IT: Where tax neutrality of accounting treatment was claimed, same has to be established with reference to accounts being maintained
IT: Where disallowance was effected on ground of personal nature, same could not be deleted on reference of charge of Fringe Benefit Tax
■■■
[2013] 35 taxmann.com 650 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'H'
Hercules Pigment Industry
v.
Income-tax Officer, 20(1) -3*
B.R. MITTAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL NO. 271 (MUM.) OF 2012
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
MAY 29, 2013
I. Section 145A, read with section 43B, of the Income-tax Act, 1961 - Method of accounting - In certain cases [Cenvat credit] - Assessment year 2007-08 - Assessing Officer made addition of outstanding balance in unutilized Cenvat credit account - Commissioner (Appeals) found that same represented excise component of goods in stock and sustained addition -Assessee submitted that it followed inclusive method of accounting, following mandate of section 145A, which is tax neutral - Whether provision was tax neutral was no argument for not observing same, as tax neutrality would have to be established with reference to accounts as being maintained - Held, yes - Whether only booking of profit against excess recovery of excise through sales would brought outstanding balance in UCC account at par with excise components in closing inventory - Held, yes - Whether provision became tax neutral only when duty was paid on value addition under section 43B - Held, yes [Para 4(b)] [Matter remanded]
II. Section 37(1), read with section 115WB, of the Income-tax Act, 1961 - Business expenditure - Allowability of [Personal expenses] - Assessment year 2007-08 - Assessing Officer disallowed telephone expenses on account of personal use - Assessee claimed that telephone expenses also suffered Fringe Benefit Tax - Whether since FBT could only be in respect of expenses incurred for business purpose, it could not be co-related with expenses disallowed on ground of personal use - Held, yes - Whether where disallowance was effected on ground of non-business or personal nature, said disallowance could not be deleted on reference of charge of FBT - Held, yes [Para 7] [In favour of revenue]
FACTS-I
| ■ | The assessee had filed its return of income admitting profit of Rs. 8,92,850. | |
| ■ | The Assessing Officer had added the amount of Rs. 10,39,886 outstanding in the unutilized Cenvat Credit (UCC) account under section 145A. | |
| ■ | On appeal, the Commissioner (Appeals) found that the entire unutilized cenvat credit of Rs. 10,39,886 pertains to current year and the same represents the excise duty on the raw material semi finished goods and finished goods in stock. He directed the adjustment of Rs. 3,39,777 being excise duty stands included in closing stock and sustained the addition for the balance of Rs. 7 lakhs. | |
| ■ | On second appeal, the assessee submitted that it follows inclusive method of accounting, following the mandate of section 145A, which is tax neutral, so that it should not result in any enhancement or change in income. |
HELD - I
| ■ | The assessee's accounts, cannot, 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 semi-finished goods. Only adopting all the figures at the correct values would lead to the correct profit in terms of section 145A, and the balance in the UCC account (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 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 account, are being prepared, is thus not in consistence with the accounting principles. | |
| ■ | It is only the drawing of the operating statement in accordance with section 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 unutilized 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 account 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 account, 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 realized on sales is met against excise paid on fresh purchases under the excise rules. 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 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 credit adjustment only to the extent of raw material consumed. | |
| ■ | The modvat credit in respect of unconsumed raw material 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 under section 44AB requires reporting of the unutilized credit of modvat available. The two, i.e., the accounts and the excise records, proceed independently, though are reconceivable. 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 account) at par with the excise component on the inventories would restore parity between the two. [Para 4(a)] | |
| ■ | 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, 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 duties/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 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 account 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 account at the correct value of the current assets represented by it, where the accounts are maintained on net basis, bringing the profit per the two methods at par. | |
| ■ | Thirdly,the provision becomes tax neutral only when duty is paid on value addition, else not, in view of the non obstante provision of section 43B, which has to be given effect to. 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 section 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. Asstt. CIT [IT Appeal Nos. 7260 & 7261(Mum) of 2010], dated 15-3-2013] has clarified that sections 43B and 145A, both non obstante 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 obtstante provision of section 43B, 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. [Para 4b] |
FACTS - II
| ■ | The assessee claimed telephone and internet expenses at Rs. 1.56 lakh. | |
| ■ | The Assessing Officer disallowed Rs. 18,655 in respect of expenditure of telephone installed at the residence of the partners i.e. Rs. 37,311 estimating the personal use thereof at 50 per cent. | |
| ■ | In second appeal, the assessee argued that telephone expenses were also suffered fringe benefit tax. | |
| ■ | On appeal, the commissioner (Appeals) upheld the order of the Assessing Officer. |
HELD - II
| ■ | The charge of Fringe Benefit Tax, 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 Rs. 0.37 lakhs of the total expenditure of Rs. 1.56 lakhs being on telephone at the partner/s residences, the same could not be subject to Fringe Benefit Tax. This is for the reason that the same is, on account of the manner of its incurring, considered by the revenue as towards personal purposes of the partners, i.e., for non-business purposes, while the Fringe Benefit Tax could only be in respect of the expenses incurred for the purposes of its business by the assessee. Without doubt, there could be no correlation or interfere between the two, even as sought to be emphasized by the Commissioner (Appeals) under section 115WE, assessing FBT, is not produced and, in any case, not a subject matter. As regards the decision in the case of Hansraj Mathuradas v. ITO [IT Apeal No. 2397 (Mum) of 2010, dated 16.9.2011], 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 its 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 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. [Para 7] |
CASE REVIEW - I
CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman 179 (SC) (para 3.7) and CIT v. Shri Ram Honda Power Equipment Ltd.[2012] 26 taxmann.com 331/210 Taxman 577 (SC) (para 3.7) followed.
CASES REFERRED TO
Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) (para 3.2), Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) (para 3.2),Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) (para 3.2), CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275/130 Taxman 179 (SC) (para 3.7), CIT v. Shri Ram Honda Power Equipment Ltd. [2012] 26 taxmann.com 331/210 Taxman 577 (SC) (para 3.7), Raj Petro Specialities (P.) Ltd. v. Asstt. CIT [IT Appeal Nos. 7260 & 7261(Mum) of 2010 dated, 15-3-2013] (para 4), Hansraj Mathuradas v. ITO[IT Apeal No. 2397 (Mum) of 2010, dated 16.9.2011] (para 5.2).
Mehul Shah for the Appellant. G.S. Bare for the Respondent.
ORDER
Sanjay Arora, Accountant Member - 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/-.
2.1 Opening the arguments for and on behalf of the assessee, it was pleaded by the Id. AR, its counsel, that the assessee has valued its closing stock inclusive of all taxes. The assessee follows inclusive method of accounting, following the mandate of section 145A, 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 Id. CIT(A) has allowed it relief to that extent, for which he would refer to pgs.11 & 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 Id. 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 a/c 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 Rs.230/-, i.e., the difference in the duty paid (Rs. 1,250/- = 125 x 10), and that recovered (Rs. 1,020/- = 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 further 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 further 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 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.25.56.246/- respectively (PB pg. 11 & 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 Id. DR, on the other hand, 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 Id. 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 Id. 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. 10.39,886/-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 inventories, as mandated by the non obstanteprovision 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 Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC)holds the field to date, and continues to be a guide post in the matter. Likewise, 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-neutral, 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 Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray & Co. (P.) Ltd. v. CIT [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. Thirdly, 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.l45A, 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 Annexure-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 a/c), 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 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 aforestated 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, if 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 assessee, whose accounts in fact reflect a profit of Rs. 5,53,073/- (Part B of Ann.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 assessee 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 in the 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 (Annexes 2A), 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 (Annexes 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 & 1B), 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 the time the duty paid (on excisable inputs) is not recovered or adjusted in full, as Rs. 1250/- in the cited example (Ann. 1-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 Rs.2 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. 1A), 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 aforesaid. In fact, the difference between the profit disclosed by the assessee's accounts and that per the statement drawn u/s.145A, would reveal the extent of 'profit' or 'loss' that the assessee has made or suffered, 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 assessee 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.145A, 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 liability against excise on value addition (or the excess recovery aforesaid), reducing the positive balance in PLA (UCC a/c) 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-discharged 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 A/c. To demonstrate (taking the figures of Ex.1 at Annexure 1-A), an accounting entry of Rs.170/-, 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.1,870/-. 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.l45A), 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 assessee (refer Ann. 1-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 Rs. 1700/-. 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 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 275/130 Taxman 179 (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. [2012] 26 taxmann.com 331/210 Taxman 577 (SC), again considered suo motu by us, is again to the same effect. In fact, this is precisely what we have sought to emphasize from the beginning of our discussion, clarifying 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 modvat credit (on raw material) against excise liability (on sales), 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 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 values. 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 AO 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 Petro 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 lndo Nippon Chemicals Co. Ltd. (supra) andShri Ram Honda Power Equipment Ltd. (supra), both of which though relate to the assessment years prior to the co-option of the non obstanteclause 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 semi-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.145A, 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 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. 145 A, 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 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 credit/adjustment only to the extent of raw material consumed. The modvat credit in respect of unconsumed raw material (Rs. 400/- in the example # 1/Ann. 1A) 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.145A; 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 assessee, 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 duties/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 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. Thirdly, 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, understating simultaneously the corresponding asset, to contend non-difference in operating results. The tribunal, in Raj Petro Specialities (P.) Ltd. v. Asstt. CIT [IT Appeal Nos. 7260 & 7261/(Mum)/2010 dated 15-3-2013] has clarified that ss. 43B and 145A, both non obstante 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. 43B, 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. | |
| (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: |
| ♦ | increase the value of the opening stock of FG and RMS by the amount of excise duty, if any, suffered thereon; | |
| ♦ | 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 A/c; and | |
| ♦ | carry forward the closing stock, so valued, as the value of the opening stock for computing the profits u/s.145 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.18,655/-, out of the telephone expenses of Rs.37,311/-, on account of personal component therein. The disallowance by the A.O, 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.
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 29.08.2005, no disallowance could be made. Reference was also made to the decision by the tribunal in the case of Hansraj Mathuradas v. ITO [in IT Apeal No. 2397 (Mum) of 2010, dated 16.9.2011]. 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 Id. AR that the disallowance could not exceed 20%, i.e., the threshold limit of s. 115WC.
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 internet expenses as claimed is at Rs.1.56 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.1.56 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 assessee. Without doubt, there could be no correlation or interface between the two, even as sought to be emphasized by the Id. CIT(A). The order u/s.115WE, 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.
Regards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment