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2021 (1) TMI 162 - AT - Income TaxMethod of accounting - Valuation of closing stock - Addition of CENVAT Credit receivable - unutilized Modvat Credit was required to be included in the closing stock of raw material and work in progress - valuation method prescribed under Section 145A - HELD THAT - Assessee is following the exclusive method of accounting consistently for years together where the purchase of capital goods as well as raw materials, stores and spares etc. and services availed/procured is recorded and charged off to Profit and Loss Account which are net of duties/taxes for which CENVAT credit is available to the assessee. CENVAT Credit receivable is being shown as an asset in the Balance Sheet and will be adjusted against excise duty liabilities as and when the same is utilized. Further that in the exclusive method of accounting, no deduction is being claimed in respect of the duties, taxes paid on purchase of material as the same was recorded as an asset in CENVAT Credit receivable account rather than being charged as an expense in the Profit and Loss Account. Whereas in the inclusive method of accounting deduction is claimed in respect of duties, taxes paid on purchase of material by treating the same as part of the purchase cost. The assessee also submitted that the method of accounting/treatment as aforesaid has been consistently followed by it over the years. We find that the assessee has also relied upon the guidance note on tax audit issued by the ICAI in support of his explanation as rendered before the authorities below. The assessee has also illustrated its contention of the revenue being neutral irrespective of the method of accounting being followed by placing the statement showing effect of both the method of accounting exclusive and inclusive as available at Page 13 of the Paper Book filed before us which we have already perused and in our considered opinion the same is acceptable. As relying on M/S. AMBUJA INTERMEDIATES LTD. 2018 (2) TMI 1631 - ITAT AHMEDABAD we find no merit in such addition made by the AO and further enhancement thereof by Ld. CIT(A) when the unutilized CENVAT credit only represents the availability of excise credit at the disposal of the assessee at the end of the year eligible to be set off against future liability and, therefore, the unutilized CENVAT credit cannot be adopted for the purposes of valuation of inventories in exercise of Section 145A of the Act where the effect is revenue neutral. We observe that inclusive method of accounting has not altered the resultant profits and a revenue neutral exercise over a period of time. We, therefore, with the above observation delete the addition made by the authorities below.
Issues Involved:
1. Addition of unutilized CENVAT Credit to closing stock. 2. Rejection of deduction claimed under Section 43B of the Income Tax Act. 3. Method of accounting for excise duty (exclusive vs. inclusive method). Detailed Analysis: 1. Addition of unutilized CENVAT Credit to closing stock: The assessee, engaged in the design and marketing of gas and liquid measurement products, filed its return of income declaring a total income of ?11,98,21,169/-. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had unutilized Modvat credit of raw material amounting to ?16,09,091/- as on 31.03.2010. The AO proposed to add this unutilized Modvat Credit to the closing stock as per Section 145A of the Income Tax Act. The assessee contended that irrespective of the accounting method (exclusive or inclusive), the net profit remains the same, and there would be no revenue loss. However, the AO rejected this contention and added the unutilized Modvat Credit to the total income. 2. Rejection of deduction claimed under Section 43B: In the appellate proceedings, the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the deduction of ?72,21,235/- claimed by the assessee under Section 43B of the Act, on the ground that no liability for payment of excise duty had accrued as of 31.03.2010. Consequently, the addition was enhanced from ?16,09,091/- to ?72,21,235/- by the CIT(A). The assessee argued that the deduction of ?72,21,235/- represented the excise duty component on raw materials and was claimed in compliance with Section 145A of the Act. The assessee also relied on a judgment by the Co-ordinate Bench in a similar case where the addition of unutilized CENVAT credit was deleted. 3. Method of accounting for excise duty (exclusive vs. inclusive method): The CIT(A) held that the assessee was required to prepare its accounts using the inclusive method as per Section 145A, which was applicable from AY 1999-2000. The CIT(A) observed that the assessee's contention that either method could be followed was incorrect, and the exclusive method was not permissible. The CIT(A) cited judicial pronouncements and a decision by the TTAT Mumbai Bench in the case of Hercules Pigment Industries to support this view. The CIT(A) further noted that the assessee's computation, which included a deduction of ?72,21,235/-, was not in accordance with the inclusive method, as there was no accrued liability for payment of excise duty as of 31.03.2010. Tribunal's Findings: The Tribunal considered the arguments and materials presented by both parties. It noted that the assessee had consistently followed the exclusive method of accounting, where duties and taxes paid on purchases were recorded as assets in the CENVAT Credit receivable account, rather than being charged as expenses. The Tribunal found that the assessee's method of accounting was acceptable and that the revenue impact was neutral irrespective of the method followed. The Tribunal also referred to the judgment by the Co-ordinate Bench in a similar case, which supported the assessee's position. Conclusion: The Tribunal concluded that the unutilized CENVAT credit represented the availability of excise credit at the end of the year, which could be set off against future liability. Therefore, it could not be adopted for the purposes of valuation of inventories under Section 145A. The Tribunal observed that the inclusive method of accounting did not alter the resultant profits and was a revenue-neutral exercise over time. Consequently, the Tribunal deleted the addition made by the AO and the enhancement by the CIT(A). Final Order: The assessee's appeal was allowed, and the addition made by the authorities below was deleted. The order was pronounced in open court on 04/01/2021.
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