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2006 (4) TMI 346 - AT - Income TaxDeduction u/s 80-IA - Method of accounting - whether section 145A would authorize the increase in valuation of closing stock by MODVAT - HELD THAT - Opening stock being closing stock of previous year has been arrived on the basis of a method of accounting in which excise duty/Modvat credit is not included while valuing the inventory sale and purchase. They are separately accounted for but in a changed method of accounting imposed by section 145A such Modvat credit has to be included. Thus opening stock will not be disturbed whereas purchases sales and closing stock will have to be disturbed by including Modvat credit. It was submitted before the Assessing Officer that purchases have also been debited in the P/L Account. Before us also it was argued that if cess/excise duty/sales tax etc. are added into purchases sales and closing stock then net result would be nil. We therefore restore this issue to the file of Assessing Officer to re-cast trading account after including cess/excise duty/sales tax in the purchases/sales and closing stock (but not in the opening stock which shall not be disturbed as discussed) and work out the addition if any to the total income. Therefore this issue is allowed for statistical purposes only. Deduction under sections 80HHC and 80-IA together - HELD THAT - In our considered view and as per the language used in section 80-IA(9A) the deduction allowed u/s 80-IA will not be allowed as further deduction under other sections 80HH to 80RRA. This means that deduction u/s 80HHC will be worked out independently without reducing the business profits by the deduction under section 80-IA. That is effect of deduction u/s 80-IA will be given after applying the formula and working out deduction u/s 80HHC. This is clear from the language of section 80-IA(9A) that Any amount of profits and gains........ allowed as deduction u/s 80-IA shall not be allowed as deduction under other sections (from 80HH to 80RRA). So deduction u/s 80HHC has to be calculated independently and then effect of section 80-IA(9A) has to be given. Where deduction u/s 80HHC is more than the deduction u/s 80-IA the figure of deduction u/s 80-IA will be reduced from the deduction u/s 80HHC. The balance will be the deduction u/s 80HHC. Where deduction u/s 80-IA is more than the deduction u/s 80HHC calculated for the unit then no deduction u/s 80HHC will be separately allowed. From this it follows that in a case where both the deductions are available to an assessee then higher of the two will be allowed. The upper limit of the deductions under sections 80HH to 80RRA has also been laid down u/s 80-IA(9A). Where it is said that in no case the deductions shall exceed the profits and gains of the undertaking. Thus in no case deduction u/s 80-IA and other sections from 80HH to 80RRA will exceed 100% of the profits of the undertaking. We find that the steps at 1 2 and 3( a ) suggested by CIT(A) in his order and reproduced are correct. but for the purpose of computing deductions under other sections such as 80HHC no effect of deduction u/s 80-IA will be given but after computing deduction u/s 80HHC the capping will be done as suggested above in our final conclusions. As a result the order of CIT(A) is modified as indicated above. Appeal of the assessee is allowed partly on this ground - Finally the appeal of the assessee is allowed partly.
Issues Involved:
1. Valuation of closing stock by MODVAT under Section 145A. 2. Inclusion of profits from the sale of steam, insurance receipts, and miscellaneous income in business profits for deduction under Section 80HHC. 3. Effect of Section 80-IA(9A) on the working of deduction under Section 80HHC. 4. Combined effect of deductions under Sections 80-IA and 80HHC. Detailed Analysis: 1. Valuation of Closing Stock by MODVAT under Section 145A: The primary issue was whether Section 145A authorizes the increase in the valuation of closing stock by including MODVAT credit. The Assessing Officer added Rs. 12,95,762 of unutilized MODVAT credit to the closing stock value. The CIT(A) upheld this decision, referencing the amendment by F.A. (No. 2) 1998, effective from April 1, 1999, which introduced Section 145A. The assessee argued that MODVAT credit should be accounted for in purchases, sales, and inventory, not just closing stock, to neutralize any addition. The Tribunal agreed, stating that while opening stock should not be disturbed, purchases, sales, and closing stock should include MODVAT credit. This approach aligns with the decision in Melmould Corpn. v. CIT. The issue was remanded to the Assessing Officer to recast the trading account accordingly. 2. Inclusion of Profits from Sale of Steam, Insurance Receipts, and Miscellaneous Income in Business Profits for Deduction under Section 80HHC: The CIT(A) held that profits from the sale of steam do not constitute business profits, while profits from the sale of scrap do. The Tribunal disagreed, stating that if the sale of steam is part of turnover, it should also be part of business profits. This view is supported by the decision in CIT v. Kantilal Chhotalal. The Tribunal concluded that both the sale of steam and scrap should be included in business profits and turnover. Regarding insurance receipts and miscellaneous income from the sale of ammonia sulfate, the CIT(A) excluded these from business profits, citing no direct nexus with business activity. The Tribunal, however, held that both insurance claims and the sale of ammonia sulfate should be included in business profits and turnover, referencing the assessee's own case for the assessment year 1998-99 and the decision in Kantilal Chhotalal. 3. Effect of Section 80-IA(9A) on the Working of Deduction under Section 80HHC: The CIT(A) directed that unit-wise profits should be calculated, consolidated, and then deductions under Section 80-IA should be computed and allowed before calculating deductions under Section 80HHC. The assessee argued that Section 80-IA(9A) does not alter the mandatory working of deduction under Section 80HHC and that deductions should be worked out independently. The Tribunal noted that Section 80-IA(9A) prevents double deductions and ensures that total deductions do not exceed 100% of the profits and gains of the undertaking. Deductions under Section 80HHC should be calculated independently, and the effect of Section 80-IA(9A) should be given after applying the formula for Section 80HHC. The Tribunal emphasized that the total deductions under Chapter VI-A should not exceed the gross total income before allowing these deductions. 4. Combined Effect of Deductions under Sections 80-IA and 80HHC: The Tribunal outlined the principles for combined deductions: 1. Deductions under Sections 80-IA and 80HHC should be computed unit-wise and independently. 2. The total deductions available will be the higher of the two. 3. Overall deductions for an industrial undertaking under Sections 80-IA and 80HHC will be limited to 100% of the profits and gains of that undertaking. 4. Total deductions under Chapter VI-A will not exceed the gross total income before these deductions. The Tribunal modified the CIT(A)'s order to reflect these principles and allowed the appeal partly. Conclusion: The Tribunal's decision addressed the proper valuation of closing stock under Section 145A, the inclusion of various incomes in business profits for Section 80HHC deductions, and the interplay between Sections 80-IA and 80HHC deductions. The appeal was allowed partly, with directions to recast the trading account and compute deductions in line with the Tribunal's findings.
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