2016 (6) TMI 1076 - AT - Income Tax

Revision u/s 263 - non-inclusion of MODVAT credit to the closing stock - Held that - AO had raised specific query in the notice issued u/s.142(1) of the Act. The queries raised by the AO were replied by the assessee and these details also formed part of the tax Audit Report that were filed by the assessee before AO. Thus, it can be seen that after making the necessary queries with respect to the issues under consideration and on receiving replies from the assessee, the AO was satisfied with the submission of Assessee and, therefore no additions were made by the AO. We find that the Hon ble Apex Court in the case of CIT vs. Max India Ltd. reported at (2007 (11) TMI 12 - Supreme Court of India ) has held that where two views are possible and the ITO has taken one view with which CIT does not agree, the order of the AO cannot be treated as erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is sustainable in law. Further on the issue of considering MODVAT credit as income, we find that the Hon ble Apex Court in the case of CIT vs. Indo Nippon Chemicals Co.Ltd.(2003 (1) TMI 8 - SUPREME Court ) has held that unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such MODVAT credit. Before us, Revenue has not brought any material record to demonstrate that the view taken by the AO was an impermissible view and was contrary to law or was upon erroneous applications of legal principles necessitating the exercising of revisionary power u/s.263 of the Act. In view of the aforesaid facts, we are of the view that in the present case Ld.CIT was not justified in resorting to revisionary powers u/s.263 of the Act - Decided in favour of assessee

Issues Involved:
1. Jurisdiction and validity of the order passed under Section 263 of the Income Tax Act.
2. Non-inclusion of unutilized balance of CENVAT credit in the closing stock under Section 145A.
3. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of the Order Passed Under Section 263:

The appellant challenged the jurisdiction and validity of the order passed under Section 263 by the Principal Commissioner of Income Tax (CIT), arguing that the conditions necessary for invoking Section 263 were not fulfilled. The appellant contended that the original assessment order passed under Section 143(3) was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal noted that the power of revision under Section 263 is supervisory and can only be exercised if the order is erroneous and prejudicial to the interests of the Revenue. The Tribunal cited the Supreme Court's decision in Malabar Industrial Co. Ltd. vs. CIT, which held that both conditions must be satisfied for Section 263 to be invoked. The Tribunal concluded that the CIT was not justified in invoking Section 263 as the Assessing Officer (AO) had made necessary inquiries and the view taken by the AO was a permissible view in law.

2. Non-inclusion of Unutilized Balance of CENVAT Credit in the Closing Stock Under Section 145A:

The CIT observed that the assessee had not included the unutilized balance of CENVAT credit in the closing stock, which should have been done under Section 145A. The assessee argued that it was following the Exclusive Method of accounting, where the excise duty paid on raw materials was held as advance (MODVAT credit) and adjusted against excise duty payable on finished goods. The Tribunal noted that the AO had raised specific queries regarding this issue during the assessment proceedings, and the assessee had provided satisfactory explanations. The Tribunal referenced the Supreme Court's decision in CIT vs. Indo Nippon Chemicals Co. Ltd., which held that unavailed MODVAT credit cannot be construed as income. The Tribunal found that the AO's decision was a permissible view and not erroneous.

3. Disallowance Under Section 14A Read with Rule 8D:

The CIT noted that the AO had not correctly disallowed the interest expenditure under Section 14A read with Rule 8D. The assessee contended that it had considered net interest for the purpose of disallowance and that the AO had raised specific queries and applied his mind before deciding the issue. The Tribunal observed that the AO had indeed made necessary inquiries and was satisfied with the assessee's submissions. The Tribunal emphasized that when two views are possible, and the AO has taken one view, the CIT cannot invoke Section 263 merely because he disagrees with the AO's view, unless the AO's view is unsustainable in law. The Tribunal cited the Supreme Court's decision in CIT vs. Max India Ltd., which supported this principle.

Conclusion:

The Tribunal concluded that the CIT was not justified in invoking Section 263 as the AO had made necessary inquiries, and the views taken by the AO were permissible and sustainable in law. The Tribunal set aside the CIT's order and allowed the assessee's appeal.

Order:

The assessee's appeal was allowed, and the order of the CIT cancelling the AO's assessment order was set aside. The order was pronounced on June 3, 2016, at Ahmedabad.

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