2012 (4) TMI 330 - HC - Income Tax

Appellate Authorities held that the MODVAT credit should not be added to the income as well as the value of the closing stock for the current assessment year as held by the Assessing Officer CIT(A) assessing officer should not have rejected the method of accounting employed by the assessee, as it was a standard method of accounting and even as approved by the institute of Chartered Accountants in India and therefore this amount was directed to be deleted Held that - follow the view taken by the Income-tax Appellate Tribunal, Mumbai in the case of S.H. Kelkar & Co. Ltd. v. Dy. CIT (1992 - TMI - 58028 - ITAT BOMBAY-A ) and also in the case of Berger Paints India Ltd. v. Dy. CIT (1992 - TMI - 60611 - ITAT CALCUTTA-E ) the assessing officer was not justified in adding the amount on account of MODVAT etc., and therefore upheld the view of the appellate Commissioner and dismissed the appeal of the revenue - deem it proper to remand this matter to the assessing officer on this question, so that the assessee can make good its claim in terms of actual payment etc. disallowance on the ground of obsolescence - the Appellate Authorities held that custom duty paid on goods claimed as irrecoverable and therefore the entire amount of Rs. 9,84,349/- should be allowed as an expenditure despite the assessee not establishing that this amount had become obsolete Held that - the understanding and the manner of working out of the extent of obsolescence by the appellate Commissioner was fully justified, having regard to the nature of the business the assessee carried on and the kind of product with which it is dealing with etc against revenue. Whether the Appellate Authorities were correct in holding that custom duty paid on software and expenses incurred on MRB items should be allowed in full and not at 50% as held by the Assessing Officer and since computer software would become obsolete despite the assessee not producing any proof to claim such obsolescence - Held that - having regard to the fact that the products got obsolete fairly fast in comparison to the other products in other industry and more so even in the computer industry a software having comparatively lessor shelf life we do not propose to disturb the view taken by the appellate authorities - in favour of the assessee.

Issues Involved:

1. Whether MODVAT credit should be added to the income and the value of the closing stock.
2. Whether custom duty paid on goods claimed as irrecoverable should be allowed as an expenditure.
3. Whether custom duty paid on software and expenses incurred on MRB items should be allowed in full or at 50%.

Issue-wise Detailed Analysis:

1. MODVAT Credit and Closing Stock Valuation:
The primary issue revolves around whether the MODVAT credit amounting to Rs. 78,90,593 should be included in the valuation of the closing stock for the assessment year 1992-93. The assessee argued that this amount represents excise duty paid on inputs used for assembling or producing computers and should be deducted from the closing stock value. The assessing officer rejected this method, resulting in an inflated profit figure.

The appellate authorities, following the Institute of Chartered Accountants of India's approved accounting method, directed the deletion of this amount from the closing stock value. The tribunal upheld this view, referencing similar cases such as S.H. Kelkar & Co. Ltd. v. Dy. CIT and Berger Paints India Ltd. v. Dy. CIT, concluding that the assessing officer's addition was unjustified.

However, the revenue contested this decision, citing a previous judgment involving the same assessee for a subsequent assessment year, where the matter was remanded to the assessing officer for reconsideration. The court noted that the Supreme Court's judgment in CIT v. Indo Nippon Chemicals Co. Ltd. could have resolved the issue in favor of the assessee, but since it wasn't previously relied upon, the matter should be remanded for the assessee to substantiate its claim with proof of actual excise duty payment.

2. Custom Duty on Irrecoverable Goods:
The second issue concerns whether the entire custom duty amount of Rs. 9,84,349 paid on goods claimed as irrecoverable should be allowed as an expenditure. The appellate authorities allowed this claim, but the revenue argued that the assessee did not establish that this amount had become obsolete.

The court agreed with the revenue's position, noting that the assessee had not provided sufficient evidence to support the claim of obsolescence. Therefore, this question was answered in favor of the revenue, disallowing the custom duty expenditure claim.

3. Custom Duty on Software and MRB Items:
The third issue pertains to whether the custom duty paid on software and expenses on MRB items should be allowed in full or at 50%. The assessing officer had allowed only 50% of the expenditure, citing potential utility of the materials. However, the appellate authorities allowed 100% of the expenditure, considering the rapid obsolescence in the computer industry.

The court upheld the appellate authorities' decision, recognizing the fast-paced obsolescence of software and related products. It found no illegality or error in law in the appellate authorities' view, thus answering this question in favor of the assessee.

Conclusion:
The appeal was partially allowed. The first and second issues were remanded to the assessing officer for the assessee to provide proof of actual excise duty payment and substantiate claims of obsolescence. The third issue was resolved in favor of the assessee, allowing 100% deduction for custom duty on software and MRB items.

← Previous Next →