2008 (5) TMI 238 - HC - Income Tax

Addition made on account of Modvat Credit - assessee had not utilized the credit for payment of excise duty or adjusted the amount against the purchase - merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material it would not amount to income which is liable to be taxed under the Income Tax Act tribunal was right in deleting the additions made on above ground

Summary

Issues:
1. Whether the Tribunal was right in upholding the order of the Commissioner of Income Tax deleting the addition made on account of Modvat Credit?

Analysis:
The High Court of Gujarat was presented with the issue of whether the Tribunal's decision to uphold the deletion of an addition made on account of Modvat Credit by the Commissioner of Income Tax was correct. The case pertained to the Assessment Year 1989-90, with the relevant previous year ending on 31.3.1989. The Assessing Officer contended that an amount of Rs. 3,40,644/-, available as credit to the assessee under the Central Excise Act, should be treated as income liable to tax since the assessee had not utilized the credit for excise duty payment or adjusted it against purchases.

In the appeal filed by the assessee, the Commissioner (Appeals) relied on a decision by the Calcutta Bench in the case of M/s. Berger Paints India Limited and allowed the appeal. Subsequently, the Tribunal upheld the Commissioner (Appeals)'s order. The High Court considered the matter in light of the Supreme Court's judgment in the case of Commissioner of Income-Tax vs. Indo Nippon Chemicals Co. Ltd., where it was observed that Modvat credit, being an irreversible credit available to manufacturers upon purchasing duty paid raw material, does not amount to taxable income under the Income Tax Act.

The High Court, referring to the Apex Court's decision, concluded that the Assessing Officer's method of valuation, which assumed income generated by Modvat credit on unconsumed raw material not reflected in the accounts, was erroneous. Consequently, the Court answered the question in favor of the assessee and against the revenue. The reference was disposed of accordingly, with no order as to costs.