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TMI Blog2013 (2) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee would take credit of tax paid on such inputs. Some of these components would not be used immediately. As per the accounting standards permissible, the assessee would, therefore, depreciate the book value of these inputs for the purpose of income-tax. 2.2 The case of the respondent is that though the respondent would write off such inputs either fully or partially for the income-tax purpose, the goods would not be unusable and would be used over a period of time as per its requirement. For the purpose of excise, therefore, the respondent would not reverse the modvat credit taken on such inputs. 2.3 The Department, however, was of the opinion that such different standards adopted by the respondent would not be permissible. A show-cause notice, therefore, came to be issued by the adjudicating authority on 18-7-2003 calling upon the respondent to show cause why modvat/cenvat credit amounting to Rs.88,26,440/- be not recovered from them under rule 57I(ii) of the Central Excise Rules, 1944 (hereinafter referred to as 'the rules of 1944') and further why penalty should not be imposed on the company. 2.4 The respondent opposed the proceedings contending that the respondent which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity to examine the presence of the inputs in the appellant's factory even though they were written off in the books of accounts and to decide the availability of the modvat credit accordingly. It is this decision of the Tribunal which the revenue has challenged in Tax Appeal No.798/2006. 3. In Tax Appeal No.810/2008, a Division Bench of this court on 22-4-2009 while admitting the appeal framed the following substantial questions of law:- (a) Whether, in the facts and circumstances of the case, the Tribunal was justified in rejecting the appeal of the Revenue and confirming the order of the Adjudicating Authority dropping the demand for recovering the amount of Modvat Credit on inputs completely written off in the books of accounts on account of the same being rendered obsolete and slow moving items and which were of no use and were not used in or in relation to manufacture of final product? (b) Whether, in the facts and circumstances of the present case, the Tribunal was justified in holding that writing off of inputs completely in the books of accounts would not make an assessee liable to reverse the Modvat/Cenvat Credit availed of on such written off inputs? 3.1 Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial. In either case, the respondent was required to reverse the modvat/cenvat credit taken on such inputs. He drew our attention to two circulars of the Board dated 22-2-1995 and 16-7-2002 in this regard. We would take note of contents of such circulars later. 4.1 Counsel submitted that as per such circulars, the respondent was required to reverse the credit on such inputs in the books of accounts. The respondent, therefore, cannot continue to avail modvat credit even if the goods were still lying in the factory premises. 5. Counsel Shri Nainawati for the respondent assessee opposed the appeal contending that the modvat scheme permitted the manufacturer to take credit on the inputs as soon as the same were purchased. The scheme did not defer the event of taking such credit to the actual utilisation of the inputs for the manufacture of the final product. He submitted that such credit could be utilised for clearance of other goods as well. In this respect, he relied on the decision of the Apex Court in the case of Collector of Central Excise, Pune vs. Dai Ichi Karkaria Ltd., 1999 (112) E.L.T. 353. He contended that the assessee as per the permissible accounting practices was autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit taken on such inputs? As already noted, the case of the assessee is that such writing is only for the limited purpose of its accounts so as not to present a distorted picture of the balance-sheet and the ultimate profit. Such writing off for the income-tax purpose had no relation to the manufacturing activity of the assessee. Before the revenue authorities, it was pointed out that as a manufacturer of engineering product, the assessee would have to continuously introduce new models and also upgrade its existing machinery. For such purpose, it was required to maintain a larger inventory of spares. Even for repairs of the machinery already sold in the market, it would have to maintain certain spares even though the product of the model may have been discontinued. 7. We are of the opinion that the reduction of the value of such spares (inputs) for income-tax purpose, cannot be equated with writing off of the physical stock. The accounts maintained by the manufacturer for the income-tax purpose stand on an entirely different footing and would have to follow the accounting standards prescribed under the law. If under such accounting principles, the assessee is entitled to dimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f inputs for home consumption shall be made - (a) on payment of duty equal to the amount of credit availed in respect of such inputs; and (b) under the cover of invoice prescribed under rule 52A. From the said rule, it can be seen that the liability of the assessee to pay duty equal to the amount of credit availed in respect of a particular input would arise at the time of the removal of the inputs for home consumption. This rule did not envisage reversal of cenvat credit even before removal of goods. 10. With this background, we may peruse the two circulars heavily relied upon by the revenue. These circulars have been issued by the CBEC in exercise of powers under section 37B of the Central Excise Act, 1944 ('the Act', for short). In the circular dated 22-2-1995, it was inter alia provided as under:- "Instances have been brought to the notice of the Board where Modvat credit taken on inputs by the assessee was not reversed even after writing off of the materials on which the credit was taken. Cases have also been noticed where the credit had not been adjusted even though the write-off of the input materials had taken place three or four years ago. In such situation, it is obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no question of demand of cenvat credit availed. However, in cases where unused inputs were fully written off, the earlier circular would prevail. In other words, the reversal of modvat credit would be compulsory. 14. To our mind, such a circular could not provide for the reversal of modvat credit in cases which are covered prior to introduction of rule 5B of the Cenvat Credit Rules. As already noted, there was no provision under which the modvat credit already taken under the rules of 1944 could be directed to be reversed simply because the input goods were not utilised for a certain period of time. We also note that there is significant difference in the accounting approach for the income-tax purpose and the approach for stock maintenance for the purpose of manufacturing activities relevant for the question of excise. Therefore, merely because the value of goods diminished in the books of accounts of the assessee would not by itself permit the Department to insist on reversal of the credit particularly when such goods were still available in the factory in usable condition. 15. In absence of any such authority under the rules, the CBEC could not have issued circular for revers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous a proposition to require any argument for it. A circular cannot evenimpose on the tax-payer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However,--this is what Sri Ramachandran really has in mind--circulars beneficial to the assessees and which tone down the rigour of the law issued in exercise of the statutory power under Section 119 of the Act or under corresponding provisions of the predecessor Act are binding on the authorities in the administration of the Act. The Tribunal, much less the High Court, is an authority under the Act. The circulars do not bind them. But the benefits of such circulars to assessees have been held to bepermissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, the support of certain judicial o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or "sticky" loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received." 18. Under the circumstances, with the aid of the circulars noted above, the Department could not have collected the duty which was otherwise not permissible under the rules. We may notice that the rules themselves were later on amended to cover such a situation. The modvat scheme was substituted by the cenvat scheme framed under the Cenvat Credit Rules. In such rules, rule 5B was introduced as under:- [(5B) If the value of any, (i) input, or (ii) capital goods before being put to use, on which CENVAT Credit has been taken is writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off in the books, have taken a view that the benefit is available. Those judgments have been accepted." 22. This decision was followed by the High Court in a subsequent decision in the case of Hindalco Industries Ltd. (supra) making following observations:- "6. In Commissioner of Central Excise v. Indian Petrochemicals Corporation Limited, 2008 (226) E.L.T. 339 a Division Bench of this Court had noted that the Tribunal in a long line of judgments had taken the view that where the goods have been shown as written off goods, the benefit is available. In the present case, as already noted earlier, the period to which the dispute relates is prior to the insertion of sub-rules (5B) and (5C) in Rule 3. The Tribunal held that the case of the assessee was covered by several of its judgments which have been adverted to in para 11 of the judgment. Counsel appearing on behalf of the Revenue has not submitted before the Court that any of those judgments have been overruled by any decision of this Court or of the Supreme court. This case relates to a period prior to the amendment of Rule 3 by the insertion of sub-rules (5B) and (5C). In that view of the matter and for the reasons already no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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