Query No. 38

Subject:           

Accounting  treatment  of  MODVAT  on  inputs  and  capital goods.1

A. Facts of the Case

1. A company is allowed MODVAT credit on inputs and capital goods as  per  the  Central  Excise  Rules.  MODVAT  credit  allowed  as  per  the Rules on inputs and capital goods is recorded in the respective MODVAT registers.  The  following  entry  is  passed  in  the  books  of  account  for MODVAT claimed on inputs:

Material A/c     Dr.

Store MODVAT A/c   Dr .

To Party’s A/c

(Being the adjustment of party’s bill in respect of purchase)

A similar entry is passed for MODVAT claimed on capital goods. Hence, the material and capital goods are accounted for net of MODVAT credit.

2. At the time of the deposit of excise duty into bank, the following entry is passed:

Excise duty A/c            Dr.

To Bank/Cash

(Being excise duty deposited into bank)

3. At the time of booking of sale, the following entry is passed:

Customer’s A/c      Dr.

To Sales A/c

To Excise Duty Received A/c

(Being booking of sales)

4. At  the  time  the  goods  are  despatched,  excise  duty  payable  on clearance  of  final  products  is  duly  adjusted  from  PLA  register  and/or from MODVAT register, as  the case  may be.  In the  final accounts,  the balance in the Store MODVAT A/c which represents un-utilised portion of  MODVAT,  is  shown  in  the  balance  sheet  under  the  head  “Current Assets”. The rest of the amount of Store MODVAT A/c is transferred to Excise Duty A/c, by passing the following entry:

Excise Duty Paid A/c    Dr.

To Store MODVAT A/c

(Being adjustment of MODVAT credit to Excise Duty paid A/c)

5. As per the above, the Excise Duty Paid A/c which appears on the debit side of the statement of profit and loss shows duty paid on clearance and  Excise  Duty  Received A/c  is  merged  with  Sales A/c  on  the  credit side of the statement of profit and loss.

6. The above accounting procedure has been objected to by the excise authorities  on  the  ground  that  the  procedure  of  adjusting  the  Store MODVAT A/c to Excise Duty Paid A/c has contravened Rule 57R(8) of the Central Excise Rules.

7. Rule 57R(8) of Central Excise Rules, 1944, which was valid upto 30.6.2000, states as below:

“No credit of the specified duty paid on the capital goods shall be allowed, if the manufacturer, claims depreciation under section 32 of the Income tax Act, 1961 (43 of 1961), or as revenue expenditure under any other provision of the said Income- tax Act, in respect of that part of the value of capital goods which represents the amount of specified duty on such capital goods.”

As per the querist, the term ‘capital goods’ as contained in the Central Excise  Rules  includes  fixed  assets  as  well  as  consumables.  The  first portion  of  the  above  provision  refers  to  fixed  assets  and  the  second portion  refers  to  consumable  goods.  Therefore,  the  assets  as  well  as consumables are accounted for net of MODVAT.

B. Queries

8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

                (a)        Whether the accounting system followed by the company is in agreement with Accounting Standards/Guidance Notes                              of the Institute of Chartered Accountants of India and with the Income- tax Act, 1961.

               (b)        Whether  the  transfer of  Store  MODVAT A/c to  Excise  Duty Paid A/c contravenes Rule 57R(8) of the Central                                     Excise Rules,1944.

              (c)        If the accounting system followed by the company is not correct, please advise as to the correct accounting system                           which fulfils the requirements of all the related Acts.

C. Points considered by the Committee

9. The  Committee  notes  paragraph  24  of  the  Guidance  Note  on Accounting Treatment of MODVAT/CENVAT issued by the Institute of Chartered Accountants of India. The relevant portion of this paragraph is reproduced below:

“..... the specified duty on capital goods should be debited to separate account, e.g., MODVAT Credit Receivable (Capital Goods) Account. On  actual  utilisation,  the  account  will  be  adjusted  against  excise duty on final products. Accordingly, the purchase cost of the capital goods  would  be  net  of  the  specified  duty  on  capital  goods.  The unadjusted  balance  standing  in  the  MODVAT  Credit  Receivable (Capital Goods) Account, if any, should be shown on the assets side under the head `advances’.”

10. From the above, the Committee notes that MODVAT credit on capital goods should be debited to a separate account. The Committee is of the view that the company’s accounting practice of debiting the MODVAT credit  on  inputs  and  capital  goods  to  a  single  account,  namely,  Store MODVAT A/c, is not in accordance with the Institute’s Guidance Note.

11. The Committee further notes that the liability for excise duty arises as soon as the manufacture of goods is completed, and that it is necessary to  create  provision  for  unpaid  excise  duty  on  closing  inventory.  The Committee is of the view that it is not clear from the facts of the case as to  whether  the  liability  for  unpaid  excise  duty  on  closing  inventory  is provided for in the books of account or not.

12. The Committee notes that it appears from the facts of the case, that as  per  the  excise  authorities,  according  to  Rule  57R(8)  of  the  Central Excise Rules, 1944, the MODVAT credit availed against the capital goods cannot be claimed as revenue expenditure in the statement of profit and loss for income-tax purposes.

13. The Committee notes Rule 57R(8) reproduced in paragraph 7 above. The Committee observes that the term ‘capital goods’ contained in Rule 57R(8)  includes  fixed  assets  as  well  as  consumables.  The  Committee further observes that as per Rule 57R(8), where the ‘capital goods’ are in the nature of ‘fixed assets’ and depreciation is allowable thereon under the Income-tax Act, no depreciation should be claimed in respect of the amounts  claimed as  MODVAT credit  on the  fixed  assets.  In respect  of ‘capital goods’ of the nature of ‘consumables’ which are eligible to be debited to the statement of profit and loss as a revenue expenditure, the amount to the extent of MODVAT credit claimed on such consumables should not be debited to the profit and loss account as revenue expenditure. This would imply that the purchase cost of such consumables chargeable to the statement of profit and loss should be net of the MODVAT credit.

14. From the above, the Committee is of the view that the provisions of Rule 57R(8) are not contravened due to adjustment of Store MODVAT A/c  to  Excise  Duty  Paid A/c.  This  is  so  because  the  MODVAT  credit availed against the capital goods is not debited to the statement of profit and loss; rather it is utilised towards payment of excise duty due on final goods. The amount that is debited to the statement of profit and loss is the total excise duty liability on the manufacture of the final goods.

D. Opinion

15.  On the basis of the above, the Committee is of the following opinion on the issues raised paragraph 8:

              (a)        The accounting practice followed by the querist is in accordance with Accounting Standards and Guidance Notes of the                           Institute except  for the  differences specified  in paragraphs  10 and  11 above.

              (b)        The  transfer  of  amount  from Store  MODVAT A/c  to  Excise Duty Paid A/c is not in contravention of Rule 57R(8)                            of the Central Excise Rules, 1944.

              (c)        Refer point (a) above.

1Opinion finalised by the Committee on 28.9.2001.