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The Accounting Standard AS-2 issued by the Institute of Chartered Accountants of India(ICAI) which is a mandatory standard stipulates that 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. The costs of purchase is defined in the AS-2 which consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Thus AS-2 which is a mandatory standard requires that duties and taxes paid on purchase are to form part of cost of purchases but other than

'The High Court has taken the several illustrations in the charts placed before it by both sides and demonstrated that there are two possible methods of valuation of stock. The first would be the "gross method" , in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted , then the unconsumed stock also must necessarily be valued in the same manner. The other method is the "net method" , in which the raw material purchased is valued at the actual cost,that is the actual purchase price and , on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same.' Similarly, ICAI has also in the guidance note on tax audit u/s 44AB of the Income Tax Act,1961 at para 23.23 has demonstrated with practical examples that under both the methods i.e. 'inclusive method' also called as 'gross method' or 'exclusive method' also called as 'net method', the gross profits in trading account shall be the same . It is difficult to believe that the enterprise will make profits on taxes, duties , cess and fee payable to Government in the midst of prevailing law's concerning and with reference to doctrine of unjust enrichment. The relevant extracts from the Guidance note on Tax Audit u/s 44AB of the Income Tax Act,1961 issued by ICAI are reproduced below:

** ** ** 23.22 Section 145A of the Income-tax Act provides that the valuation of purchase and sales of goods and inventory for the purpose of computation of income from business or profession shall be made on 25 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 the basis of method of accounting regularly employed by the assessee but this shall be subject to certain adjustments. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. The adjustment provided for in this section should be made while computing the income for the purpose of preparing the return of income. Therefore, the recommended method for accounting of VAT will not result in non- compliance of section 145A of the Income-tax Act. 23.23 The adjustments envisaged by section 145A will not have any impact on the trading account of the assessee. In other words both under exclusive method of accounting and inclusive method of accounting, the gross profit in the trading account will remain the same.' The present regime of value added taxation has progressed way ahead now as compared to the year 1998 when Section 145A of the Act was introduced whereby now the Cenvat Credit Scheme is allowing across the board credit of various taxes, duties, cess, fee as per applicable laws, rules and regulation like excise duty on inputs, CVD/SAD on import of inputs, service tax on services utilized for manufacturing of finished goods, excise duty on capital goods etc. paid to be set off against liability of excise duty on finished goods manufactured by the enterprise without any one to one co-relation which is likely to be further revolutionized with the introduction of 'GST' shortly with an intent and purpose of eliminating cascading effect of taxes levied at multiple stages to reduce transaction cost and bring in transparency into the system and Apex Court has already held in the case of Eicher Motors (supra) that cenvat credit once validly taken cannot be effaced and creates an accrued right in favour of enterprise, it becomes apparent that 'exclusive method' also called as 'net method' appears certainly to be better choice in the present scenario vis-à-vis 'inclusive method' also called 'gross method' of accounting for maintaining books of account for accounting for cost of purchases which is also stipulated by ICAI because these cenvatable duties and taxes on procurement of goods and services paid by the enterprise are payments made by the enterprise with an attached and accrued right in favour of the enterprise that these cenvatable taxes so paid on raw materials, input services once validly taken cannot be effaced and shall be paid back to the enterprise by the Government by way of set off against the excise duty liability on finished goods manufactured by the enterprise and these 'cenvat credit' is more akin to 'current assets' rather than part of the cost of purchases and inventory being taxes recoverable from Government by way of adjustment against the excise duty payable on finished goods manufactured by the enterprise , more-so the result by the both the methods of accounting viz. 'gross method' or 'net method' will be same as observed by Apex Court in the judgment of Indo Nippon Chemicals Co. Ltd. (supra) and also demonstrated by ICAI in its guidance note as detailed above. The ICAI in view of divergence between AS-2 and mandatory requirements of Section 145A of the Act has stipulated in the guidance note on tax audit at para 23.22 that books of account are to be maintained by the enterprise following 'exclusive method' also called as 'net method', while due to mandatory requirement of Section 145A of the Act while preparing return of income to be filed with Revenue, it is stipulated by ICAI to follow 'inclusive method' also called as 'gross method but the gross profits under both the methods will yield same profits which in any case will not cause any prejudice to the Revenue. The provisions of Section 26 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 43B of the Act also protect the interest of Revenue that the taxes, duties, fee and cess payable as at the year end by the taxpayer shall only be allowed as deduction from the income under the Act if the same are actually paid to the credit of Government before the due date of filing of return of income as stipulated u/s 139(1) of the Act. The Excise laws, rules and regulation also requires the records to be maintained in an prescribed manner whereby cenvat credit availed and utilized can be clearly demarcated to establish that correct cenvat credit is availed and utilized by the Enterprise. The Income Tax Act,1961 cannot work in vaccum in isolation but has to progress along-with the rapid development taking place in the economy as it is a living Act and harmonization of various laws is the need of the hour to reduce complexities and bring in the ease of doing business, of course, without compromising / sacrificing with the basic intent and mandate of the Income Tax Act, 1961 to collect correct taxes as per provisions of the Act. During the last few decades, things have radically and drastically changed in the economy the way businesses are conducted as now e-commerce and international transactions have taken primacy in the economy which are now the key areas of challenge under the Income Tax Laws. It is for the Parliament to frame and amend laws to keep pace with the fast changing environment in the economy. We have seen above that Section 145A of the Act was brought into statute in 1998 when MODVAT scheme was prevalent which allowed credit / set off on specified inputs used in manufacture of excisable goods apart from capital goods but now with Cenvat Scheme in operation which allows both manufacturers and service providers to take input credits on goods and services apart from capital goods across cross sectors without any one to one correlation and the Apex Court already holding in Eicher Motors (supra) that cenvat credit once validly taken cannot be effaced and creates an accrued right in favour of the enterprise, there is a need to align Section 145A of the Act with the present regime of indirect taxation which Parliament alone in its wisdom can do to keep pace with the developments taking place in economy. As far as the first category of taxes, fees, duties, cess having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods discussed in the preceding para's above are concerned which are paid on raw materials and also during WIP stage on which no cenvat credit is allowed by the law under cenvat scheme and are absorbed in the Profit and Loss Account by the enterprise as one of the components and item of the cost, we are of the considered opinion that such taxes, duties, fees, cess (by whatever name called) having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods has to be included in the cost of purchase and valuation of the goods irrespective of whether the enterprise is following 'exclusive method' or 'inclusive method' of accounting to satisfy the mandatory requirement of Section 145A of the Act. Similarly, for valuation of finished goods manufactured by the enterprises, the excise duty on finished goods manufactured by the enterprises is to be added to value of finished goods as the excise duty on finished goods is actually paid or incurred by the taxpayer to bring the goods to the place of its location and conditions as on the date of valuation irrespective of whether the enterprise is following 'exclusive method' or 'inclusive method' of accounting.

"10. Before concluding, we may mention that, in rejoinder, the learned counsel for the department has brought to our attention section 145A of the Act. He has also invited our attention to the Subsequent Guidance Note issued by the Institute of Chartered Accountants of India on Tax Audit under section 44AB of the Act. It was contended that even the ICAI has subsequently declared that the net/exclusive method adopted by various assessees should be applied with adjustments on account of any tax, duty, cess or fee actually paid or incurred on inputs which should be added to the cost of the inputs if not so added in the books of account. He contended that in the Subsequent Guidance Note, the ICAI once again discussed the above two methods and, in the circumstances, it was urged that the net method followed by the assessee was wrong because the assessee has followed the net method without making any adjustments as required under section 145A. In this connection, we may point of that section 145A was introduced by the Finance (No. 2) Bill 1998. Originally, the Bill contemplated the proposed amendment to apply from 1-4-1986 in relation to the assessment year 1986-87 and subsequent years. However, later on, when the said Bill was enacted into law, the provision was made applicable from 1-4-1999, i.e., assessment year 1999-2000. In this appeal, we are concerned with the assessment year 1989-90. In the circumstances, we are not inclined to go into the provisions of section 145A. We are also not examining, therefore, the 32 | P a g e I.T.A. No.6789/Mum/2013 I.T.A. No.7196/Mum/2013 Subsequent Guidance Note issued by the ICAI which is based on section 145A. The Legislature clearly intended, therefore, that the computation made by the assessees prior to the assessment year 1999- 2000 should not be disturbed and, therefore, the Legislature has brought the said section 145A into force only from 1-4-1999."