Treatment of c.i moulds in ingot unit
This query is : Resolved
30 May 2013
C.I Moulds are used in the manufacture of M S Ingots. The moulds have life of 4mths - 6 mths and than they are scrapped. In the Excise Laws, the moulds are capital items and CENVAT is accordingly available. I seek advice on the following issues:
1. Considering the above, is the mould a capital item or revenue expenses ?
2. If it is to be treated as capital item, what should be the depreciation charged in I.T Act as it has life of 6 mths approx.
Please advice preferably quoting ICAI Guidance note/ opinion (if any) and relavent case laws.
1. Considering the above, is the mould a capital item or revenue expenses ?
2. If it is to be treated as capital item, what should be the depreciation charged in I.T Act as it has life of 6 mths approx.
Please advice preferably quoting ICAI Guidance note/ opinion (if any) and relavent case laws.
30 May 2013
AS PER ACCOUNTING STANDARD -2
YOU CAN MAKE A STOCK REGISTER
THAT OP+PUR-SCRAP= CLSOING
SCRAP VALUE YOU WILL CLAIM AS CONSUMED MODULE
IN EXCISE TARIFF MODVAT UNDER CAPITAL GOODS DUE TO THIS UNDER EXCISE AS CAPITAL GOODS
YOU CAN MAKE A STOCK REGISTER
THAT OP+PUR-SCRAP= CLSOING
SCRAP VALUE YOU WILL CLAIM AS CONSUMED MODULE
IN EXCISE TARIFF MODVAT UNDER CAPITAL GOODS DUE TO THIS UNDER EXCISE AS CAPITAL GOODS
30 May 2013
Dear Mr. Rupesh,
In the earlier year the unit has treated the same way you have suggested and in current year they are of opinion to transfer the moulds to FA and charge depreciation. I do not concur with this view.
I also understand that this would mean change in accounting policy.
I would appreciate if you can provide some light with reference to ICAI guidance/ opinions and other case laws to substantiate our view.
In the earlier year the unit has treated the same way you have suggested and in current year they are of opinion to transfer the moulds to FA and charge depreciation. I do not concur with this view.
I also understand that this would mean change in accounting policy.
I would appreciate if you can provide some light with reference to ICAI guidance/ opinions and other case laws to substantiate our view.
02 August 2025
This is a classic dilemma faced by manufacturing units regarding items like **C.I. moulds** with short useful lives and their accounting treatment.
Here’s a detailed perspective:
---
### 1. **Capital Item or Revenue Expense?**
* **Accounting Standards View:**
* According to **AS 2 (Inventories)** and **AS 10 (Property, Plant and Equipment)**, an asset is capitalized if it meets the following criteria:
* It is held for use in production or supply of goods/services.
* It has a useful life extending beyond one accounting period.
* It is not intended for sale in the ordinary course of business.
* **C.I. moulds with a life of only 4-6 months** pose a challenge:
* Because their life is less than one year (the accounting period), many consider them **consumable stores** or **revenue expenses**.
* However, **Excise laws treat them as capital goods**, allowing CENVAT credit, which means from a tax and excise perspective, moulds are capitalized.
* **Practical Treatment:**
* Since the moulds are scrapped after 4-6 months, it is often **prudent to treat them as consumable stores (revenue expenses)**.
* But, for excise benefits and consistency, companies may capitalize and depreciate the moulds.
* **ICAI Guidance:**
* ICAI **Accounting Standard (AS) 2** suggests such items with short life are better treated as consumables.
* **No explicit ICAI guidance** exists on short-life moulds, but treating them as consumables is common.
---
### 2. **Depreciation Treatment for Capitalized Moulds**
* If treated as capital assets:
* Since their useful life is **4-6 months (less than a year)**, **depreciate fully in that period**.
* Under Income Tax Act:
* Depreciation can be claimed proportionally for the months used.
* As per **Section 32**, depreciation can be claimed for the period of use in the financial year.
* Typically, companies write off the cost fully in the year of purchase as depreciation.
* **Alternative Treatment:**
* Treat moulds as **stores and spares**, charge the cost directly to **manufacturing expenses**.
* Maintain a **stock register** for moulds:
* Opening stock + Purchases – Scrap value = Closing stock.
* This aligns with AS 2 on inventories.
---
### 3. **Case Laws & Expert Opinions**
* **Case Law Example:**
* *CIT vs. Tata Iron & Steel Co.* (SC) recognized consumables with short life to be treated as revenue expenditure.
* **ICAI Opinions:**
* ICAI committees generally recommend **consistency** in treatment.
* A **change from revenue expense to capitalizing moulds** constitutes a change in accounting policy requiring disclosure.
* **Excise Perspective:**
* Excise allows CENVAT on moulds as capital goods, but accounting treatment should align with accounting standards.
---
### **Summary & Recommendation**
| Aspect | Recommended Treatment |
| ----------------------------- | --------------------------------------------------- |
| Life of mould | 4-6 months (short life) |
| Accounting treatment | Treat as consumable stores (revenue expense) |
| Excise treatment | Considered capital goods for CENVAT |
| Depreciation (if capitalized) | Full depreciation in the period of use (4-6 months) |
| Change in accounting policy | Requires disclosure and justification |
---
### Practical Suggestion
* Continue treating moulds as **revenue expenses** for accounting purposes.
* Maintain a stock register for accurate inventory tracking.
* Claim CENVAT credit as per excise law on purchase.
* Avoid capitalizing moulds unless company policy and auditors agree, and disclose the policy change clearly.
---
If you want, I can help draft a formal note explaining this treatment for your auditors or management. Would that help?
Here’s a detailed perspective:
---
### 1. **Capital Item or Revenue Expense?**
* **Accounting Standards View:**
* According to **AS 2 (Inventories)** and **AS 10 (Property, Plant and Equipment)**, an asset is capitalized if it meets the following criteria:
* It is held for use in production or supply of goods/services.
* It has a useful life extending beyond one accounting period.
* It is not intended for sale in the ordinary course of business.
* **C.I. moulds with a life of only 4-6 months** pose a challenge:
* Because their life is less than one year (the accounting period), many consider them **consumable stores** or **revenue expenses**.
* However, **Excise laws treat them as capital goods**, allowing CENVAT credit, which means from a tax and excise perspective, moulds are capitalized.
* **Practical Treatment:**
* Since the moulds are scrapped after 4-6 months, it is often **prudent to treat them as consumable stores (revenue expenses)**.
* But, for excise benefits and consistency, companies may capitalize and depreciate the moulds.
* **ICAI Guidance:**
* ICAI **Accounting Standard (AS) 2** suggests such items with short life are better treated as consumables.
* **No explicit ICAI guidance** exists on short-life moulds, but treating them as consumables is common.
---
### 2. **Depreciation Treatment for Capitalized Moulds**
* If treated as capital assets:
* Since their useful life is **4-6 months (less than a year)**, **depreciate fully in that period**.
* Under Income Tax Act:
* Depreciation can be claimed proportionally for the months used.
* As per **Section 32**, depreciation can be claimed for the period of use in the financial year.
* Typically, companies write off the cost fully in the year of purchase as depreciation.
* **Alternative Treatment:**
* Treat moulds as **stores and spares**, charge the cost directly to **manufacturing expenses**.
* Maintain a **stock register** for moulds:
* Opening stock + Purchases – Scrap value = Closing stock.
* This aligns with AS 2 on inventories.
---
### 3. **Case Laws & Expert Opinions**
* **Case Law Example:**
* *CIT vs. Tata Iron & Steel Co.* (SC) recognized consumables with short life to be treated as revenue expenditure.
* **ICAI Opinions:**
* ICAI committees generally recommend **consistency** in treatment.
* A **change from revenue expense to capitalizing moulds** constitutes a change in accounting policy requiring disclosure.
* **Excise Perspective:**
* Excise allows CENVAT on moulds as capital goods, but accounting treatment should align with accounting standards.
---
### **Summary & Recommendation**
| Aspect | Recommended Treatment |
| ----------------------------- | --------------------------------------------------- |
| Life of mould | 4-6 months (short life) |
| Accounting treatment | Treat as consumable stores (revenue expense) |
| Excise treatment | Considered capital goods for CENVAT |
| Depreciation (if capitalized) | Full depreciation in the period of use (4-6 months) |
| Change in accounting policy | Requires disclosure and justification |
---
### Practical Suggestion
* Continue treating moulds as **revenue expenses** for accounting purposes.
* Maintain a stock register for accurate inventory tracking.
* Claim CENVAT credit as per excise law on purchase.
* Avoid capitalizing moulds unless company policy and auditors agree, and disclose the policy change clearly.
---
If you want, I can help draft a formal note explaining this treatment for your auditors or management. Would that help?
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