2013 (3) TMI 49 - HC - Income Tax

Non-inclusion of excise duty element in closing stock - ITAT deleted the addition - Tribunal held that if the Department wants to add the excise duty in the closing stock for valuation purposes, the department should also add the excise duty paid on the raw material as the assessee was claiming MODVAT - Held that - As decided in Commissioner of Income-Tax Versus Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT unable to accept the view of the AO that merely because Modvat credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act. AO adopted the gross method at the time of purchase, and the net method of valuation at the time of valuation of the stock on hand. By this method, which is wholly erroneous he assumed that the income, to the extent of the Modvat credit on the unconsumed raw material, was generated, which was not reflected in the accounts and attempted to bring it to charge under the Act - no substantial question of law is involved in the appeal.

Summary

Issues:
1. Justification of Income Tax Appellate Tribunal's decision on yield calculation and GP rate application.
2. Deletion of addition on account of non-inclusion of excise duty element in closing stock valuation.

Analysis:

1. The appeal was filed against the Income Tax Appellate Tribunal's order for the Assessment Year 2004-05. The first issue raised was whether the Tribunal was correct in not appreciating the inability to calculate yield and compare input and output materials, leading to the application of a GP rate of 8%. The petitioner argued that the Tribunal erred in not considering the complexities of yield calculation and the necessity to adjust the GP rate accordingly. However, the Tribunal's decision was based on the method adopted by the assessee for valuation, particularly regarding the inclusion of excise duty in closing stock valuation due to MODVAT. The Tribunal's stance was supported by the Apex Court's ruling in Commissioner of Income-tax versus Indo Nippon Chemicals Co. Ltd., emphasizing the inaccuracy of assuming income generation based on Modvat credits on unconsumed raw material.

2. The second issue pertained to the deletion of an addition of Rs. 11,19,577 on account of non-inclusion of excise duty in the closing stock valuation. The petitioner contended that the Tribunal's decision was not in line with the judgment in ACIT vs. S.P. Fabricators (P) Ltd., which highlighted the tax-neutral effect of switching valuation methods for closing stock. The petitioner argued that the excise duty should have been included in the closing stock valuation, considering the MODVAT credit claimed by the assessee. However, the Tribunal maintained that if the excise duty was to be added for valuation purposes, it should also include the excise duty paid on raw materials, as claimed by the assessee for MODVAT.

In conclusion, the High Court dismissed the appeal summarily, upholding the Tribunal's decision on both issues. The Court found that the Tribunal's approach in considering the inclusion of excise duty in closing stock valuation was appropriate, supported by legal precedent, and did not identify any substantial question of law warranting further consideration.