The method of valuation of excise duty-paid raw material and the treatment of MODVAT credit as income for taxation purposes must be consistent with accepted principles of accountancy and the cost for excisable product should be reckoned exclusive of the MODVAT credit.

ORDER

1. In all these appeals, the pivotal issue involved is: is it permissible for the assessing officer under the Income Tax Act to adopt different methods of valuation of excise duty-paid raw material when purchased and the unconsumed raw material on hand at the end of the year?

2. The assessees are manufacturing units liable to excise duty. Under the MODVAT Scheme, they get credit for the excise duty already paid on the raw materials purchased by them and utilized in manufacture of excisable goods. When they manufacture the goods and sell them, the proportionate part of the MODVAT credit is set off against their excise duty liability. In each of these cases, the assessing officer took the view that the MODVAT credit that is available should be treated as an income or an advantage in the nature of a income, and, therefore, added back the said amount to the income of each of these assessees. The Commissioner of Income Tax in some of the cases agreed with the view of the assessing officer, and in some cases differed. However, when the matter came to the Tribunal, the Tribunal uniformly took the view that the MODVAT credit could not be added back to the income of the assessee.

3. Upon appeal to the High Court under Section 260-A of the Act, the High Court addressed itself to the issue as to whether the value of the closing stock of the duty-paid inputs, work-in-progress and finished goods must necessarily include the element of MODVAT credit available. The High Court took the view that unless the assessing officer acted under circumstances indicated in Section 145 of the Act, the assessing officer is bound to adopt the method of computation of income regularly employed by the assessee. However, if he comes to the conclusion that the method of accounting employed by the assessee makes it impossible to correctly compute the income, then the assessing officer is entitled to adopt any other suitable accounting method. We may add that, whatever method the assessing officer adopts, the method has to be consistent with the accepted principles of accountancy. It is not open to the assessing officer to treat outgoings as income under Section 145 of the Act.

4. 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.

5. We are unable to accept the view of the assessing officer that merely because MODVAT credit is an irreversible credit available to the manufacturers upon purchase of duty-paid raw material, it would amount to income which is liable to be taxed under the Act.

6. Mr P.I. Pardiwala, learned counsel for the respondent in CAs Nos. 2161 and 2164-65 of 2002, points out that the assessees have all uniformly adopted the "net method", namely, valuing the raw materials at the purchase price minus the MODVAT credit. This method was also adopted by them while valuing the unconsumed raw materials and the work in progress at the end of the year. We, therefore, do not think that their method of valuation was wrong. The assessing officer adopted the "gross method" at the time of purchase, and the "net method" of valuation at the time of valuation of the on hand. By this method, which is wholly erroneous in our view, he assumed that the income, to the extent of the MODVAT credit on the unconsumed raw material, was generated, whi