2011 (11) TMI 511 - AT - Income Tax

Deduction u/s 80-IB denied on Cenvat availed - Revenue treated Cenvat like a scheme of duty drawback - assessee received Cenvat on excise duty paid on purchases of raw material and debited it in the Cenvat adjustment (recoverable amount)account - excise duty payable on sales is adjusted against the said account - Held that - As assessee reflected purchases in the P&L A/c inclusive of excise duty and consequently Cenvat availed during the year has been credited in the P&L A/c it is apparent that net effect of the accounting methodology employed by the assessee did not impact the derivation of profits and gains ascertainable for the purposes of deduction u/s 80-IB. Also, Revenue have not demonstrated as to how the Cenvat Scheme is parallel to the scheme of DEPB or Duty Draw Back. Therefore, CIT(A) was not justified in upholding the dis-allowance. In CIT vs. Meghalaya Steels Ltd. (2010 (9) TMI 679 - GAUHATI HIGH COURT) it was held that Cenvat scheme is only a mechanism to compute final excise duty on sales, based on the value addition undertaken by the seller and does not represent income liable to be taxed - Decided in favor of assessee.

Summary

Issues Involved:
1. Denial of deduction under section 80-IB on Cenvat availed.
2. Nature and treatment of Cenvat credit in profit and loss account.
3. Applicability of the decision in CIT vs. Dharam Pal Prem Chand Ltd. to the case.

Detailed Analysis:

1. Denial of Deduction under Section 80-IB on Cenvat Availed:
The CIT (Appeals) denied the deduction under section 80-IB on Cenvat availed, equating it to an incentive scheme similar to duty drawback, following the Supreme Court's decision in Liberty India. The assessee argued that Cenvat credit is merely a book entry and does not constitute real income. The Tribunal noted that the CIT (Appeals) and AO did not analyze the terms of the Cenvat and DEPB schemes to establish their similarity. The Tribunal found that Cenvat credit, unlike DEPB, is a mechanism to compute excise duty on sales and does not represent income liable to be taxed.

2. Nature and Treatment of Cenvat Credit in Profit and Loss Account:
The assessee explained that Cenvat availed is credited in the profit and loss account while the excise duty on purchases is debited in the Cenvat adjustment account. The Tribunal observed that the net impact of these entries is nil, and the assessee did not receive any incentive from the government. The Tribunal referred to the jurisdictional High Court's decision, which stated that the net effect of the accounting methodology employed by the assessee did not impact the derivation of profits for the purpose of deduction under section 80-IB.

3. Applicability of the Decision in CIT vs. Dharam Pal Prem Chand Ltd.:
The Tribunal highlighted the difference in language between sections 80HH, 80I, and 80-IB of the Act, noting that section 80-IB requires profits to be derived from any business of the industrial undertaking, not necessarily a direct nexus. The Tribunal cited the Delhi High Court's decision in CIT vs. Dharam Pal Prem Chand Ltd., which concluded that the net effect of the accounting methodology employed by the assessee was nil, and thus, there was no reason to exclude the refund of excise duty in arriving at the profit derived for the purposes of claiming deduction under section 80-IB. The Tribunal also referred to other decisions supporting the view that Cenvat credit does not constitute income derived from the industrial undertaking.

Conclusion:
The Tribunal concluded that the CIT (Appeals) was not justified in upholding the disallowance of deduction under section 80-IB in relation to the Cenvat credit of excise duty. The Tribunal allowed the appeal, stating that the net effect of the accounting methodology employed by the assessee did not impact the derivation of profits and gains for the purposes of deduction under section 80-IB. The Tribunal dismissed the residuary ground and concluded that no other argument or plea was made before them. The appeal was allowed, and the order was pronounced in the open court.