2019 (1) TMI 1623 - HC - Income Tax

Inclusion of cenvat credit balance as part of the closing stock - Unavailed cenvat balance not included in the cost of inventory as the cenvat element was integral part of valuation of closing inventory - HELD THAT - We noticed that the Supreme Court in the case of Commissioner of Income Tax v/s Indo Nippon Chemicals Co Ltd 2003 (1) TMI 8 - SUPREME COURT confirmed the decision of the High Court in which the accounting practice consistently followed by the Assessee of excluding Modvat credit (which was prevailing at the relevant time and which was later on replaced by cenvat in the valuation of closing stock.) Following the judgment of the Supreme Court in the case of Indo Nippon Chemicals Co Ltd (supra), a Division Bench of this Court in the case of Commissioner of Income Tax v/s Diamond Dye Chem Ltd 2017 (7) TMI 616 - BOMBAY HIGH COURT dismissed the Revenue's Appeal as held merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid raw materials, that would not amount to income which was liable to the taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same - decided against revenue

Summary

Issues:
Inclusion of cenvat credit balance in closing stock valuation.

Analysis:
The High Court considered the appeal filed by the Revenue challenging the decision of the Income Tax Appellate Tribunal. The primary issue was whether the unavailed cenvat balance as on a specific date should be included in the cost of inventory. The Court referred to the case law of Commissioner of Income Tax v/s Indo Nippon Chemicals Co Ltd and highlighted the accounting practice followed by the Assessee of excluding Modvat credit in the valuation of closing stock. The Supreme Court's decision in the mentioned case affirmed the exclusion of Modvat credit in determining income. The Division Bench of the High Court, in the case of Commissioner of Income Tax v/s Diamond Dye Chem Ltd, also dismissed the Revenue's Appeal, emphasizing that the method of accounting adopted did not affect the final result. The Court reiterated that the Modvat credit, being an irreversible credit on duty paid raw materials, did not constitute taxable income under the Act. Consequently, the Court upheld the Tribunal's decision and dismissed the Tax Appeal filed by the Revenue.