1.20 Query:           

Inclusion of unpaid excise duty in the valuation of bonded stock.

1.The querist has drawn attention to the following paragraph 38(v) of the Guidance Note on Accounting Treatment for Excise Duty, issued by the Research Committee of the Institute of Chartered Accountants of India:

                        “Where the liability of excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made. If provision is not made, the liability should be quantified and that fact about the non-provision of such liability should be disclosed in the accounts.”

2.The company in question had been making provision for the unpaid liability of excised duty on bonded stock till the year 1988-89. During 1989-90, it changed its practice to non-provision of the liability but disclosing the same in the notes to the accounts. The above practice was in line with the alternative approach suggested by the Institute as above. However, during the course of audit by the C & AG, the Government Audit has made an observation and has indicated to the company that the above practice of non-provision of liability is not in accordance with the accrual accounting concept stipulated in Section 209(3)(b) of the Companies Act, 1956, which states that:

                        “Proper books of accounts shall not be deemed to be kept with respect to the matters specified if such books are not kept on accrual basis and according to the Double Entry System of accounting.”

3.In view of the opinion expressed by the C & AG, the querist has requested the Expert Advisory Committee to give its opinion on the correct methodology to be followed in valuation of closing stock in bonded warehouse in respect of the duty element.

                                                                   Opinion                                           March 19, 1991

The Committee is of the opinion that in respect of closing stock lying in bonded warehouse, provision for the unpaid excise duty should be made. However, in case the provision is not made, the liability in respect of excise duty should be quantified and the fact about the non-provision of the said liability should be disclosed in accounts.

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