2012 (11) TMI 284 - AT - Income Tax

Revisionary powers used by CIT(A) - order of the A.O. was erroneous - non inclusion of unutilized MODVAT and VAT credit in valuing closing stock of Raw material and work in progress - Held that - Assessee had made written submissions and submitted the details before A.O. whereby it was contended that the assessee has been consistently following exclusive method of accounting for sales, purchase and closing stock. It also demonstrated through the annexure of tax audit report certified by Chartered Accountant that whichever method of accounting is adopted (inclusive or exclusive method) by the assessee, there is no impact on the profit of the year. Similarly assessee also submitted before A.O. & CIT the method of accounting employed consistently followed by it for accounting of Excise duty and CENVAT and by following either of the method there is no impact on profit and loss account. The A.O. in the instant case had examined the issue of stock. The observation of the CIT that the A.O. overlooked the provisions of 145A also does not appear to be justified for the reason that the A.O. had examined the same. The order of assessment dated 4-12-2009, no doubt does not contain a detailed discussion on this aspect, but that however would not render the order as erroneous as decided in Commissioner Of Income-Tax Versus Gabriel India Limited 1993 (4) TMI 55 - BOMBAY HIGH COURT . Thus as the A.O. had made necessary inquiries and the assessee had provided an explanation in that regard.Thus, it can be said the A.O. on being satisfied did not make any addition and disallowance relying on CIT vs. Indo Nippon Chemicals Co. 2003 (1) TMI 8 - SUPREME COURT wherein held that hat no addition on account of modvat credit can be made - Therefore the order of the A.O. cannot be considered either to be erroneous or prejudicial to the interest of the Revenue - in favour of assessee.

Summary

Issues Involved:
1. Invocation of Section 263 of the I.T. Act by CIT.
2. Valuation of closing stock including unutilized MODVAT and VAT credits.
3. Examination and application of Section 145A of the I.T. Act.
4. Determination of whether the assessment order was erroneous and prejudicial to the interest of Revenue.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the I.T. Act by CIT:
The primary issue raised by the assessee was regarding the CIT-III invoking the provisions of Section 263 of the I.T. Act. The CIT issued a show cause notice to the assessee, questioning why the assessment should not be modified or canceled under Section 263, citing the non-inclusion of unutilized MODVAT and VAT credits in the valuation of closing stock. The assessee argued that the assessment was completed by the A.O. after detailed inquiry and verification, and thus, the order was neither erroneous nor prejudicial to the interest of Revenue. The CIT, however, found the submissions unconvincing and held that the A.O. failed to examine the issue, making the assessment erroneous and prejudicial to the Revenue's interest.

2. Valuation of Closing Stock Including Unutilized MODVAT and VAT Credits:
The CIT's contention was that the assessee did not include unutilized MODVAT and VAT credits in the valuation of closing stock, which should have been done as per Section 145A of the I.T. Act. The assessee argued that under the exclusive method of accounting as per Accounting Standard-2 (AS-2) of ICAI, MODVAT and VAT were excluded from raw material purchases, sales, and closing stock, with the credit balance shown under "Current Liabilities." The assessee also submitted that including these credits in the closing stock would not result in Revenue loss, as demonstrated by the reconciliation statement furnished with the Audit Report.

3. Examination and Application of Section 145A of the I.T. Act:
Section 145A mandates that the valuation of purchase, sale, and inventory should include any tax, duty, cess, or fee incurred to bring the goods to their location and condition as on the date of valuation. The CIT argued that the A.O. did not examine this aspect, making the assessment erroneous. The CIT cited various case laws, including the Delhi High Court's decision in Commissioner of Income Tax vs. Mahavir Aluminium Ltd., supporting the inclusion of excise duty in the valuation of closing stock.

4. Determination of Whether the Assessment Order was Erroneous and Prejudicial to the Interest of Revenue:
The Tribunal observed that for the CIT to exercise jurisdiction under Section 263, the order must be both erroneous and prejudicial to the interest of Revenue. The Tribunal noted that the A.O. had examined the issue of stock and the method of accounting employed by the assessee. The assessee had made written submissions and provided details to the A.O., demonstrating that the method of accounting followed did not impact the profit. The Tribunal held that the A.O.'s decision, supported by judicial precedents, was not unsustainable in law. Therefore, the assessment order could not be considered erroneous or prejudicial to the interest of Revenue.

Conclusion:
The Tribunal concluded that the CIT was not justified in invoking Section 263 as the A.O. had made necessary inquiries and the assessee had provided explanations. The Tribunal quashed the CIT's order and allowed the appeal filed by the assessee. The assessment order was not considered erroneous or prejudicial to the interest of Revenue, and the appeal was allowed in favor of the assessee.