Clause wise discussion on form 3CD Clause 12

[Tax Audit Report]

(a) Method of valuation of closing stock employed in the previous year.

(b) Details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss.

[Clause 12 (a) and (b)]

[Tax Audit Report]

The method of valuation of closing stock is to be stated under this clause.

It is the normal practice to disclose the same as a part of disclosure of significant accounting policies.

Accordingly, a reference may be invited to the same or the method of valuation may be again described in Form No.3CD.

[Tax Audit Report]

The method of valuation followed by the assessee having regard to the articles or goods dealt in or manufactured by the assessee, should be clearly indicated.

Examples:

(i) raw material at cost or net realisable value whichever is lower,

(ii) finished goods at cost or net realisable value whichever is lower.

[Tax Audit Report]

In clause 3(i) of the old Form No. 3CD reference was to "opening and closing stock-in-trade".
In sub-clause (a) of clause 12 of revised Form No.3CD, the reference is to "closing stock".
The expression "stock-intrade" means finished goods and raw materials.
Since sub-clause (b) refers to section 145A where the term "inventories" is used, the term "closing stock" will include all items of inventories. AS-2 defines the term "inventories" to include finished goods, raw materials, work-inprogress, materials, maintenance supplies, consumables and loose tools.
Therefore, method of valuation of items of inventories will have to be given under sub-clause (a).

[Tax Audit Report]

The tax auditor should study the procedure followed by the assessee in taking the inventory of closing stock at the end of the year and the valuation thereof.
He should obtain the inventory of closing stock, indicating the basis of valuation thereof, for reporting on the method of valuation of closing stock under this clause.

[Tax Audit Report]

The method of stock valuation must be consistently followed from year to year and the method followed must be brought out clearly.

The tax auditor should examine the basis adopted for ascertaining the cost and this basis should be consistently followed.
It is necessary to ensure that the method followed for valuation of stock results in disclosure of correct profit and gains.

The Hon’ble Supreme Court in case of CIT v. British Paints Ltd. [1991] 188 ITR 44 (SC) has held that the method of valuation of stock at actual cost of raw materials and not taking into account overhead charges was not the correct method of valuation even though the said method has been consistently followed. As per AS-2 - Valuation of inventories (Revised) (mandatory from accounting year starting from 1.4.1999), historical cost of manufactured inventories can be arrived at on the basis of absorption costing alone and the allocation of fixed costs of inventories should be based on the normal level of production only.
It is further provided that overheads should be included as part of the inventory cost only to the extent that they clearly relate to putting the inventories in their present location and condition.

[Tax Audit Report]

It is not necessary to indicate any change in the method of valuation of closing stock under this clause.

However, as stated earlier in paragraph 23.7, any such change in the method of valuation of closing stock would amount to change in an accounting policy and needs to be disclosed in the financial statements as required by AS-1 and AS(IT)

[Tax Audit Report]

The details of deviation, if any, from the method of valuation prescribed under section 145A, and the effect thereof on the profit or loss have to be stated under clause 12(b).

[Tax Audit Report]

Section 145A has been enacted by the Finance (No.2) Act, 1998 and in force from the accounting year 1.4.1998 to 31.3.1999.

This section provides thatthe valuation of purchase and sale of goods and inventory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the assessee but this shall be subject to certain adjustments.
Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account.
The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income.

These adjustments are as follows:

(a) Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw-materials, stores etc.); if not already added in the books of account.

(b) Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account.

(c) Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts.

[Tax Audit Report]

It may be stated that the CENVAT is a procedure whereby manufacturer can utilise credit for input duty against duty payable on final products. Duty credit taken on input is of the nature of set off available against the excise duty payable on the final products. Two alternative methods of treatment of CENVAT credit in the accounts are permissible.


I. Duty paid on inputs may be debited to a separate account, e.g. CENVAT credit receivable account. As and when the CENVAT credit is actually utilised against payment of excise duty on final products appropriate accounting entries will be required to adjust the excise duty paid out of "CENVAT credit receivable account" to the account maintained for payment/provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of input duty. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of input duty. This method is hereinafter referred to as “exclusive method”.

II. In the second alternative, the cost of inputs may be recorded at the total amount paid to the supplier inclusive of input duty. To the extent the CENVAT credit is utilised for payment of excise duty on final products, the amount could be credited to a separate account, i.e. CENVAT credit availed account. Out of the CENVAT credit availed account, the amount of CENVAT credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. This method is hereinafter referred to as “inclusive method”. The effect of section 145A is to reflect the figures on "inclusive method”.