2013 (10) TMI 18 - HC - Income Tax

Whether the excise duty on raw material consumed during the year is allowable u/s. 37(1) - Whether the assessee is entitled to MODVAT credit on account of excess of excise duty/additional customs duty, paid by it on purchase of raw material, over the duty payable on finished goods, in the year of accrual i.e. when the raw material is purchased or in the year of receipt, when the assessee is maintaining accounts on mercantile system of accounting? - Held that - As payment of excise and additional customs duties had been made, it was to be allowed as a deduction under Section 37(1) of the Act. Unutilised MODVAT credit remained on the credit side and was refunded in the next assessment year, i.e., Assessment Year 1996-97, when income of the assessee to the tune of Rs.7.16 crores was taxed on account of refund. This would amount to double taxation of the same amount in the two years. The issue in question is covered by the decision of the Supreme Court in CIT versus Indo Nippon Chemicals Company Limited, 2003 (1) TMI 8 - SUPREME Court , wherein it was observed that the Assessing Officer/Revenue was not correct in holding that MODVAT credit was irreversible credit available to the manufacturers upon purchase of duty paid raw material and it should amount to income, which is liable to be taxed under the Act - In the said case it was also noticed that the assessee had uniformly applied the net method, namely, valuing the raw material at purchase price minus MODVAT credit and the order of the Assessing Officer/Revenue was adversely commented upon because they had adopted gross method which included the MODVAT credit at the time of purchase and net method at the time of valuation of stock in trade. This practice was depreciated. MODVAT credit paid was brought to tax in the next year - Decided against the Revenue.

Summary

Issues:
1. Whether excise duty on raw material consumed is allowable under Section 37(1) of the Income Tax Act.
2. Whether the assessee is entitled to MODVAT credit on raw material.

Analysis:
1. The appeal concerned the Assessment Year 1995-96 and revolved around the admissibility of excise duty on raw material consumed under Section 37(1) of the Income Tax Act. The Assessing Officer rejected the claim of deduction made by the assessee for unutilized MODVAT credit, stating it could have been used in the following year. The Commissioner of Income Tax (Appeals) noted that excise duty and additional customs duty formed part of the cost of raw material and should be allowed when the raw material is consumed. The tribunal, in its order, accepted the appeal of the assessee, emphasizing that excise and customs duties paid should be allowed as a deduction under Section 37(1) of the Act to prevent double taxation.

2. The issue of MODVAT credit on raw material was also addressed in the judgment. The tribunal observed that the unutilized MODVAT credit was refunded in the subsequent assessment year, leading to double taxation if not allowed as a deduction. The Supreme Court's decision in a similar case highlighted the importance of following the correct valuation method for raw materials to avoid discrepancies. Despite doubts raised about the valuation method used by the assessee, the tribunal found no reason to interfere with its decision, ultimately ruling in favor of the respondent-assessee based on the principles established by previous court judgments.

In conclusion, the High Court upheld the tribunal's decision, rejecting the Revenue's appeal and ruling in favor of the respondent-assessee on both issues raised. The judgment emphasized the importance of correctly applying tax laws and valuation methods to prevent double taxation and ensure fair treatment of deductions related to excise duties and MODVAT credits.