c


Accounting treatment of central excise is mainly related to accounting in respect of Cenvat.

Accounting for Cenvat needs following consideration

(a) Since credit is available of excise duty paid while purchasing inputs, duty paid on inputs while
purchase is not an expense but an asset.

(b) Un-availed Cenvat is not available as refund (except when it is a case of exports). This may
happen when duty paid on inputs is more than duty payable on final product.

(c) Cenvat is available instantly on receipt of inputs and Cenvat credit may be utilised even before
inputs on which Cenvat is availed are actually used in production.

(d) Valuation of stock of finished goods also needs consideration.

Institute of Chartered Accountants of India has published a guidance note. It has been published in
Chartered Accountant - September, 2000 issue. [earlier note was published in August 1995 issue].
and is as per legal position as of 1-4-2000, including Cenvat credit. This note replaces the earlier
guidance note.

?






hen inputs are purchased, Purchase price (net of
Excise) should be debited to Purchase Account and excise on inputs should be debited to ¶Cenvat
Credit Receivable (Inputs) account·. Total Invoice amount (i.e. net purchase price plus excise) will be
credited to Supplier·s Account (as the supplier has paid Excise and his Invoice is inclusive of excise
paid by him on the material supplied). hen duty is debited in Input Cenvat Credit Account (earlier
RG23A Part II) while despatching the goods, ¶Excise Duty Paid on Final Products· account should be
debited and ¶Cenvat Credit Receivable (Input) account· should be credited. [Author·s suggestion :
This entry could be made once at the end of the month]. Balance in ¶Cenvat Credit Receivable
(Input) account· in General Ledger and credit in 'Input Cenvat Credit Account' as per excise
records (that time ¶RG23 A Part II·) should tally, or reconciled.

If there is debit balance at the end of year in ¶Cenvat· account, it means that credit is not fully
utilised and should be shown under Current Assets under ¶Loans and Advances·. Closing stock of
inputs should be valued ¶Net of Excise Duty·. However, since Cenvat on stock which has not been
used is also utilised for payment of duty, purchases are understated to that extent.  




 








 



Change from method II to method I - The earlier guidance note of August 1995 had prescribed two
methods. However, in view of accounting standard AS-2, method II - called 'inclusive method' was
withdrawn by ICAI for inputs. (Chartered Accountant - November, 1999).

The method as specified in September 2000 guidelines is similar to earlier method I. If an

enterprise was earlier following method II, it will have to shift to new method (which is similar to
earlier method I). The change in accounting policy will have to be explained in accounts and
necessary journal entries will have to be passed.

Write off of non-utilisable balance in Cenvat credit receivable account - Some times, Cenvat Credit
Receivable Account may have balance, but it may not be possible to utilise the balance. This may
happen in cases where credit on inputs is higher than duty payable on final products. Thus, though
credit is available, it may be lying idle, as there is no scope for utilising the same.

As per guidance note of ICAI, the balances in Cenvat credit receivable account should be reviewed
at end of the year. If it is found that balances in Cenvat credit are not likely to be used in normal
course of business with a reasonable time, the non-usable excess credit should be adjusted in
financial accounts i.e. purchase price of raw materials should be increased to that extent. If it is
not possible to identify the excess credit to a particular lot or lots of materials purchased, the
excess credit may be apportioned over entire purchases of raw materials, components etc. entitled
to Cenvat credit during the year, on pro-rata basis. Valuation of closing stock will also increase to
that extent.

Adjustment of excess credit related to capital goods should be made to concerned capital goods
account. Excess Cenvat credit which relates to fixed assets acquired, should be added to cost of
relevant fixed asset. If value of capital goods is enhanced, depreciation on revised un-amortised
depreciable amount should be provided over residual useful life of the asset.

[Of course, depreciation for Income Tax purposes will be permitted if balance in Cenvat Credit
Account in excise records is also reversed.]

If the asset does not exist, the relevant amount should be written off in the P&L account. In case
of capital goods acquired on lease, excess Cenvat credit should be written off on a pro-rata basis
along with lease rentals.

In relation to capital goods other than fixed assets (i.e. those which are 'capital goods' as per
excise definition, but are not capitalised in books of account of the company), the accounting
treatment is same as per accounting treatment of inputs. It is advisable the Cenvat Credit
Receivable (Capital Goods) account is maintained separately for fixed assets (which are capitalised)
and other capital goods.

If entry in Cenvat Credit available account is reversed, credit available in 'Cenvat Credit Account'
as per excise records and balances in ¶Cenvat Credit Receivable· in financial accounts will not tally.
Hence, reconciliation statement will have to be prepared as this difference will continue in
subsequent years also.

Reversal of Cenvat credit - In some cases, Cenvat credit on inputs is not available, e.g. when final
product is fully exempt, or when inputs are rejected even before they are issued to production. In
such cases, Cenvat credit will have to be reversed. In such case, appropriate adjustments in cost of
inputs and value for purposes of stock will have to be made.
?




 
It has to be remembered that if Cenvat
credit on capital goods is availed, depreciation under section 32 of Income Tax is not available.
Moreover, Cenvat credit on capital goods is available in two stages i.e. 50% in current year and
balance 50% in subsequent year.

¶Capital Goods· for Cenvat purposes include tools, spare parts etc., which are treated as consumables
and normally not capitalised in financial accounts. Hence, question of claiming depreciation on these
does not arise. hen credit is availed of duty paid on machinery or equipment which is capitalised,
it will be necessary to reduce cost of asset by the amount of duty claimed as credit.

If the assessee follows the accounting system as suggested by Guidance Note of Institute of
Chartered Accountants of India, the condition gets satisfied. According to Guidance Note
published by Institute of Chartered Accountants of India in September, 2000 issue of ¶Chartered
Accountant·, the accounting treatment is as follows :

If the enterprise does not avail Cenvat credit, no accounting treatment is necessary. Separate
entries in respect of duty on capital goods are to be made only when (i) The manufacturer is
entitled to Cenvat credit as per rule and (ii) There is a reasonable certainty that the Cenvat credit
will be indeed utilised. If there are little or no chances of the Cenvat credit being utilised, entries
need not be and in fact, should not be made.

hen the enterprise avails Cenvat credit, Cenvat credit should be reduced from purchase cost. The
entry would be : Debit Capital Goods account net price excluding excise duty, Debit excise duty
element to Cenvat Credit Receivable (Capital Goods) Account with 50% duty and Cenvat Credit on
capital goods deferred account balance 50%. Credit Supplier·s account with full amount (i.e. cost of
capital goods inclusive of excise duty paid on such capital goods). The subsequent entries will be
similar to Method I for Cenvat on inputs. Thus, when Cenvat credit is utilised, Excise Duty paid on
final products is debited and ¶Cenvat Credit Receivable (Capital Goods) Account' is credited.
Unadjusted balance standing in the Cenvat credit Receivable (Capital Goods) Account will be shown
on assets side under the head ¶Advances·.

Naturally, depreciation will not be charged on the excise duty component of the value of machinery
etc. which is capitalised.

In next year when balance Cenvat credit is availed, amount of Cenvat credit availed should be
credited to 'Cenvat Credit on capital goods deferred account' with corresponding debit to 'Cenvat
credit Receivable (Capital Goods) Account.

Inventory of spare parts, tools etc. will be valued Net of Specified Duty, i.e. duty paid of tools,
spare parts, capital goods etc. will not form part of their cost.

Accounting treatment by lessee when capital goods acquired on lease - The lessee can avail Cenvat
on duty paid on capital goods obtained on lease. If the financing arrangement includes financing of
excise duty component, in the books of lessor, asset given on lease should be shown at purchase
cost net of excise duty on capital goods. The excise duty on capital goods (which would be availed as
Cenvat credit by lessee) should be recorded and disclosed separately as duty recoverable from
lessee. This will not form part of ¶Minimum Lease Payments·. In the books of lessee, treatment of
Cenvat credit on capital goods should be same as per other capital goods. However, leased capital
asset and corresponding depreciation will not be accounted in books of lessee. It may be noted that
as per excise rules, lessor cannot finance excise duty portion of capital goods, if lessee intends to
avail Cenvat.

If excise duty on capital goods does not form part of financing arrangement and lessee pays the
duty directly to supplier, no entry is necessary in books of lessor.

Accounting treatment by lessor when capital goods given on lease - In the books of lessor, where
the financing arrangement also covers the specified duty on capital goods, the asset given on lease
should be shown at purchase cost net of specified duty on the capital goods. The specified duty on
capital goods, which would be availed as Cenvat credit by lessee, should be recorded and disclosed
separately as the duty recoverable from lessee. This will not form 'Minimum Lease Payments'. This
is because definition of 'minimum lease payment' as per Guidance Note on Accounting for Leases
issued by ICAI, is as follows - 'The payments over the lease term that the lessee is or can be
required to make (excluding costs for services and taxes to be paid by and be reimbursable to
lessor) together with the residual value'.

If the specified duty does not from part of financing arrangement and the lessee pays the duty
directly to supplier, the same need not be recorded in books of the lessor.

In the books of lesssee, Cenvat credit on the capital goods acquired on lease should be same as per
other capital goods i.e. 50% in Cenvat credit receivable (Capital Goods) account and 50% in Cenvat
Credit (Capital Goods) deferred account'.

Accounting treatment when capital goods obtained on hire purchase - Capital goods acquired on hire
purchase should be recorded and disclosed at net cash value, i.e. cash value net of Cenvat credit
available in the books of hirer. The other accounting treatment in the books of hirer is same as if
the asset has been acquired on outright purchase basis. These entries are to be made even if the
excise duty on the capital goods does not form part of the financing arrangement.

In the books of vendor, if excise duty on capital goods forms part of financing arrangement, the
vendor should book the sale at price inclusive of duty on the capital goods. If excise duty paid on
capital goods does not form part of financing arrangement, the same need not be recorded in the
books of vendor.

 



 


The Guidance Note gives an illustration of entries.
The illustration is on the assumption that there is opening stock of 10 units purchased at Rs 10 per
unit plus Rs 2/- excise duty, aggregating to Rs 12/-. 100 units of raw materials are purchased at Rs.
10 per unit, plus Rs. 2 for excise duty, aggregating to Rs. 12/-. Out of these, 70 units are consumed
in process involving manufacture of 70 items of final product. These 70 units of final product are
sold @ Rs. 15/- per unit, inclusive of excise duty of Rs. 3/- per unit. The Cenvat credit has been
utilised fully for payment of duty on final products. The entries will be as follows :
c
 o
i
 - E
ri  i
r  c of c
 o
i
 r  follow - (Thi w  rm d 
M hod I   r 1995 gd l
).
Prch of rw m rl Dr. R. 1,000
c
 cr d R c bl Dr. R. 200
To S
dry cr d r cr. R. 1,200
(B 
g rch f 100 
)
Exc Dy Pd
f
l r dc Dr. R. 210
c
 cr d R c bl Acc 
 cr. R. 210

Th P&L cc 
 wll l k  f ll w :

T O

g  ck f Rw M rl (10 
) R. 100
T Prch f Rw M rl (100 
) R. 1000
L  : S ck f Rw M rl (40 
) R. 400
N  c
m
f RM (70 
) R. 700
R.
Exc Dy d
210

I
h Bl
c Sh , h  ck f m rl wll b h w
 R. 400/-.

I
h c
 cr d R c bl Acc 
, 

g d b bl
c wll b R 20 (
c f 10  c 
f 

g  ck). Dr
g h  r d, h r wll b d b f R 200 
r  c f 
 rch d
dr
g h y r. Th cc 
 wll b cr d d by R 210  h dy w d
70  c  fr m
c
 cr d cc 
. Th cl 
g d b bl
c wll b R. 10/- 
h c
 cr d R c bl
cc 
 wll b h w
   
d r 'L 
 
d Ad
c '. Th,  l ¶ · wll b R 410.

Acc 

g f cl G d - I
c f cl g d, h
r  wll b dff r
. c
 cr d

cl g d c
b k

w g  - 50% 
crr
 y r 
d 50% 
b q
 y r.

D f

f cl g d   r I
c m Tx (whch  l f ll w d f r c m
y Lw r  ) 

dff r
 fr m d f

f cl G d 
d r rl 57AA() [ rl r 57Q] f c
rl Exc f r
r   f c
. .g.  m lk c
mbl , r r,  l r d f
d  'cl g d' f r
c

cl g d b
 c
d r d  'cl g d' 
r glr cc 
. Th, h
r 
wll d 
d
wh h r h d f

 m r dff r
.

(A) If cl g d  d f
d 
r glr cc 
 r m  cl g d   r c
 -

Prch f cl g d Dr. R. 1,000

c
 cr d R c bl Dr. R. 100
(cl g d) cc 

c
 cr d
cl Dr. R. 100
g d d f rr d cc 

T S
dry cr d r cr. R. 1200
(B 
g rch f cl g d)
 Excise Duty Paid on final products Dr. Rs. 80
Cenvat Credit Receivable Cr. Rs. 80
(capital goods) account

In the balance sheet, capital goods will be valued net of excise duty and depreciation will
automatically be provided on net value only. Unadjusted balance of Rs 20/- standing in the Cenvat
credit receivable (Capital Goods) Account will be shown on assets side under the head 'Loans and
Advances'. Similarly, debit balance of Rs 100 in Cenvat Credit on capital goods deferred account
will be shown as current asset under Loans and Advances'.

In next year when balance Cenvat credit is availed, amount of Cenvat credit availed should be
credited to 'Cenvat Credit on capital goods deferred account' with corresponding debit to 'Cenvat
credit Receivable (Capital Goods) Account.

(B) If capital goods as defined in regular accounts are different from capital goods as per Cenvat -
In such cases, the item will not be capitalised in books of account and will be written off in
accounts.

If 100 units of 'tools' are purchased which are treated as 'consumables' in accounts, but 'capital
goods' for purpose of excise law, and if stock is 40 units at the year end, the entries in books of
account will be as follows -
Purchase of tools Dr. Rs. 1,000
Cenvat Credit Receivable (capital goods)
Dr. Rs. 100
account
Cenvat Credit on capital goods deferred
Dr. Rs. 100
account
To Sundry Creditors Cr. Rs. 1200
(Being purchase of 100 units)
Excise Duty Paid on final products Dr. Rs. 80
Cenvat Credit Receivable Account Cr. Rs. 80

The P&L account will look as follows :

To Purchase of tools Rs. 1,000
Less : Stock of tools Rs. 400
Net Consumption of tools Rs. 600
Excise Duty paid Rs. 80

In the Balance Sheet, the stock of tools will be shown at Rs. 400/- Unadjusted balance of Rs 20/-
standing in the Cenvat credit receivable (Capital Goods) Account will be shown on assets side under
the head 'Loans and Advances'.

[[ 
- The illustrations in respect of capital goods are designed by author. These are not given in
the guidance note of the ICAI. Hence, these cannot be taken as authentic guidelines of ICAI].
CONFLICT BETEEN INCOME TAX PROVISIONS & ACCOUNTING STANDARDS - As per
section 145A of Income Tax Act, stock should be valued including excise duty. However, as per
Accounting Standard of ICAI (AS-2), inventory of inputs should be valued exclusive of excise duty,
if Cenvat credit of input is availed. - . - In case of capital goods, depreciation cannot be claimed on
excise portion of value of capital goods. In view of this, for capital goods, entries are required to
be made as per guidance note of ICAI.



 

Valuation of inventory is affected by Cenvat considerations.

Inventory should be valued at cost or market value, whichever is lower, as it is a prudent business
practice. This principle has been accepted in Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC) *
ALA Firm v. CIT (1991) 189 ITR 285 = 55 Taxman 497 (SC).

ICAI has introduced revised accounting standard AS-2 which is mandatory w.e.f. 1-4-1999. This
standard closely follows IAS - 2. As per AS2 of ICAI, inventories are assets (a) Held in ordinary
course of business (b) In the process of production for such sale or (c) In the form of materials or
supplies to be consumed in the production or in the rendering of services. Inventory is classified as
(i) Raw materials and components (ii) IP (iii) Finished goods (iv) Stores and spares and (v) Loose
tools.

AS-2 does not apply to IP in construction contracts and related service contracts, IP of
service providers, shares and debentures held as stock in trade. It also does not apply to live stock,
agricultural and forest products and mineral oils, ores and gases, if it is measured as Net Realisable
Value.

As per Part I of Schedule VI of Companies Act, inventories are classified as (i) Stores and spares
(ii) Loose tools (iii) Stock-in-trade (iv) IP for purpose of balance sheet. Item-wise breakup of raw
materials, opening and closing stock etc. has to be given as provided in para 3(ii)(a) of Part II of
Schedule VI.

As per section 145A of Income Tax Act, stock valuation should be inclusive of any tax, duty, cess or
fee actually paid by assessee to bring the goods to the place of its location and condition as on date
of valuation, even if such tax or duty is refundable. Thus, duty paid on inputs will have to be added
while valuing stock, even if Cenvat credit is availed of such duty paid. In respect of finished stock,
excise duty payable should be added to the inventory valuation even if not paid as goods are still
lying in the factory. Both opening as well as closing stock should be valued on same basis.

The amended section 145A is effective from 1-4-1999 and will apply to AY 1999-2000 and onwards.

However, as per Accounting Standard of ICAI (AS-2), inventory cost should comprise of all cost of
purchases, cost of conversion and other costs incurred in bringing the inventories to the present
location and condition. Cost of purchase consists of purchase price including duties and taxes (other
than those subsequently recoverable by the enterprise from the taxing authorities), freight
inwards and other expenditure directly attributable to such acquisition. trade discounts, rebates,
duty drawbacks and other similar items are deducted in determining the costs of purchase. - . -
Cost of purchases should be exclusive of duties which are recoverable from the taxing authorities.
(e.g. Cenvat). Inventory should be valued at lower of cost or net realisable value. Inventory should
be valued on FIFO (First in First Out) method or weighted average method. [LIFO is not
permitted]. The AS-2 has been made mandatory w.e.f. 1st April, 1999. [see Chartered Accountant -
July 1999].

If Cenvat credit of duty paid on inputs is not available for any reason, the closing stock should be
valued inclusive of duty paid on inputs. [Guidance Note of ICAI on Accounting Treatment of Modvat
/ Cenvat - September 2000 issue of Chartered Accountant].

Thus, for purposes of Income Tax, inventory is required to be valued inclusive of excise duty, even
if assessee is entitled to get Cenvat credit of duty. However, for purposes of balance sheet as per
Companies Act, inventory should be valued exclusive of excise duty, if assessee is entitled to get
Cenvat credit of duty paid on inputs.

In view of this conflict, Institute of Chartered Accountant of India has advised that in the
company accounts, inventory of inputs should be valued without considering Cenvat. For purposes of
income tax section 145A, computation should be made outside the books, as made in case of some
other items like depreciation. [Chartered Accountant - November 1999 - page 83]. [Note that
depreciation for income tax and for company law are different and hence separate calculations have
to be made while submitting income tax return. Same will have to be done for inventory valuation
also].

CENVAT CREDIT SHOULD BE ADDED BOTH IN OPENING AND CLOSING STOCK - If Cenvat
credit on inputs is added for valuation of closing stock, it should be added for valuation of opening
stock also. - Tribunal view confirmed in CIT v. Indo Nippon Chemical Co. Ltd. (2000) 112 Taxman
555 (Bom HC DB). In this case, reliance was placed on Chainrup Sampatram v. CIT (1953) 24 ITR
481 (SC), where it was held that profits do not arise out of valuation of closing stock. The source of
profit is business.

ACCOUNTING TREATMENT OF UNPAID EXCISE DUTY ON FINAL PRODUCTS - Duty liability of

excise is fastened as soon as goods are manufactured, though duty is payable at the time of
removal. ICAI has published revised guidance note on 'Accounting Treatment for Excise Duty'
effective from 1-4-1999 (published in July 2000 issue of Chartered Accountant, superceding
earlier guidance note of 1988). As per these guidelines, estimated duty liability on finished goods in
stock should be provided in books of account on the basis of rates and valuation on date of balance
sheet. hile estimating the duty liability, factors like exemptions availed, pattern of sales e.g.
export sales, SSI exemptions etc. should be considered. If no duty is payable on intermediate
products, it is not necessary to make provision of duty liability in respect of intermediate products.

Excise duty provided on stock should be included in valuation of stock of finished goods. If excise
duty was, in fact, paid on finished stock (this may happen if duty paid stock is lying at depots /
branch offices), it will have to be included while valuing closing stock.

Valuation of inventory of IP and final products - AS PER GUIDANCE NOTE OF ICAI, while
valuing inventories of IP and final products, the value of inputs should be net of duty on inputs,
i.e. the purchase cost as reduced by Cenvat credit, if Cenvat credit is available. If Cenvat credit is
not available, the material cost should be inclusive of excise duty. [Guidance Note of ICAI on
Accounting Treatment for Excise Duty - Chartered Accountant July 2000 - view reiterated in
Guidance Note of ICAI on Accounting Treatment of Modvat / Cenvat - Chartered Accountant -
September, 2000].

GUIDANCE NOTE OF ICA - ICA of India has issued 'Guidance Note on Valuation Audit under
Central Excise Law' in July, 1997. This guidance note also states that cost of inputs should be
exclusive of Cenvat credit.

INVENTORY VALUATION IS RESPONSIBILITY OF AUDITOR ALSO - A note in balance sheet of

many companies states - 'Inventory - (As valued and certified by Management). This gives an
impression that inventory valuation is not responsibility of auditor. Hence, ICAI has advised that
these words should not be used in balance sheet, as auditor is required to perform audit procedures
to check inventory. - Chartered Accountant - September, 1999 - page 66]. [Thus, auditor has
responsibility of stock valuation also]

SECTION 145A IS AGAINST ACCOUNTING PRINCIPLES - According to method suggested by

ICAI and made mandatory vide AS-2, inventory of raw materials should be valued at cost, without
considering excise duty, as manufacturer has availed credit of the same. However, this reduces
value of stock and hence profits are lower. In S. H. Kelkar & Co. Ltd. v. Dy. CIT - 44 ITD 170
(Tribunal), Lakhan Pal National 162 ITR 240 = 27 Taxman 462 (Guj) and ITO v. Food Specialities
(1994) 206 ITR 119 (ITAT SB), it was held that stock should be valued without considering Cenvat
credit. The amendment in Income Tax Act has been made to neutralise the effect of this decision,
though the Court and Tribunal decisions are sound and correct as per accounting principles. - . - . -
Really, in the long run, it does not make any difference, as long as same method of valuation is
followed consistently. If Cenvat credit is added to value of stock, profit in first year will be higher,
as closing stock valuation will be higher. However, in the subsequent period, profit will be
correspondingly lower. In fact, according to income tax provisions, both opening and closing stock
has to be valued on same basis. Thus, if, for AY 1999-2000, both opening and closing stocks are re-
valued as per Income Tax section 145A, the difference in profits will be only marginal.

STOCK VALUATION FOR BALANCE SHEET AND INCOME TAX RETURN CAN BE DIFFERENT -
In United Commercial Bank v. CIT (1999) 106 Taxman 601 = JT 1999(7) SC 544 = AIR 2000 SC 94
(SC), it was held that valuation of stock for balance sheet as per statutory requirement (at cost in
this case) can be different from valuation for income tax purposes (at cost or market value
whichever is lower in this case). It was also held that stock can be valued at cost or market value,
whichever is lower. In CIT v. R Venkatachari (1999) 107 Taxman 438 (Mad HC DB) also, it was held
that stock can be valued at lower of cost or market price.

0


 




If a demand for excise duty is received,
assessee may pay it through Cenvat credit account. If demand is paid out of credit balance in
Cenvat Credit account, it should be debited to appropriate account, depending upon nature of
demand. e.g. (a) If demand is in respect of final product, it should be debited to excise duty
account. (b) If demand pertains to disallowance of Cenvat credit in respect of purchases of inputs
during the current year, it should be added to cost of inputs and inventory valuation will have to be
suitably adjusted. (c) If demand is in respect of purchases in previous years, the disallowance
should be debited to excise duty account and treated as expense of the current year. However, if
the raw materials are still in stock, duty demand should be added to cost of stock of inputs.

 
   


Excise duty should be considered as a manufacturing
expense and should be considered as an element of cost for inventory valuation, like other
manufacturing expenses. Excise duty cannot be treated as a period cost. If duty paid on inputs is
not recoverable as credit, it becomes part of manufacturing cost and must be included in valuation
of IP / finished goods. - Guidance Note of ICAI on Accounting Treatment for Excise Duty -
Chartered Accountant - July 2000