2016 (1) TMI 1079 - AT - Income Tax

Change in method of accounting for the excise duty from exclusive method to inclusive method - old brought forward CENVAT credit balance from the sales in the name of changing the method of accounting to comply with the provisions of section 145A - Held that - Prior period accumulation has to be given credit during the year, when purchases and sales are accounted with or without excise duty, and if such exercise is carried out there would be difference in profits. So far as the amount of ₹ 81,09,050/- which the AO held it to be a notional duty, the Ld. CIT(A) on a correct appreciation of facts has given correct finding, which can not be interfered with as the total excise duty payable on the sale during the year was at ₹ 1,51,44,409/- and after reducing the opening credit of ₹ 70,35,659/- the balance remaining payable on the sale was ₹ 81,09,750/-. This was further reduced from the amount of the excise duty paid on inputs during the year for sales aggregating to ₹ 1,96,74,139/-. The balance remaining on current purchases is ₹ 1,15,47,370/- and this has been duly accounted for in the manner provided u/s 145A in this year. The Ld. CIT(A) already given relief on account excise portion of the opening stock of ₹ 30,60,519/- as it was part of the brought forward MODVAT credit of ₹ 70,50,659/-. However, the sum of ₹ 39,74,140/- which has been confirmed by the CIT(A) cannot be upheld in principle because these are accrual over the years and when there is change in the method of accounting in the assessment year 2005-06, the entire amount gets due in this year which has to be allowed. However such an allowance is subject to limited verification by the AO, whether the assessee has forgone the MODVAT credit as per Excise law and rules and instead availed the benefit under the Income-tax Act in this year and further if the said amount has already subjected to tax in the earlier years in a way that the assessee had not claimed the benefit of excise duty on this amount in the earlier year and hence relief has to be given in this year. Thus, with this limited direction of verification the issue raised vide revenue s ground are treated as dismissed whereas the amount of ₹ 39,74,140/- as confirmed by the CIT(A) is treated as partly allowed for statistical purposes. Deduction u/s 80IB - Held that - As pointed by Ld. Counsel right from assessment years 2001-02 to 2004-05, assessee has been allowed deduction u/s 80IB continuously in 3 years by the department even when, the assessee s case has been assessed under scrutiny proceedings u/s 143(3). If similar facts are permeating in this year also, then as a matter of consistency different view cannot be taken in this year. The fundamental aspect of allowing deduction u/s 80IB has been examined and granted earlier, then without any change in the material facts a different view should not be taken. Accordingly, we hold that, the activities carried out by the assessee amounts to manufacturing and accordingly, the assessee is entitled for claim of deduction u/s 80IB. Thus, the ground raised by the assessee is allowed.

Summary

Issues Involved:

1. Change in Method of Accounting and Adjustment of CENVAT Credit.
2. Disallowance of Deduction under Section 80IB.

Issue-wise Detailed Analysis:

1. Change in Method of Accounting and Adjustment of CENVAT Credit:

The primary issue revolves around the assessee's change in the method of accounting from the exclusive method to the inclusive method to comply with section 145A of the Income-tax Act, 1961. The Assessing Officer (AO) added back Rs. 1,25,34,122/- to the assessee's income, arguing that the change was arbitrary and not in compliance with section 145A. The AO noted that the assessee did not route the excise duty through the Profit & Loss Account, thus questioning the legitimacy of the accounting change.

The CIT(A) partly sustained the AO's addition, confirming Rs. 39,74,140/- while deleting Rs. 85,59,982/-. The CIT(A) acknowledged the bona fide nature of the change but held that the adjustment should have been made in the earlier years when section 145A came into force. The CIT(A) reasoned that the balance of Rs. 39,74,140/- represented liabilities from earlier years and could not be adjusted in the current year.

Upon appeal, the Tribunal found the change in the method of accounting to be bona fide and in line with section 145A. It noted that the inclusive method required accounting for excise duty in opening stock, purchases, sales, and closing stock. The Tribunal emphasized that the change was revenue-neutral over time. It directed the AO to verify whether the assessee had forgone the MODVAT credit as per Excise law and rules and whether the amount had already been subjected to tax in earlier years. The Tribunal concluded that the amount of Rs. 39,74,140/- should be allowed if these conditions were met.

2. Disallowance of Deduction under Section 80IB:

The second issue concerns the disallowance of the deduction under section 80IB amounting to Rs. 59,66,478/- for AY 2005-06 and Rs. 5,45,795/- for AY 2006-07. The AO rejected the claim, stating that the assessee was not engaged in manufacturing activities. The AO's analysis indicated that the activities carried out by the assessee, such as crimping, twisting, sizing, and warping, did not constitute manufacturing.

The CIT(A) upheld the AO's decision, noting the absence of proof of manufacturing activities and reliance on the auditor's report, which categorized the business as "Trading in Fabrics."

The Tribunal, however, found that the assessee had a Small Scale Industry (SSI) unit and was registered under the Excise Department, incurring substantial expenses on electricity, fuel, and plant and machinery, indicating manufacturing activities. It referred to the CBDT circular and various judicial precedents, which recognized activities like twisting and crimping of yarn as manufacturing. The Tribunal also invoked the principle of consistency, noting that the assessee had been allowed the deduction under section 80IB in earlier years under scrutiny assessments. It concluded that the assessee's activities amounted to manufacturing and allowed the deduction under section 80IB for both AY 2005-06 and AY 2006-07.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeals, directing the AO to verify specific conditions regarding the adjustment of CENVAT credit and confirming the allowance of deduction under section 80IB for the respective assessment years.