SIMULTANEOUS AVAILMENT OF CENVAT CREDIT AND DEPRECIATION UNDER INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Rule 3 of CENVAT Credit Rules, 2004 (‘Rules’ for short) allows a manufacturer or producer of final products or provider of taxable services to take credit of the duty, service tax, national calamity duty etc., against the payment of central excise or service tax.   Rule 4 imposes certain conditions for availing credit.  In respect of capital goods Rule 4(2)(a) provides that the CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding 50% of the duty paid on such capital goods n the same financial year.  The CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared in the same financial year. 

Rule 4(4) provides that the CENVAT credit in respect of the capital goods shall not be allowed in respect of the part of the value of goods  which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under Section 32 of the Income Tax Act, 1961.

It is thus clear that simultaneous availment of CENVAT credit and depreciation under Section 32 of the Income Tax Act is not possible. 

In ‘Commissioner of Central Excise and Service Tax, Bangalore V. Suprajit Engineering Limited’ – 2010 -TMI - 77489 - KARNATAKA HIGH COURT the assessee is having factory at Bommasandra Industrial Area engaged in the manufacture of excisable goods falling under the heading Nos. 8714, 8483, 8708.   The assessee is availing CENVAT credit of duty paid on inputs/capital goods.  During the year 2000 – 01 the assessee purchased capital goods and availed 50% of CENVAT credit of Capital goods as per prevailing rules and also availed depreciation under Section 32 of the Income Tax Act, 1961 in respect of the remaining 50% of the CENVAT credit which was not availed by it.   In the next financial year the assessee availed CENVAT credit for the balance 50% unavailed during the previous financial year. 

The Revenue on noticing the same issued a show cause notice to the assessee calling upon the assessee to pay duty and also to pay interest and penalty.  A reply was filed by the assessee.   The Jurisdictional Deputy Commissioner confirmed the duty demanded along with interest and penalty.  The assessee filed appeal before Commissioner of Central Excise which also confirmed the order of the Deputy Commissioner.   On the appeal filed by the assessee the Tribunal allowed the appeal filed by the assessee.

Being aggrieved against the order of the Tribunal the Department filed an appeal before the High Court.  The question of law framed by the Department is – “Whether the Tribunal is right in arriving at decision that the assessee availed  CENVAT credit during the second year as per Rule 4(2)(b) of CENVAT credit Rules and further the finding of the Tribunal that there is no bar under Rule 4(4) to claim depreciation of the balance 50% of the value of the capital goods which represents the duty under Section 32 of the Income Tax Act, 1961, without noticing the show cause notice, wherein it is stated that the assessee has availed the second 50% of the value of the capital goods in respect of which CENVAT credit availed from all the units and the same is contrary to Rule 4 of said Rules.”

The Department put forth the following submissions before the Tribunal:

• When the assessee had availed 50% of the CENVAT credit for the relevant assessment year and having claimed depreciation under Section 32 of the Income Tax Act, 1961 it was not open to the assessee to claim credit again in subsequent assessment year;
• The issue of show cause notice by the revenue and levy of interest and penalty was justified;
• The Tribunal without considering the relevant provision of law and without giving any finding allowed the appeal;
• The order passed by the Tribunal is one without application of mind and contrary to Rule 4 of the CENVAT Credit Rues, 1961

The Department prayed the High Court to allow the appeal.

The assessee put forth the following submissions before the Tribunal:

• In the first year the assessee has utilized 50% of the CENVAT credit and the remaining 50% has been made use of for the subsequent year as it was in credit;
• In view of Rule 4(4) the assessee was entitled to claim depreciation under Section 32 of the Income Tax Act, 1961 in respect of the unused CENVAT Credit;
• The conduct of the assessee cannot be termed as violation of Rule 4(4);
• The proceedings initiated by the department was also not maintainable since the assessee had reversed the credit in view of the availment of depreciation under section 32 of the Income Tax Act much prior to the issuance of show cause notice

In view of the above the assessee prayed the High Court to dismiss the appeal.

The High Court after considering the facts and circumstances of the case held that the Tribunal has committed a serious error in not considering Rule 4(4) of CENVAT Credit Rules, 1964.  Without applying its mind, without coming to the conclusion how the assessee would be entitled to avail benefit of depreciation under Section 32 of the Income Tax Act and also claiming benefit of CENVAT credit in the subsequent year has allowed the appeal wrongly.  The High Court is of the view that on account of improper interpretation of Rule 4(4) relief has been granted to the assessee by the Tribunal which is liable to be set aside.  The assessee cannot claim depreciation under Section 32 of the Income Tax Act, 1961 in respect of non utilized CENVAT credit and claiming benefit for the relevant assessment year having claimed depreciation under Section 32 of the Income Tax Act, 1961.  In regard to penalty and interest the High Court observed that the Department has not raised any question of law in the appeal. If the entry has been reversed the High Court is of the view that the Revenue cannot levy penalty or interest. 

Thus it is confirmed through the decided case law simultaneous availment of CENVAT Credit and depreciation under Income Tax Act, 1962 is not possible.