1.5 Query: Accounting for excise duty.
1. According to the querist, from a reading of the revised Guidance Note on Accounting Treatment for Excise Duty, issued by the Institute of Chartered Accountants of India, in December, 1988, it appears that the liability for excise duty arises (i.e., accrues) at the point of time at which the manufacture is complete.
2. Section 209(3) of the Companies Act, 1956, as substituted by the Companies (Amendment) Act, 1988, has been reproduced by the querist as follows:
“(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept in respect to the matters specified therein-
(a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the Company or branch office, as the case may be, and to explain its transactions; and
(b) if such books are not kept on accrual basis and according to the double entry system of account.” (emphasis supplied by the querist)
3. As per the querist, on the basis of the view expressed in the Guidance Note that the liability for excise duty accrues at the point of time at which manufacture is complete, it appears that unless the liability for excise duty on finished goods lying in factories and undespatched at the year end, is shown by a company as a charge in the profit and loss account (with corresponding liability disclosed under the heading ‘Current Liabilities & Provisions’ in the balance sheet), there will be non-compliance of the provisions of Section 209(3)(b) of the Companies Act, 1956.
4. However, the querist notes that paragraph 37 of the aforesaid Guidance Note, states:
“In case the entity has not made provision for the unpaid excise duty on goods lying in the factory premises or the bonded warehouse as explained in paragraph 33, the auditor should qualify his report, if the liability is not quantified on an estimated basis and disclosed by way of a note in the financial statements.” (emphasis supplied by the querist)
5. The querist has made the observation that in respect of the requirements of Section 209(3) of the Companies Act, 1956, and paragraph 37 of the Guidance Note on Accounting Treatment for Excise Duty, different practices are being adopted by the companies as well as the auditors. In support of his observation, the querist has sent extracts from the published accounts of a few companies and the reports issued thereon by the auditors of such companies for the perusal of the Expert Advisory Committee.
6. The opinion of the Expert Advisory Committee has been sought with regard to the following:
(a) Bearing in mind the wordings of section 209(3)(b) of the Companies Act, 1956, an entity, being a company as defined in the Companies Act, 1956, which has not provided for the unpaid excise duty on goods lying in the factory premises or the bonded warehouse as explained in paragraph 33, of the aforesaid Guidance Note by way of a charge to the profit and loss account, merely because it has quantified the liability on estimated basis and disclosed this by way of a note in the accounts, can it be said to have complied with the provisions of section 209(3)(b) of the Companies Act, 1956?
(b) In view of what has been stated in para 37 of the Guidance Note referred above, where the unpaid liability for excise duty has not been provided for in the accounts of the company but quantified on an estimated basis and disclosed by way of a note in the financial statements, whether the auditor need not make any reference to this in his report. If not, how this matter should be dealt with in the auditors’ report. Opinion August 17, 1992
The Committee is of the opinion that-
(a) in respect of finished goods lying in factories and undespatched at the year end, 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; and
(b) where a provision for excise duty has not been made but the disclosure has been made as per (a) above, the auditor should not qualify his report. ___________________________ |