1.9 Query: Whether expenditure incurred during shut down period, which is not capitalised, should form part of cost of production.
1. During the year 1990-91, a major overhaul was carried out in a company which is engaged in the production of glass bottles. This overhaul is usual in glass industry with an interval of five to six years.
2. The expenditure incurred during the year ended March 31, 1991, directly attributable to the ‘major overhaul’, i.e., rebuilding of ‘furnace’, including the indirect expenditure relatable thereto, was capitalised in the accounts for the year ended March 31, 1991.
3. The revenue expenditure incurred during the year ended March 31, 1991, which was not relatable to the ‘major overhaul’ of the glass factory, arrived at on the basis of the number of days the glass factory remained shut down due to the carrying out of the overhaul activity, was charged to the profit and loss account for the year ended March 31, 1991 in accordance with the normal practice followed by the company in respect of such expenditure.
4. The querist has sought the opinion of the Expert Advisory Committee as to whether the expenditure referred to in para 3 above should be considered as an element of “cost” in arriving at the cost of production. The excise authorities have insisted that this expenditure has to be included in the cost of ‘bottles’ for the purpose of assessing excise duty thereon.
Opinion April 25, 1996
1. The opinion of the Committee given hereafter is strictly from the accounting point of view and, therefore, may not be relevant from the excise law point of view. As per the Advisory Service Rules, the Committee is prohibited from giving opinions on matters involving legal interpretations. The Committee also does not express its opinion on whether the expenses capitalised in respect of overhaul have been properly capitalised, since the question has not been raised by the querist. The opinion of the Committee is, thus, restricted to only those expenses incurred during shut down which have not been capitalised. The Committee presumes that the decision not to capitalise these expenses was proper.
2. The Committee is of the view that cost of production of a product comprises cost of purchase of materials and other supplies and cost of conversion thereof.
3. The Committee notes form the facts of the query that keeping in view the nature of the industry, the periodic overhaul is a necessity and its timing can be predetermined and, therefore, is a normal feature of the industry. The Committee is, accordingly, of the opinion that the revenue expenses in question relating to production should be charged to actual cost of production. ___________________________ |