2011 (11) TMI 8 - AT - Income Tax

Deduction u/s 80IB - Income from MODVAT Credit - the term Derived from - Held that - the issue on merit is covered in favour of the assessee by the decision in the case of Commissioner of Income-tax v. Meghalaya Steels Ltd. (2010 -TMI - 205350 - GAUHATI HIGH COURT) and the decision of the Hon ble Supreme Court in the case of Liberty India vs CIT (2009 -TMI - 34471 - SUPREME COURT) - Decided in favor of assessee.

Summary

Issues:
1. Allowability of deduction under Sec. 80IB on MODVAT credit income derived from industrial undertaking for AY 2006-07.

Analysis:
The revenue appealed against the CIT(A)'s order allowing the deduction claimed under Sec. 80IB on MODVAT credit income. The Assessing Officer disallowed the claim, stating that the income did not arise from the manufacturing activity of the undertaking due to differential excise duty rates on raw material purchase and goods sale. However, the CIT(A) upheld the claim. The main contention was whether the MODVAT credit income was eligible for deduction for the year under consideration.

The revenue argued that since the MODVAT credit was available in earlier years, it did not arise in the current year, thus not eligible for deduction. Conversely, the assessee contended that the income arose due to the excise duty rate difference and the amendment in excise duty rates in the current year allowed recovery of earlier paid duty. The assessee cited precedents supporting their position.

The Tribunal observed that the MODVAT credit was unutilized in earlier years due to excise duty rate discrepancies. The amendment in excise duty rates in the current year enabled the recovery and set off of the credit earned in previous years. The Tribunal noted that the benefit was not a cash refund but a credit set off against excise duty on goods sale. The Assessing Officer did not treat it as income of earlier years but denied the deduction on the grounds of not being derived from the industrial undertaking.

The Tribunal referenced the decision of the Hon'ble Guwahati High Court in a similar case, where it was held that the refund of excise duty, similar to MODVAT credit, was directly derived from industrial activity. The High Court emphasized the link between manufacturing activity, excise duty payment, and refund. Following this decision, the Tribunal ruled in favor of the assessee, dismissing the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision, allowing the deduction under Sec. 80IB on MODVAT credit income for the Assessment Year 2006-07. The judgment was based on the direct nexus between the manufacturing activity, excise duty payment, and the benefit derived, as established by legal precedents.