2013 (2) TMI 32 - HC - Central Excise

Reversal of Cenvat Credit Rule 5B of the CCR, 2004 - Written off input or capital goods or any provision thereof Whether writing off certain inputs either partially or fully in its books of accounts for the income-tax purpose, also required to reverse CENVAT credit taken on such inputs Rule 57A Circulars dated 22-2-1995 and 16-7-2002 Held that - There is significant difference in the accounting approach for the income-tax purpose and the approach for stock maintenance for the purpose of manufacturing activities relevant for the question of excise. Merely because the value of goods diminished in the books of accounts of the assessee would not by itself permit the Department to insist on reversal of the credit particularly when such goods were still available in the factory in usable condition Reduction of the value of such spares (inputs) for income-tax purpose, cannot be equated with writing off of the physical stock. The accounts maintained by the manufacturer for the income-tax purpose stand on an entirely different footing and would have to follow the accounting standards prescribed under the law. If under such accounting principles, the assessee is entitled to diminish the value of a certain stock held over a period longer than the specified period, the same has no correlation with the availability of physical stock insofar as the manufacturing activity is concerned In absence of such statutory provisions, merely on the strength of the Board s circulars, it would not be open for the Department to enforce reversal of CENVAT credit. In favour of assessee

Issues Involved:
1. Whether modvat credit on inputs not used by the assessee and completely written off in books is required to be reversed.
2. Whether the Tribunal was justified in rejecting the appeal of the Revenue and confirming the order of the Adjudicating Authority dropping the demand for recovering the amount of Modvat Credit on inputs completely written off in the books of accounts.
3. Whether writing off of inputs completely in the books of accounts makes an assessee liable to reverse the Modvat/Cenvat Credit availed of on such written off inputs.

Issue-wise Detailed Analysis:

1. Reversal of Modvat Credit on Written-off Inputs:
The core issue in Tax Appeal No.798/2006 was whether modvat credit on inputs not used by the assessee and completely written off in books is required to be reversed. The respondent, a manufacturer of Air Compressors, took credit of tax paid on inputs under the modvat scheme. Some inputs were written off for income-tax purposes but were still available for use. The Department issued a show-cause notice demanding reversal of modvat credit based on a CBEC circular dated 22-2-1995. The adjudicating officer confirmed the duty demand and imposed penalties. However, the Tribunal allowed the assessee's appeal, stating that modvat credit cannot be denied if inputs are still available in the factory premises. The High Court upheld this view, noting that the reduction in book value for income-tax purposes does not equate to physical stock write-off.

2. Justification of Tribunal's Rejection of Revenue's Appeal:
In Tax Appeal No.810/2008, the Tribunal's decision to reject the Revenue's appeal and confirm the Adjudicating Authority's order was questioned. The Commissioner had dropped the demand for recovery of modvat credit, stating that unless the Department proves wrongful credit availing or removal of inputs without duty payment, credit cannot be extinguished if inputs remain in the factory. The Tribunal upheld this, noting the absence of any dispute over the physical presence of goods. The High Court supported this, highlighting that the rules did not mandate reversal of credit merely due to book value reduction.

3. Liability to Reverse Modvat/Cenvat Credit on Written-off Inputs:
The High Court examined whether writing off inputs in books of accounts necessitates reversing modvat/cenvat credit. The respondent argued that modvat credit is taken upon input purchase, not deferred to actual usage. The Court noted that the modvat scheme under the rules of 1944 did not specify a time limit for input consumption. The CBEC circulars of 1995 and 2002, which mandated reversal of credit on written-off inputs, were found inconsistent with the statutory provisions. The Court emphasized that circulars cannot impose liabilities not envisaged by the rules. It cited the Supreme Court's decision in Dai Ichi Karkaria Ltd., which stated that validly taken credit remains available without time limitation unless inputs are removed for home consumption.

Conclusion:
The High Court concluded that the reduction in book value for accounting purposes does not necessitate modvat credit reversal if inputs are still physically available in the factory. The CBEC circulars could not override the statutory provisions, and the rules did not mandate such reversal. Both appeals were dismissed, and the questions were answered in favor of the assessee and against the Department.

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