Customer Care No.

91-1145562222

Valuation of closing stock

under ICDS

www.taxmann.com

2
Introduction
1.If major difference between ICDS-2 and AS-2 can be
defined in one sentence, it can be said that unlike AS-2,
duties and taxes subsequently recoverable from taxing
authorities have to be included in cost of purchase under
ICDS. Hence, ICDS has changed the definition of cost of
purchase. ICDS has defined "cost of purchase" as
thepurchase price including duties and taxes, freight
inwards and other expenditures directly attributable
to the acquisition. It also defines that trade discounts,
rebates and similar items shall be deducted in determining
the cost of purchase. Hence, amount of CENVAT credit, VAT
receivable and service tax receivable have to be included in
the cost of purchase. This provision under ICDS is in line with
provisions of section 145A of the Income-tax Act, as section
145A stipulates thatcost of purchase of the goods
includes any tax, duty, cessor fee (by whatever name
called) actually paid or incurred by the assessee to
Customer
Caregoods
No. 91-11bring the
to the place of their location or

www.taxmann.com

3
But AS-2 differs with the provisions of ICDS, as it excludes duties and taxes recoverable from
taxing authorities from the cost of purchase. Due to implementation of ICDS amounts of
CENVAT and VAT receivable are added to the value of closing stock, hence, profit in the first
year will be higher. But in the subsequent years, profit will be correspondingly lower. Hence,
net effect on profit will be Nil. As this provision is tax neutral, more emphasis should be given
on proper and effective disclosure in financial statement. Even if this provision is followed
properly, but disclosure is not made in a proper way, litigations may arise. Some court rulings
related to section 145A which are also relevant to the provisions of ICDS-2, are discussed in
this article to understand proper implication of this provision.
2.Udaykumar Chhabildas Patelv.Jt. CIT[IT Appeal No. 3304 (Ahd.) of 2010]
2.1Facts of the case:The assessee was running the business of manufacturing of
machinery. Assessee had shown closing balance of MODVAT CENVAT credit at Rs. 748,755 in
the balance sheet as CENVAT receivable. The assessee had also shown service tax receivable
Rs. 109,213 and input VAT receivable Rs.973,031. The AO was of the opinion that assessee
had not included above unutilized balances of the taxes in the value of closing stock. Hence,
he had made addition of Rs. 1,830,999 under section. 145A. Order of the AO was affirmed by
the CIT(A). Assessee contended that he had not claimed any deduction of excise receivable,
service tax receivable and VAT included in the cost of raw material and, therefore, the
Customer
No. 91-11questionCare
of including
the same for the purpose of section 145A did not arise. www.taxmann.com

4
Assessee also contended that unutilized amount of CENVAT/service tax shown at asset side of
the balance sheet included amount paid as advance to excise department and it was utilized in
payment of excise duty in next year. Also, input VAT receivable was utilized and adjusted
against liabilities due on the sale of next year. The closing stock included raw material, work-inprogress and unpacked machines and did not include finished goods. Hence, excise duty, input
VAT, was not required to be included in closing stock valuation. ITAT, Ahmedabad held
thatunless and until the amount of duty was not entered on one side as an item of
cost, it could not be taken as a component of the value of closing stock on the other
side.The true purpose of crediting the value of unsold stock is to balance the cost of goods
entered into other side of the account. To ascertain correct position of law, it was necessary to
ascertain whether assessee had adopted "exclusive method" or "inclusive method." Hence, to
ascertain the method of accounting adopted by assessee in respect of the duties and taxes
mentioned above, the matter was remanded back to the AO.
2.2Analysis of the judgment:Section 145A of the Act stipulates that "valuation of
purchase and sale of goods and inventory for the purpose of determining the
income chargeable under the head "Profits and gains of business or profession"
shall be in accordance with the method of accounting regularly employed by the
assessee and 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
Customer
Care
No.
91-11www.taxmann.com
goods to
the
place
of their location and condition as on date of valuation."
It means

5
If method of accounting is not as per section 145A, only adjustment should be made in
computation of income to comply with the requirements of section145A. This section is
consistent with the accepted accounting principles of valuation of inventories. There are two
method of valuation of inventory, i.e., "exclusive method" and "inclusive method". Section 145A
and ICDS-2 mandate only "inclusive method". As per this method, duties and taxes should be
included in the opening stock, purchase and closing stock. No separate account should be
prepared for such duties and taxes, but profit and loss account should be prepared in such a way
that the CENVAT credit account is effectively incorporated in the profit and loss account and
correct profit should be determined. AS-2 prescribes exclusive method, where purchases are
debited net off CENVAT and closing stock of raw material, WIP and finished goods are valued net
off CENVAT and a separate account, i.e., "CENVAT credit receivable account" is maintained for
recording payment and utilization of excise duty. Since the cost of purchase does not include
CENVAT, closing stock is valued net off CENVAT. Some court rulings allow both methods,
provided they lead to same result and pass test under section 145A. But one method for
valuation of excise duty paid when raw material is purchased and another method at the time of
valuation of unconsumed raw material cannot be adopted. In the case mentioned above,
assessee had contended that he had not claimed any deduction of excise receivable, service tax
receivable and VAT included in the cost of raw material and, therefore, the question of including
the same for the purpose of section 145A did not arise. In case ofAsstt. CITv.Narmada
Chematur
Petrochemicals
Ltd.[2010] 327 ITR 369/194 Taxman 103 (Guj.),
the
Hon'ble
Customer
Care
No.
91-11www.taxmann.com
jurisdictional High Court held that unless and until the amount of duty is not entered on one side

To read more, please click here

Customer Care No. 91-11-

www.taxmann.com