2008 (10) TMI 32 - HC - Income Tax

Just as excise duty does not involve any element of turnover (as held by the Supreme Court in Lakshmi Machine Works) modvat credit also does not involve any such element of turnover - Tribunal was correct in law in holding that modvat credit has not to be included in the total turnover for the purposes of computing the eligible deduction under Section 80HHC

Summary

Issues:
1. Whether MODVAT credit should be included in the total turnover for computing the eligible deduction under Section 80HHC of the Income Tax Act, 1961.

Detailed Analysis:
1. The appeals under Section 260A of the Income Tax Act pertained to the same assessee for different assessment years. The primary issue was whether MODVAT credit should be considered in the total turnover for calculating the deduction under Section 80HHC. The Assessing Officer argued for its inclusion, while the assessee contended otherwise based on previous Tribunal decisions.

2. The Tribunal, consistent with its earlier rulings for the assessee's case, held that MODVAT credit should not be included in the total turnover for claiming deductions under Section 80HHC. The Revenue contended that MODVAT credit should be included as it formed part of the final product's cost, citing the definition of total turnover in Explanation (ba) of Section 80HHC.

3. The Supreme Court's decision in Commissioner of Income-Tax v Lakshmi Machine Works clarified that excise duty and sales tax should be excluded from total turnover for Section 80HHC deductions. The Court emphasized that these taxes do not relate to turnover. The Tribunal's decision aligns with this principle, asserting that MODVAT credit, akin to excise duty, should not be included in total turnover.

4. The nature of MODVAT credit was explained as a duty-collecting procedure to relieve manufacturers of duty paid on inputs. Adjusting this credit against excise duty on final products discharges the liability to pay excise duty. Various court decisions emphasized that MODVAT credit is equivalent to tax paid, further supporting its exclusion from total turnover for Section 80HHC deductions.

5. The Court concluded that MODVAT credit, being akin to excise duty and not involving turnover elements, should not be considered in total turnover for calculating deductions under Section 80HHC. Therefore, the Tribunal's decision to exclude MODVAT credit from total turnover was upheld, resulting in the dismissal of the appeals with each party bearing their costs.