieties, i.e., raw material, WIP and finished goods, at
gross of all levies, as stipulated by section 145A, while maintaining the Cenvat credit
account separately as a memoranda account, which in fact is required to be so maintained
as the assessee's personal ledger account (PLA) with the excise department. Any direct
payment of excise in case of excess recovery, where so, would be claimed as a direct
expenditure through debit to the profit and loss account. The assessee, alternatively,
could maintain its accounts on net (exclusive) basis, recording the payment or recovery of
excise in the Cenvat account. Reporting of the profit for tax purposes under the Act in
such a case though would have to be made by drawing a separate P & L A/c in terms of
section 145A, i.e., by including the excise component on all the constituents of the
trading account. The assessee, as we have found, following the latter (exclusive) method,
it would have to adopt the alternative course afore-said. In fact, the dijference between
the profit disclosed by the assessee's accounts and that per the statement drawn
u/5.145/1, would reveal the extent of 'profit' or 'loss' that the assessee has made or
.., __ p I .
3 ' ITANo.271/Mum/2012{A.Y. 2007-08)
Herecules Pigment Industry vs. ITO 0
suflered, as the case may be, on account of payment and recovery of excise (as at Rs. 2/- ;
per unit or Re. 0.40 per unit in the two examples cited). The assesse could book this profit
or loss in accounts, which would then match the profit per its accounts, the book profit,
with the profit disclosed u/s.l45A, following which, as clarified earlier, yields the
correct, commercial profits. We also state of 'loss' in addition to 'profit', as' the assessee
could also incur 'loss', as where the excise collected is on a lower sale value or the excise
rate on the output itself is less, as in Example 3 cited by the assessee (PB pg.52/Annexure
1-B), where excise is recovered @ Rs.9.60 per unit as against the charge at Rs.10 per
unit. This loss of Re.0.40 per unit (as per the example) would get written off through the
trading account.
3.6 Continuing further, the profit u/s. 145A is, of course, subject to the payment of the
excess recovery of excise (if any) through the sale of goods, i.e., to the government. That
is, the profit under the gross method, which includes the profit on excise account, as @
Rs. 2/- per unit in the example, comes with a concomitant liability to pay it to the credit
of the central government as excise duty on the value addition. A deduction in its respect
though would be allowable on actual payment. If, however, it is not paid, but gets
'adjusted' through payment of excise on subsequent purchases, no 'deduction' would be
exigible inasmuch as the excise on the subsequent purchases -is payable separately on
account of purchase of excisable goods. The same would form part of the purchase cost,
to be reckoned in valuing the corresponding goods as at the year-end or the profit on their
sale, whether as such or on processing, or partly as one and partly as another. That is, it
gets reflected in the accounts as a current asset or absorbed in the trading account,
depending upon whether the corresponding goods are lying in stock as at the year-end or
not. When the purchase cost is paid to the creditor, simultaneously is the excise duty
included therein. The payment, therefore, cannot be considered as toward excise duty on
value addition (or excess recovery). There is thus no question of it (i.e., excise duty on
subsequent purchases) being reflected as a payment toward the liability against excess
recovery of excise. We emphasize so, as it is permissible under the excise law to adjust
the excise paid through subsequent purchases, considering it as in discharge of the
9 ITA No.271/Mum/2012 (A. Y. 2007-08)
Herecules Pigment Industry vs. ITO
liability against excise on value addition (or the excess recovery aforesaid), reducing the
the positive balance in PLA (UCC ale) to that extent, as by Rs. 170/-- in example # 1
(Ann. 1A). However, such an adjustment in accounts, even if carried out, would be to no
effect. This is as the excise duty against purchases would remain un--c1i-schargecl to that
extent. Also, this would necessitate booking of excise liability (on the value-addition) in
accounts, preferably in total, or at least in the sum as incurred on such purchases. The
liability, thus, gets stated in books, either way, rendering the argument of the excise
liability being discharged through fresh purchases of excisable goods, to no effect.
Coming back to our discussion on the profit u/s. 145A, even though payable in due
course, prudence would suggest booking the provision against the liability to the credit of
the Government in respect of excess recovery (or against subsequent purchases, if one
may prefer to see it that way) with reference to the difference in the reported profits per
the two separate statements of the P & L No. To demonstrate (taking the figures of Ex.l
at Annexure l--A), an accounting entry of Rs.l70/-, i.e., the profit component in the
excise account (85 units @ Rs.2/-- each), would increase the debit in the UCC A/c from
Rs.230/-- to Rs.400/-, i.e., the excise component in the closing stock of Rs.4,400/-, while
at the same time inflating the profit as determined on net basis (Rs.1,700/--) to Rs.l,870/--.
True, only the recording of the liability to the Government in the accounts would reveal
correct profits, i.e., at Rs. 1700/-. Non--booking or non-recording the said liability
amounts to deferring its recognition in accounts, overstating its profits (as computed
u/s.145A), as at Rs. 1870/- in the example, to that extent (Rs. 170/-). However, this
would have no material effect as the overstatement is only of the 'book profit', and has
no bearing on the taxable profit (income) inasmuch as the deduction on account of the
liability to excise duty would stand to be allowed only on actual payment in view of
section 43B. We may clarify this through recourse to and using the first example
employed by the assesse (refer Ann; l-A). The booking of the 'profit' and the
corresponding liability, where accounts are on net basis, or only the 'liability' where
maintained on gross basis, would state the profit, either way, at the correct amount of Q
,l'/(}_()/--. Section 43B would however preclude deduction of liability of Rs. 170/-, so that
the taxable income would be at Rs. 1870/-. No separate recording of 'loss' on account of
E
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ITA No.2 71 / Mum/ 201 2 (A. Y. 200 7-08)
Herecules Pigment Industry vs. ITO -
the below par recovery of excise would be required as, as aforesaid, the same would get .
absorbed through the trading account itself, as we may again clarify through another cited
example. The gross profit of Rs.2,450/-- (in Ex.3/Annexure 1-B), being already adjusted
on account -of loss of Rs.50/- (125 units @ Rs.0.40 per unit), requires no further
modification as we have clarified by drawing accounts on net basis, which would
necessitate passing of an entry in its respect (refer Annexure 1-B.2).
The excise department, on the other hand, proceeds on the basis of the registers
maintained under the relevant rules, prescribing full credit for excise on the basis of
purchase of raw material, and not on the basis of its consumption for production, and its
adjustment to the extent recovered, so that it needs to be paid, whether directly or through
subsequent purchases, where recovered in excess, while the no refund is allowed in case
of short recovery.
3.7 Even though not referred to, we shall also advert to the decision by the apex court
in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC). The
same clarifies that the assessee could validly follow any of the two ---- net or gross --
methods of accounting for reporting taxable profits under the Act inasmuch as they lead
to the same result and, thus, pass the test of s. 145. Its recent decision in the case of CIT
v. Shri Ram Honda Power Equipment Ltd. (2013) 258 CTR (SC) 329, again considered
suo motu by. us, is again to the same effect. In fact, this is precisely what we have sought
to emphasine fi-om the beginning of our discussion, clarijfizing that subject to following
correct accounting principles in recording the value of current assets and liabilities, the
two methods are at par (refer paras 3.2 to 3.4 of this order). In that case, the assessee was
setting off the proportionate part of the rnodvat credit (on raw material) against excise
liability (onisales), while in the instant case the assessee is setting off the entire recovery
of excise, i.e., including that on the value addition made. The practice has no sanction in
accountancy. The determination of the proportionate part, i.e., the excise paid on the
input/s consumed in producing the relevant output (on the removal of which the liability
to excise arises), is crucial to the validity of the accounting treatment. As demonstrated,
only passing the correct accounting entries in case of excess or short recovery, in case of
.-W3'-'
11 ITA No.271/ Mum/ 201 2 (A. Y. 2007-O8)
Herecules Pigment Industry vs. ITO
net method, would yield correct profit, as well as the statement of the current
asset/liability as on the cut-off date at the correct value/s. It is only the difficulty in
identifying the excess/short recovery, only upon which proportionate set off could be
made, i.e., in real--life situations, which would require accurate physical conversions,
entailing complex calculations over a number of inputs, if not also outputs, as well as
correct costing, that led us to advocate the 'gross method'. Further, the A0 in that case
chose to bring the modvat credit on unconsumed raw material to tax without adjusting
upward, similarly, the purchase cost of such raw material. This in fact is the same flaw as
noted by the tribunal in the case of Raj Petra Specialities (P. ) Ltd. (supra), as also by us,
requiring adoption of purchases and sales at gross values, as in Ann. 2-B (also refer para
4(c) infra). Our decision thus is in no manner inconsistent and, rather, is in conformity
with the decisions in the case of Indo Nippon Chemicals Co. Ltd. (supra) and CIT v. Shri
Ram Honda Power Equipment Ltd. (supra), both of which though relate to the assessment
years prior to the co-option of the non obstante clause of s. 145A on the statute w.e.f
01/4/1999, as well as other decisions by the hon'ble apex court, noted supra (para 3.2).
Decision
4. We believe that we have amply explained and adequately determined the two
issues arising for our adjudication as referred to at para 3.3 supra. We, therefore, hold as
under:
a) The assessee's accounts (Annexure 2-B), reflecting a profit of Rs.5,53,073/--, cannot,
accordingly, be said to be in accordance with section 145A inasmuch as Rs. 10,39,886/-,
reflected as a part of the cost of raw material as at the year-end is the balancing figure,
and does not represent the excise component on the raw material, or even that on the
closing inventories of finished and serni-finished goods. The correct valuation of raw-
material, i.e., inclusive of excise levied thereon, is undeniably Rs.28,96,023/--, and not
Rs.35,96,132/-, as adopted. Only adopting all the figures at the correct values would lead
to the correct profit in terms of s.l45A, and the balance in the UCC a/c (for the time
being) cannot be taken as a surrogate measure of the excise component in the inventories
at that point of time. That is, the same, based as it is on excise rules, does not represent
"3ir',**'-='l""L_-; w. ._;- -- ~
12 rm No.27:/Mum/2o12(A.Y. 2007-O8)
Herecules Pigment Industry vs. ITO '
the unutilized credit available on goods held in stock. This is as it, in disregard of the .
accounting principles, allows full adjustment of the excise liability on the removal of
goods, i.e., including the excise liability on the value addition, against excise paid on
purchases, and, concomitantly, for such an adjustment even in respect of raw material not
consumed but lying in stock. The UCC a/c, as being prepared, is thus not in consistence
with the accounting principles. It is only the drawing of the operating statement in
accordance with sec. 145A, valuing all the ingredients of the trading account at inclusive
of excise (input levies) that would lead to the removal of these anomalies, bringing forth
the correct profit. No separate accounting for the 'profit' or 'loss' embedded in the
unutilised cenvat credit account, as warranted by mercantile book-keeping, would then be
required as both the 'profit' and 'loss' get subsumed in the trading profit (loss) as
reflected per the trading account prepared on inclusive basis; the UCC a/c becoming part
of or in effect incorporated therein. In fact, booking the said 'profit' or 'loss', where
accounts are maintained, as in the instant case, on exclusive basis, would adjust the
outstanding in the UCC A/c, increasing or decreasing respectively the debit balance in the
said account, so as to state it at its correct value, bringing the profit per the two
statements, i.e., following the inclusive and exclusive methods, at par. The said profit,
which gets automatically reflected under the gross method, and requires to be separately
accounted for under the exclusive (net) method, is, however, accompanied by a
corresponding liability, i.e., the excise duty on the value addition, for which no deduction
would be eligible unless paid, being allowable only on payment basis, and in which event
it would, in any case, stand to be deducted in the computation of the taxable profit. In the
case of 'loss', i.e., a short recovery of excise, there is no case of 'refund' or 'credit',
which lapses, so as to be borne by the assessee, so that the said loss would stand to be
written off to the profit and loss account, where maintained on net basis. The liability
against excess recovery of excise realised on sales is met against excise paid on fresh
purchases under the excise rules. We have already clarified that it is immaterial or
irrelevant whether this excise liability is met against subsequent purchases or through
direct payment, so that the same would continue to outstand in the assessee's accounts
until adjusted. The divergence between the excise rules and the tenets of accountancy
13 ITA No.27}/Mum/2012 (A. Y. 200 7-08}
Herecules Pigment Industry vs. ITO
insofar as accounting of excise is concerned has also been noted. The purport of the two
is different. The difference or conflict, it may be appreciated, is on account of the excise
department following 'cash basis', allowing full credit for the excise on purchases,
whether consumed or not, while accountancy would admit of credidadjustmeni only to
the extent of raw material consumed. The modvat credit in respect of unconsumed raw
material (Rs. 400/- in the example # I/Ann. IA) has to be necessarily carried forward to
the following period, irrespective of the nomenclature of the account under which it is so,
and cannot be availed of merely on the basis that excise stands paid thereon. In fact, the
tax audit report u/s. 44AB requires reporting of the unutilized credit of modvat available.
The two, i.e., the accounts and the excise records, proceed independently, though are
reconcilable. A periodic reconciliation is, in any case, recommended. Perhaps, only a
provision in the excise law for direct payment of excise on value-addition or,
equivalently, maintaining the balance in the PLA (UCC a/c) at par with the excise
component on the inventories (Rs. 400/-- in our example/Ann. IA), would restore parity
between the two. In sum, we reiterate the primacy of s.l45A', the excise rules being
inconsistent with the tenets of accountancy.
b) In our clear view, thus, the proper manner in which the correct profit in terms of
section 145A could be determined is by scrupulously following the mandate of the said
section. All the constituents of the manufacturing account that are subject to
levy/incidence of excise (or any other tax for that matter) are to be loaded therewith. That
the provision is tax--neutral is no argument for not observing the same, as the same (tax
neutrality) would have to be established in each case with reference to the accounts as
being maintained. This is as in practical situations, a one-to-one correspondence between
input/s and output/s, as manifest and apparent in the examples of different trading
scenarios assumed by the assesse, and adopted by us (for the sake of simplicity), is
difficult to establish in real life manufacturing cases, where a variety of inputs, if not also
outputs, obtain. Secondly, the closing inventory, loaded with all input dutiesl levies, would
only state the same at actual cost, even as advocated by AS-2 by ICAI. Again, this only
would state the current asset, which it represents, at its proper value, i.e., in the balance-
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" 14 ITA No.271/Mum/2012 (AY. 2007-03;
Herecules Pigment Industry vs. ITO --
sheet, and at which the same is to be carried forward to the following year._ Even where .
accounted for separately, the same is to be carried forward as a cost which is recoverable.
Only a correct statement of the current assets and liabilities, i.e., which are not on capital
account, in the balance-sheet, would enable reflection of the correct operating results for
the relevant accounting period. Toward this, only the booking of profit (against excess
recovery of excise duty) would enable an agreement of the outstanding balance in the
UCC a/c with the excise component in the closing inventories, so that the accounts --
whether maintained on gross or net basis, reflect the current asset in respect of excise
paid thereon at the same, correct value. Further, it is only this, reckoning the 'profit' on
excess recovery as the difference between the profit per the two statements prepared on
net and gross basis, that would state the UCC a/c at the correct Value of the current asset
represented by it, where the accounts are maintained on net basis, bringing the profit per
the two methods at par. Thirdbz, the provision becomes tax-neutral only when duty is paid
on value addition, else not, in View of the non obstante provision of s.43B, which has to
be given 'effect to (refer Ann. 1). That, however, in any case, cannot be a ground for not
observing the method of accounting that yields "correct profits or operating results.
Further, even where the accounting treatment provides correct results, the provision of s.
43B would have to be given due effect. The same cannot be defeated by non-booking the
statutory liability in respect of excise in accounts, even if payable in due course, under-
stating simultaneously the corresponding asset/s, to contend non-difference in operating
results. The tribunal, in Raj Petro Specialities (P. ) Ltd. v. Asst. CIT (in ITA Nos. 7260': &
7261/Mum/2010 dated 15/3/2013) has clarified that ss. 43B and 145A, both non obstahte
provisions, are to be read in harmony and, further, explained that there was in fact no
conflict or inconsistency between the two sections. In final analysis, the tax neutrality of
the net method is subject to it being established, with the non obstante provision of s."
433, which in fact obtains irrespective of the method of accounting followed, assuming a
crucial significance when the liability in respect of all the levies as accrued are booked
or accounted for.
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15 ' ITA No.271/Mum/2012 (A. Y. 2007-08)
Herecules Pigment Industry vs. ITO
c) Coming to the facts and figures of the case, the operating statement at gross values
(Annexure 2--B) would need to be modified in the following manner, so as to bring it in
conformity with section 145A:
0 increase the value of the opening stock of F6 and RMS by the amount of' excise
duty, if any, suffered thereon;
I state the closing stock of FG and RMS, similarly, at values inclusive of excise
duty thereon, and not by adding the debit amount outstanding in the UCC Ale; and
o carry forward the closing stock, so valued, as the value of the opening stock for
computing the profits u/s.l45 r.w.s. 145A for the following year.
The difference in the profit so reflected, and that per the statement drawn by excluding
excise (Ann. 2-A), restating the closing stock also, thus, at Rs.25.56 lakhs, or at a profit
of Rs.5.53 lakhs, would yield the profit or loss, as the case may be, embedded in the UCC
A/c; its opening balance being nil. The assessee may pass an accounting entry in its
accounts in its respect, which would have the effect of stating the said account at the
correct amount of current asset or current liability, as the case may be, reflected by it.
d) We may, before closing, clarify that the exercise of drawing the statement in terms
of s. 145A could have the effect of either increasing or decreasing the returned profit of
Rs.8,92,850/--, i.e., depending on the excise component in the finished and semi-finished
goods. The cenvat credit account gets, thus, effectively incorporated in the profit and loss
account, depressing the profit by the outstanding debit balance therein, while increasing it
with the excise component in the closing stock. We decide accordingly.
5.1 The next issue in this appeal, i.e., per the ground nos. 3 & 4, is the disallowance of
Rs.l8,655/-, out of the telephone expenses of Rs.37,3l1/-, on account of personal
component therein. The disallowance by the A0. at a good percentage of 50% was for
the reason that the expenditure was in respect of telephone lines installed at the
residences of the partners, and its claim that the said expenditure is largely on long
distance calls made outside regular business hours could not be substantiated by the
assessee.
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15 i' ' rm No.27]/Mum/2012 (AY. 2007-03)
Here-cules Pigment Industry vs. ITO '
5.2 In appeal, it was also argued that the telephone expenses also suffered Fringe
Benefit Tax (FBT) u/s. 115WB(2) of the Act. As such, taking into consideration the
clarification issued by the CBDT vide its Circular No. 8 of 2005 dated. 29.03.2005, no
disallowance could be made. Reference was also made to the decision by the tribunal in
the case of Hcmsraj Mathuradas vs. IT 0 (in ITA No.2397/Mum/2010, dated 16.09.2011).
The same did not find favour with the id. CIT(A). The disallowance under reference was
u/s. 37(1) in respect of use of telephone by partners for their personal purposes, while
FBT is in respect of expenses deemed to have been incurred for the benefit of the
employees. There is no correlation or interface between the two, so that one-could not be
deleted with reference to the other. The disallowance being thus confirmed, the assessee
is in second appeal.
6. Before us, the case of both the parties was much the same, i.e., as before the
authorities below. In addition, it was also argued by the 1d. AR that the disallowance
could not exceed 20%, i.e., the threshold limit of s. 1l5WC.
7. We have heard the parties, and perused the material on record. We do not, even as
observed during hearing, find much merit in the assessee's case. The total expenditure on
telephone and intemet expenses as claimed is at Rs.l.56 lakhs. The A.O., however,
effected the disallowance only in respect of the expenditure qua the telephones installed
at the residences of the partners, i.e., Rs.0.37 lakhs estimating the personal (non-
business) user thereof at 50%. These facts being not in dispute, how we wonder could the
charge of FBT, which is a different levy, and only in respect of the expenses incurred by
the assessee as an employer for the benefit of his employees or deemed to have been so
incurred, have any bearing in the matter. True, Rs.0.37 lakhs of the total expenditure of
Rs.l.56 lakhs being on telephone at the partners/s residences, the same could not be
subject to FBT. This is for the reason that the same is, on account of the manner of its
incurring, considered by the Revenue as toward personal purposes of the partners, i.e., for
non-business purposes, while the FBT could only be in respect of the expenses incurred
for the purposes of its business by the assesssee. Without doubt, there could be no
17 ITA No.27]/Mum/2012 (A.Y. 2007-08)
Herecules Pigment Industry vs. ITO
correlation or interface between the two, even as sought to be emphasized by the 1d.
CIT(A). The order u/s.1l5WE, assessing FBT, is not before us and, in any case, not a
subject matter before us. We have already indicated that we cannot possibly issue any
direction impacting the said assessment in the present proceedings. As regards the
decision in the case of Hansraj Mathuradas (supra), there is no doubt that the
presumption under law, i.e., in case of charge of FBT, would be that the relevant
expenditure is for business purposes. Howsoever, where it is found as a fact that it is not
so, and a disallowance effected only on the ground of it's being personal or non-business
in nature, the said disallowance would not stand to be impacted by the mere fact of
charge of FBT. It is, on the contrary, the assessment of FBT, which is not a matter before
us, with even the assessment order being not on record, which may need to be modified
so as to bring the two assessments in consistence with each other. The impugned
disallowance, being on facts, would not be impacted thereby. Further, no claim qua the
extent of disallowance stands made before us. Under these circumstances, we confirm the
same.
8. In the result, the assessee's appeal is partly allowed for statistical purposes.
Order pronounced on 'this 29"' day of May, 2013
Sd/- Sd/-
(B. MITTAL) (SANJAY ARORA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
MUMBAI, Dated: 29.05.2013
Emil: Annexures 1-A, 1-B and '2', which form an integral part of this order.
Copy forwarded to
l. The Appellant FIT FOR PUBLICATION IN ITD
2. The Respondent
3. The C.I.T. concerned Sd/- Sd/-
4. CIT (A)
5. The DR, H- Bench, ITAT, Mumbai (J. M.) (A.M.)
6 Guard File '
BY ORDER
ASSISTANT REGISTRAR ITAT, Mumbai Benches, Mumbai Roshani . W 'F. .......~»f:?r_-iT£F5w§'i.EE-__:_:--_;; W . \_ . , . .
18 ITA No.271/ Mum/ 201 2 (A.Y. 2007-08) 'Herecules Pigment Industry vs. ITO ANNEXURE 1--A
1. Dr. Profit & Loss Account (Gross Basis) Cr. Purchases Qty. Rate Excise Rate Cost of Sales Qty. Rate Excise Rate Cost of incl. Purchase incl. Sales taxes taxes _ Raw 125 100 10 110 13,750 Finished 85 120 12 132 11,220 Materials G0OdS Gross 1,870 Closing 40 100 10 110 4,400 Profit Stock Total 125 15.620 Total 125 15.620 CENVAT availed (through purchases, 125 @ Rs.10) 1,250 Less: CENVAT Utilised (on sales, 85 @ Rs. 12) 1,020 Balance CENVAT c/f. B_0
2. Dr. Cr.
Particulars Amount Particulars Amount (in Rs.) (in Rs.) To excise payable 85 units @ Rs.2/- 170 By Gross Profit b/d 1870 each (*) To Net Profit 1700 1870 1870 (*) the corresponding credit against excise duty payable would be to the UCC account. Deduction from taxable income in its respect, though, would be subject to actual payment in view of s. 43B.
3. Dr. Profit & Loss Account (Net Basis) Cr. Purchases Qty. Rate Rate Cost of Sales Qty. Rate Rate Cost of incl. Purchase incl. Sales taxes taxes Raw Materials 125 - 12,500 Finished 85 120 - 10,200 Goods ' _ Gross Profit 1,700 Closing 40 100 4,000 Stock Total 125 14,200 125 14,200 Dr. _ Cr.
Particulars Amount Particulars Amount (in Rs.) _(in Rs.) To provision against excise payable on 170 By Gross Profit b/d 1700 value addition (#) To Net Profit 1700 By excess recovery of excise (@) 170 1,870 1.870 (@) the corresponding debit would be to the UCC account.
(*0 Deduction from taxable income in its respect, though, would be subject to actual payment in view of s. 43B.
19 ITA No.27]/Mum/2012 (A.Y. 2007-08}Herecules Pigment Industry vs. ITO ANNEXURE 1-B
1. Dr. Profit & Loss Account (Gross Basis) Cr.
Purchases Qty. Rate Excise Rate Cost of Sales Qty. Rate Excise Rate Cost of incl. Purchase ' incl. Sales taxes ' taxes Raw 125 100 10 110 13,750 Finished 125 120 9.6 129.6 16,200 Materials Goods Gross 2,450 Closing -
Profit Stock Total 125 16,200 Total 125 16,200 CENVAT availed (through purchases, 125 @ Rs. 10) 1,250 Less: CENVAT Utilised (on sales, 125 @ Rs. 9/60) 1,200 Balance CENVAT c/f. §_()_
2. § Dr. Profit & Loss Account (Net Basis) Cr. Purchases Qty. Rate Rate Cost of Sales Qty. Rate Rate Cost of incl. Purchase incl. Sales taxes taxes Raw Materials 125 100 0 12,500 Finished 125 120 0 15,000 Goods Gross Profit 2,500 Closing - - Stock 15.000 15.000 Dr. Cr.
Particulars Amount Particulars Amount (in Rs.) (in Rs.) To CENVAT credit written 011' C') 50 By Gross Profit b/d 2500 To Net Profit 2450 ' _2_§0__Q_ _ _ 2500 C') The outstanding balance of Rs.50/- in the UCC A/c, i.e., debit at Rs.l,250/-- (through purchases), being 125 units @ of Rs.10/-, and credit at Rs.l,200/- (through sales), being 125 units @ Rs.9.60 per Unit, is written off to the profit and loss account.
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