Query No. 35

Subject:

Whether accounting treatment related to CENVAT credit, followed consequent to changes in Central Excise Act, amounts to change in the basis of accounting for the purposes of Schedule VI to the Companies Act, 1956.1

A. Facts of the Case

1. A company, which was incorporated in 1993, owns an oil refinery. The refinery started its operations in October 2000. The company did not claim CENVAT benefit from October 2000 to March 2002 because it was enjoying 100% excise refund benefit as it was set up in a backward area. However, the Government abolished this scheme in 2002 and introduced a new scheme with reduced excise duty. In response to that, the company promptly claimed accumulated CENVAT benefit on its inputs on refinery construction by crediting the ‘fixed assets’ and debiting ‘CENVAT receivable account’.

2. As a result of the above change, the depreciation for financial year (F/Y) 2002-03 was lower by Rs. 4.75 crore as compared to the previous years. Also, accumulated depreciation provided in accounts between October 2000 and March 2002 was written back to the extent of Rs. 7.30 crore.

3. The published accounts of the company disclosed the following: Accounting Policy on CENVAT: "CENVAT on eligible revenue/capital purchase is taken on receipt of such materials."

Notes to accounts: "Eligible CENVAT credit amounting to Rs. 921.69 million, accumulated during the project period has been netted-off against the fixed assets of the company during the current financial year."

 

Footnote to Fixed Assets Schedule: "(i) Depreciation charged to the profit and loss account, Rs. 1273.73 million (Rs. 1356.29 million), which includes credit of Rs. 73 million (Rs. nil million) on account of availment of CENVAT credit, related to refinery project period procurements."

4. According to the querist, the inspector of accounts has taken a stand that Part II of Schedule VI to the Companies Act, 1956, requires that amount, if material, by which any items shown in the profit and loss account are affected by change in the basis of accounting, should be disclosed. The inspector of accounts of the company is of the opinion that this tantamounts to a change in the basis of accounting since in the past, the company never recognised CENVAT as receivable. As a result of this accounting change made by the company, its profit for the year ended 31.03.2003 was higher by an amount of Rs. 12.05 crore compared to the previous year, as the amount of depreciation charged on fixed assets for the said year was lesser by an amount of Rs. 4.75 crore and depreciation in respect of earlier years in respect of the fixed assets was written back to the extent of Rs. 7.3 crore.

5. As per the querist, the company has defended its stand as under: Paragraph 3(xv) of Part II of Schedule VI to the Companies Act, 1956,requires that:

"3. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account:…

 

(xv) Amount, if material, by which any items shown in the profit and loss account are affected by any change in the basis of accounting."

 

Paragraph 31 of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, inter alia, states as follows:

 

"31. The following are not changes in accounting policies:

 

(a) the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, ……; and

 

(b) the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial."

According to the querist, the company’s decision to adopt the policy of availment of CENVAT credit was solely due to the fact that events and conditions differ in substance from previously occurring events and conditions.

6. The querist has mentioned that the recognition of a CENVAT credit cannot be construed as a change in the basis of accounting since the application is purely based on the applicable provisions of the Central Excise Act and the company has made adequate disclosure in the form of footnote to fixed assets schedule in the notes to accounts. Also, the company has stated its policy on CENVAT in its published accounts.

B . Query

7. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee as to whether recognition of CENVAT benefit amounts to change in the basis of accounting within the meaning of Part II of Schedule VI to the Companies Act, 1956.

C. Points considered by the Committee

8. The Committee notes that the querist has raised the issue as to whether the recognition of CENVAT benefit amounts to change in the basis of accounting within the meaning of Part II of Schedule VI to the Companies Act, 1956. The Committee has, accordingly, not addressed any other accounting issue that may arise from the facts of the case, for example, about the propriety or otherwise of the treatment of CENVAT benefit and the resulting change in depreciation.

9. The Committee also notes paragraph 31(a) of AS 5, reproduced by the querist in paragraph 5 above. The Committee is of the view that since CENVAT credit has been recognised on account of withdrawal of the excise refund benefit in 2002, it relates to a new event which has occurred in that year rather than a change in the basis of accounting.

D. Opinion

10. On the basis of the above, the Committee is of the opinion that recognition of CENVAT benefit does not amount to change in the basis of accounting for the purpose of Part II of Schedule VI to the Companies Act, 1956. The Committee has not addressed any other accounting issue that may arise from the facts of the case, for example, about the propriety or otherwise of the treatment of CENVAT benefit and the resulting change in depreciation.

1 Opinion finalised by the Committee on 28.1.2005