Section 145A of the Income Tax Act

Section 145A shall be substituted for the existing section 145A by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2010:

Method of accounting in certain cases.

145A. Notwithstanding anything to the contrary contained in section 145,—

(a)  the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be—

(i)  in accordance with the method of accounting regularly employed by the assessee; and

(ii)  further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

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

(b)  interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

Brief note on valuation of closing stock per the Accounting Standard (AS-2) vis-à-vis Sec 145A of the Income Tax Act

Accounting treatment of central excise duty is mainly related to accounting in respect of CENVAT. Accounting for CENVAT needs following consideration (a) since credit is available of excise duty paid while purchasing inputs, duty paid on inputs purchased is not an expense but an asset. (b) CENVAT is available instantly on receipt of inputs and CENVAT credit may be utilized even before inputs on which CENVAT is availed are actually used in production. (c) Valuation of stock of finished goods also needs consideration.

Accounting Treatment of Inputs purchased

· When inputs are purchased, the Purchase price (net of Excise) is debited to Purchase (expense A/c) and excise paid on inputs is be debited to ‘CENVAT Credit Receivable Inputs (asset a/c). Total Invoice amount (i.e. net purchase price plus excise) is credited to Supplier’s Account (as the supplier has paid Excise and his Invoice is inclusive of excise paid by him on the material supplied)

· On clearance/dispatch of dutiable final products, excise duty is paid and is debited in Input CENVAT Credit Account (earlier RG23A Part II). The accounting entry is, ‘Excise Duty paid on Final Products’ account is debited and CENVAT Credit Receivable (Input) account’ is credited.

Accounting of Duty paid on Capital Goods purchased

· It has to be remembered that if CENVAT credit on capital goods is availed, depreciation under section 32 of Income Tax is not available on the duty portion. Moreover, CENVAT Credit on capital goods is available in two stages i.e. 50% in current year and balance 50% in subsequent year.

· ‘Capital Goods’ for CENVAT purposes include tools, spare parts etc., which are treated as consumables and normally not capitalized in financial accounts. Hence, question of claiming depreciation on these does not arise. When credit is availed of duty paid on machinery or equipment which is capitalized, it will be necessary to reduce cost of asset by the amount of duty claimed as credit.

· When the enterprise avails CENVAT credit, CENVAT credit should be reduced from purchase cost. The entry is: Debit Capital Goods account net price excluding excise duty, Debit excise duty element to CENVAT Credit Receivable (Capital Goods) Account with 50% duty and CENVAT Credit on capital goods deferred account balance 50%. Credit Supplier’s account with full amount (i.e. cost of capital goods inclusive of excise duty paid on such capital goods). The subsequent entries will be similar to Method I for CENVAT on inputs. Thus, when CENVAT credit is utilized, Excise Duty paid on final products is debited and ‘CENVAT Credit Receivable (Capital Goods) Account' is credited. Unadjusted balance standing in the CENVAT credit Receivable (Capital Goods) Account is shown on assets side under the head ‘Advances’.

· Naturally, depreciation will not be charged on the excise duty portion which stands excluded from the value of machinery which when capitalized.

· Inventory of spare parts, tools etc. is valued net of Specified Duty, i.e. duty paid of tools, spare parts; capital goods etc. will not form part of their cost.

Conflict between income tax provisions & Accounting standards - As per section 145A of Income Tax Act, stock should be valued including excise duty. However, as per Accounting Standard of ICAI (AS-2), inventory of inputs should be valued exclusive of excise duty, if CENVAT credit of input is availed. In case of capital goods, depreciation cannot be claimed on excise portion of value of capital goods.

As per the amended section 145A (effective from 1-4-1999) of Income Tax Act:

Raw material stock valuation should be inclusive of any Tax, Duty, Cess or fee actually paid by assessee to bring the goods to the place of its location and condition as on date of valuation, even if such tax or duty is refundable. Thus, excise duty paid on inputs will have to be added while valuing stock, even if CENVAT credit is availed of such duty paid. In respect of finished stock, the excise duty payable is added to the Finish stock valuation and simultaneously a provision of such excise duty payable on finish stock is created by routing the same through the excise duty expense a/c.

However, as per revised Accounting Standard AS-2 … mandatory w.e.f., 1ST April, 1999 à inventory cost should comprise of all cost of purchases, cost of conversion and other costs incurred in bringing the inventories to the present location and condition. Cost of purchase consists of 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 such acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase. - . - Cost of purchases should be exclusive of duties which are recoverable from the taxing authorities. (e.g. CENVAT).

Thus, for purposes of Income Tax, inventory is required to be valued inclusive of excise duty, even if assessee is entitled to get CENVAT credit of duty. However, for purposes of balance sheet as per Companies Act, inventory should be valued exclusive of excise duty, if assessee is entitled to get CENVAT credit of duty paid on inputs.

In view of this conflict, ICAI has advised that in the company accounts, inventory of inputs should be valued net of CENVAT benefit. However, for purposes of income tax section 145A, computation should be made outside the books by adding the excise duty paid on inputs with the purchase cost of the inputs, even if CENVAT benefit is availed of such duty paid. However, the excise duty paid on inputs being a rebate/benefit in the form of CENVAT Credit, but grossed-up with the cost of purchase, a set-off of the CENVAT Credit so availed (to the extent of inputs consumed in the production)needs to be made against materials consumed to arrive at the cost of goods sold/consumed in the production.

Accounting treatment of unpaid Excise duty on final products - Duty liability of excise is fastened as soon as goods are manufactured, though duty is payable at the time of removal. W.e.f., 1-4-1999, the estimated duty liability on finished goods in stock is provided in books of account. Thus, excise duty provided on finished goods is included in valuation of stock of finished goods.

Valuation of inventory of WIP and final products - As per AS-2, while valuing inventories of WIP and final products, the value of inputs ought to be net of duty on inputs, i.e. the purchase cost is reduced by CENVAT credit, if CENVAT credit is available. If CENVAT credit is not available, the material cost should be inclusive of excise duty. The inputs in progress (i.e., in WIP) are the intermediate goods for use in manufacture of final products. Excise exemption notification no. 67/95-CE dated: 16.3.1995 [viz: CAPTIVE CONSUMPTION (GOODS USED WITHIN FACTORY OF PRODUCTION)] states that intermediate products manufactured in factory is exempt from duty, if it is consumed captively for manufacture of dutiable final products. The intermediate products (i.e. WIP) are thus exempt from duty and no provision of excise duty required on the same.

Excise duty is manufacturing expense - Excise duty paid on clearance/sale of dutiable final products is a manufacturing expense and is debited to the P/L account.

Let us take an example to illustrate & understand in principle the accounting per AS-2 & Sec 145A

· Opening stock = ‘nil’

· Purchase à 100 units of raw materials are purchased at Rs.10/- per unit plus Rs.2/- for excise duty, aggregating to Rs.12/-.

· All 100 units of raw material are consumed in manufacture of final dutiable products.

· The manufactured final products (100 units) are sold in the year at a price of Rs.30/- per unit (including excise duty at Rs.6/- per unit)

· CENVAT Credit is available on the raw materials purchased and can be set-off against the excise duty payable of final product.

· Conversion costs (i.e., manufacturing overheads) incurred = Rs.200/-

That since the excise duty paid on inputs being a rebate/benefit in the form of CENVAT Credit, is grossed-up with the cost of purchase, a set-off of the CENVAT Credit so availed (to the extent of inputs consumed in the production) needs to be made against materials consumed to arrive at the cost of goods sold/consumed in the production.

The accounting (net of ED … per AS-2) and (gross of ED … per Sec 145A) is as under;

RESULT: Profit per AS-2 / Sec 145A = revenue neutral

With my kind regards & JSK,  

Manoj Pala SIEMENS LTD, Kharagpur

Fax: 03222 233411