2015 (5) TMI 180 - AT - Income Tax

Disallowance of unutilized MODVAT/CENVAT Credit - unutilized MODVAT/CENVAT credit was required to be included in the total income of the assessee - Failure to substantiate the reason for not doing do - Held that - Assessing Officer had taken debit balance entry of MODVAT/CENVAT credit, as credit balance. Assessee is debiting its purchases and crediting sales, inclusive of MODVAT and is also following the method of valuing its closing stock with the MODVAT amount. Balance appearing in the MODVAT receivable under account was on account of fact that while excise duty on purchases of input (yarn) was 12%, which was available to assessee for set off against payment of excise duty on cloth manufactured by it, rate of excise duty on cloth manufactured was only 4%. - CIT(A) was justified in holding that debit balance appearing in MODVAT receivable account is amount which the assessee has already debited in books of account alongwith purchases and since it has opted out of scheme of excise duty payment on manufactured cloth from the MODVAT account, assessee has not been able to set off the above receivable account against any payment of excise duty under the MODVAT scheme. The purchases which have been debited in the P & L account alongwith MODVAT account and appearing in the closing stock are also with MODVAT account. Thus, no adjustment u/s. 145 was required to be made. Accordingly, CIT(A) was justified in deleting addition of ₹ 14,32,533 - MODVAT credit was an irreversible credit available to manufacturers upon purchase of duty-paid raw material. It would not amount to income which was liable to be taxed under Income Tax Act, 1961 - Following decision of CIT vs. Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME Court - Decided against Revenue.

Summary

Issues involved:
Appeal against the deletion of addition of unutilized MODVAT/CENVAT credit amounting to Rs. 14,32,533 for A.Y. 2005-06.

Analysis:
Issue 1: Addition of unutilized MODVAT/CENVAT credit
The Revenue filed an appeal against the deletion of the addition of Rs. 14,32,533 towards unutilized MODVAT/CENVAT credit. The Assessing Officer had added this amount under section 154 of the Income Tax Act, as the balance sheet of the assessee showed unutilized MODVAT/CENVAT credit. The CIT(A) deleted this addition after considering various contentions raised by the assessee. The Revenue argued that the unutilized MODVAT/CENVAT credit should have been included in the total income of the assessee, and the assessee failed to substantiate the reason for not doing so. However, the Authorized Representative supported the CIT(A)'s order, citing a Supreme Court decision in favor of the assessee. The Tribunal found that the debit balance in the MODVAT receivable account was due to the difference in excise duty rates on input and manufactured goods. The assessee had opted out of claiming MODVAT on yarn and paid it on cloth instead. The CIT(A) justified that the debit balance was already accounted for in the books and no adjustment under section 145 was necessary. The Tribunal upheld the CIT(A)'s decision, supported by the Supreme Court ruling that MODVAT credit was not taxable income under the Income Tax Act, 1961.

Final Decision:
The Tribunal dismissed the appeal filed by the Revenue, upholding the deletion of the addition of Rs. 14,32,533 towards unutilized MODVAT/CENVAT credit for the assessment year 2005-06.