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2011 (6) TMI 563 - AT - Income TaxWhether for the purpose of computing deduction u/s. 80-HHC excise duty, sales collected, sale of scrap and interest has to be considered as part of total turnover - in the case of Sudarshan Chemical Industries Ltd. Sudarshan Chemical Industries Ltd. (2000 - TMI - 15014 - BOMBAY High Court - Income Tax), appeal of the assessees which relates to inclusion of excise duty, sales tax payable and interest in the total turnover of the assessee is decided in favour of the assessee and against the revenue. Addition in valuation of closing stock on account of MODVAT excise duty credit - main controversy between the assessee and the A.O. relates to the amount to be attributed to purchase and closing stock of raw material. The assessee has debited the cost of purchases net of excise duty and consequently the closing stock inventory is also valued on Held that - two possible methods of valuation of stock. The first would be the gross method in which the stock is valued at cost price inclusive of the excise duty element. If this method is adopted, then the unconsumed stock also must necessarily be valued in the same manner. The other method is the net method in which the raw material purchased is valued at the actual cost, that is the actual purchase price and, on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same, following the judgment of the Hon ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (2003 - TMI - 6119 - SUPREME Court) , order of the CIT(A) upheld and appeal of the Revenue dismissed. Addition on account of excise duty payable on finished goods not included in the valuation of closing stock - though the assessee has debited the excise duty on unsold closing stock in its profit and loss account, but has not taken the same in the valuation of the closing stock Held that - in the case of Food Specialities Ltd. (1990 - TMI - 63941 - ITAT DELHI-C) was relied upon to adjudicate upon the question whether excise duty formed part of the cost of manufacture/production and was hence, includible in the figure of closing stock to the extent the goods remained unsold after having been cleared from the bonded warehouse and the Hon ble Special Bench decided in favour of the assessee, appeal of the Revenue is dismissed. Whether Interest charged on late payment of tax by department is not a business expenditure Held that - assessee is assessable in respect of the gross interest of Rs 45,90,876/- received from the Income-tax Department and not merely on the net interest of Rs. 44,53,655/- remaining after the set off of the interest of Rs. 1,37,225/- paid to the Income-tax Department. The interest payment has also not been held to be deductible from interest received in order to arrive at the assessable income in respect of interest received from the Income-tax Department. In this manner, as per the majority view, the Ground of Appeal of the Revenue is allowed, appeals of the assessee as well as of the Revenue are partly allowed.
Issues Involved:
1. Inclusion of Excise Duty, Sales Tax, Sale of Scrap, and Interest in Total Turnover for Deduction u/s 80-HHC. 2. Allowability of Depreciation on Transit House/Assets at Transit House u/s 37(4). 3. Deduction of Bad Debts. 4. Disallowance under Rule 6D. 5. Valuation of Closing Stock on Account of MODVAT Excise Duty Credit. 6. Addition of Excise Duty Payable on Finished Goods Not Included in Closing Stock. 7. Taxation of Net Interest Received from the Income-tax Department. Issue-wise Detailed Analysis: 1. Inclusion of Excise Duty, Sales Tax, Sale of Scrap, and Interest in Total Turnover for Deduction u/s 80-HHC: The Tribunal held that excise duty, sales tax, and interest should not be included in the total turnover for computing deduction u/s 80-HHC, following previous decisions in similar cases. This part of the ground was decided in favor of the assessee. Regarding the sale of scrap, the Tribunal followed the decision in Eagle Flask Industries Ltd. and decided that the sale of scrap cannot form part of the total turnover while determining the deduction u/s 80-HHC. This issue was also decided in favor of the assessee. 2. Allowability of Depreciation on Transit House/Assets at Transit House u/s 37(4): The Tribunal noted that the issue was covered against the assessee in previous years. Despite the assessee's reliance on the Bombay High Court decision in CIT v. Chase Bright Steel Ltd., the Tribunal followed the later decision in CIT v. Ocean Carriers (P.) Ltd. and Britania Industries Ltd. v. CIT, which held that depreciation is not allowable for guest house buildings or assets. This issue was decided in favor of the Revenue. 3. Deduction of Bad Debts: The Tribunal found that the assessee had made a provision for doubtful debts of Rs. 41.59 lakhs, which was not actually written off as irrecoverable in the accounts. Given the retrospective amendment by the Finance Act 2001, which clarified that only actual write-offs are deductible, the Tribunal upheld the disallowance of Rs. 41.59 lakhs. This issue was decided against the assessee. 4. Disallowance under Rule 6D: The Tribunal noted that the issue was covered by the decision of the Bombay High Court in CIT v. Arrow India Ltd., which was in favor of the Revenue. Consequently, the disallowance of Rs. 82,667/- was upheld. 5. Valuation of Closing Stock on Account of MODVAT Excise Duty Credit: The Tribunal upheld the CIT(A)'s decision that the correct method of accounting for MODVAT credit is to debit the purchase cost inclusive of excise duty, debit gross excise duty payable, determine the value of closing stock inclusive of excise duty, and credit the profit and loss account with MODVAT credit availed. This method aligns with the ICAI guidelines and the Supreme Court decision in CIT v. Indo Nippon Chemicals Co. Ltd. The addition of Rs. 78,89,000/- was deleted, and this issue was decided in favor of the assessee. 6. Addition of Excise Duty Payable on Finished Goods Not Included in Closing Stock: The Tribunal followed the Special Bench decision in the case of Food Specialities Ltd., which held that excise duty on finished goods is a post-manufacturing expense and should not be included in the valuation of closing stock. The addition of Rs. 2,88,46,000/- was deleted, and this issue was decided in favor of the assessee. 7. Taxation of Net Interest Received from the Income-tax Department: There was a difference of opinion between the Members. The Third Member, Hon'ble President, concluded that the assessee is assessable on the gross interest received from the Income-tax Department and not merely on the net interest after set off of the interest paid. The interest payment cannot be allowed as a deduction from the interest received. This issue was decided in favor of the Revenue. Conclusion: The appeals resulted in mixed outcomes. The assessee succeeded on issues related to the inclusion of excise duty, sales tax, sale of scrap, and interest in total turnover, valuation of closing stock on account of MODVAT credit, and addition of excise duty payable on finished goods. The Revenue succeeded on issues related to depreciation on transit house/assets, deduction of bad debts, disallowance under Rule 6D, and taxation of net interest received from the Income-tax Department.
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