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TMI Blog2015 (12) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... ot included in the cost of purchase on the premise that the assessee company is entitled for Cenvat credit on the same to be adjusted against the excise duty liability on finished goods manufactured by the assessee company , while the basic fallacy in contention of the Revenue is that the Revenue is contemplating adding the excise duty paid to the value of closing inventory following the ‘inclusive method’ also called as ‘gross method’ and not to the totality of all relevant transactions during the previous year to arrive at a correct income chargeable to tax as per the Act and hence , in our considered view, , the ‘inclusive method’ also called as ‘gross method’ as mandated by Section 145A of the Act, is to be applied to the totality of all relevant transactions during the previous year to arrive at a correct income chargeable to tax as per the Act and the same cannot be applied in a piecemeal and ad-hoc manner to a few handful chosen and selected transactions as is done by the revenue in the instant case which will lead to distortion of income chargeable to tax which is not permissible under the Act. Our above observations and discussions in preceding para’s are equally applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The assessee company e-filed its return of income on 30.10.2007 declaring total income of (-) ₹ 4,46,07,722. Notice u/s 143(2) of the Act was issued to the assessee company on 18.08.2008.The original return was revised by the assessee company by filing revised return of income on 30.03.2009 revising the loss to (-) ₹ 32,92,004/-. The loss is reduced in the revised return as compared to the original return of income filed with Revenue due to declaration of additional income being long term capital gain of ₹ 4,27,50,000/- on sale of tenancy rights in office premises at Janki Niwas, Dadar, Mumbai. 4. During the course of assessment proceedings the learned Assessing Officer (Hereinafter called the AO ) observed that the assessee company has shown Business Loss of ₹ 4,46,09,522/- which included Depreciation u/s 32 of the Act amounting to ₹ 3,20,97,526/- which the assessee company has set off against the Long Term Capital Gains of ₹ 4,27,50,000/-. Thus, the assessee company has set off the Business Loss and the Depreciation against the Long Term Capital Gain earned during the assessment year. 5. In the opinion of the AO , Section 71 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion allowance for the year under consideration computed as per provisions of Section 32(1) of the Act against the long term capital gains for the year and such set off is allowable as per provisions of Section 71 of the Act.The assessee company contended that the provisions of Section 32(2) of the Act are not attracted in the appellant company s case and the reliance of AO on Section 32(2) of the Act is devoid of merit and hence the set off of the depreciation against the long term capital gains for the year be allowed to the assessee company . 7. The CIT(A) rejected the contentions of the assessee company vide orders dated 29-03-2010 on the grounds that under Section 32(2) of the Act r.w.s. Section 14 of the Act , the words profits and gains are specifically confined to profits and gains of business only and thus , current year depreciation which could not be set off against the profits and gains of business shall be carried forward to be adjusted as per provisions of Section 32(2) of the Act r.w.s. 72(2) of the Act and Section 32(2) of the Act also stipulates that current year depreciation can be set off only against profits and gains of business and not other heads of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A). 11. We have observed that this issue has been decided by the co-ordinate bench of the Tribunal in ITA No. 4898/Mum/06 in the case of Rallis India Limited v. JCIT for the assessment year 2002-03 in favour of the taxpayer by holding that the taxpayer is entitled to set off of unabsorbed carry forward depreciation against the income computed under the head long term capital gain of the year under consideration and the relevant para s are as under: 7. Before proceeding further, we would like to see the provisions of Section 32(2) as existed prior to AY 1997-98, existed from AY 1997-98 to AY 2001-02 and existed from AY 2002-03 onwards, which are as under: Section 32(2) as it existed prior to AY 1997-98 : (2) Where, in the assessment of the assessee, 34[***] full effect cannot be given to any allowance 35[under clause (ii) of sub-section (1)] in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.] 7.1 We have also seen the decisions of the Apex court in the case of Virmani Industries Ltd(Supra) copy of which is placed on record and found that the wordings of sec.32(2) as existed for AY 2002-03 are identical to the wordings to sec. 32(2) with the year before the Hon ble Supreme Court i.e. AY 1956-57. 7.2 The facts before the Hon ble Supreme Court in the case of Virmani Industries Ltd.(supra) were as under: The assessee was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The business was stopped in that year where after the factory was let out on hire. Ten years later, i.e. in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufacture of steel pipes. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. in 59 ITR 555, Rajapalayam Mills Ltd. in 115 ITR 777 which were rendered by the Bench consisting of three judges. The Hon ble Supreme Court has also observed that since the Bench headed by three Hon ble judges, therefore, the decisions of earlier Bench are binding on them. At page 216 in para f , the Hon ble Supreme Court has observed that ; We have extracted the relevant observations from both the judgments hereinabove , which say that the unabsorbed depreciation allowance has not only to be set of against other heads of income in the relevant previous year but where it is carried forward, it stands on exactly the same footing as current depreciation. 8. After observing these observations , the Hon ble Suprem Court has answered the reference application in favour of the assessee and against the department. 9. After going through the decision of the Apex Court and the facts of the present case, we find that both the lower authorities were not justified in not accepting the claim of the assessee.The ld. CIT(A) also not justified in holding that the decision of the Apex Court is not relevant for AY 2002-03 . As stated above, the wordings of Section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any right (i.e. cenvat) arising as a consequence to such payment and hence excise component of the cost of inputs i.e. raw material/packaging material etc has to included in closing stock valuation irrespective of cenvat claim. In the opinion of AO , the excise duty component of raw material is an indirect cost charged by the manufacturer of raw material from the assessee company and is part of the cost of raw material and hence it is to be included as part of closing stock of finished goods and the modvat/cenvat scheme only allows a rebate on excise duty payable on sale/clearance of goods manufactured by assessee company calculated on the basis of excise duty rate applicable on raw material which is actually paid by manufacturer of raw material. The AO held that reliance of the assessee company on the guidance note issued by the ICAI for tax audit cannot override the specific provisions of the Act as contained in Section 145A of the Act. The AO referred to the inclusive method and exclusive method as per guidance note issued by the ICAI for tax audit in his assessment order which are contained in page 7-8 of assessment order which showed that there will not be any impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e extent of the Cenvat/VAT credit was still available in the Cenvat/VAT Register shall be added to the Cenvat/VAT set off/utilized during the year . The VAT is payable at the time of sales and not on closing stock of finished goods . Thus, the CIT(A) rejected the appeal of the assessee company on this ground and held that the addition on account of duty following the provisions of Section 145A of the Act is called for. The CIT(A) further held that no adjustment in the opening stock is to be made relying on the decision of Melmould Corporation v. CIT(supra) and the impugned assessment year being assessment year 2007-08 cannot be said to be transitional year as the provisions of Section 145A of the Act has come into force w.e.f. 01.04.1998 and hence the judgment of Mahavir Aluminium Limited 297 ITR 77(Del.) is not applicable. Thus, the CIT(A) directed the AO to verify the facts and figures and make additions as per directions. 15. Aggrieved by the orders of the CIT(A) , the assessee company is in appeal before the Tribunal. The Ld. Counsel of the assessee company reiterated submissions as made before the authorities below and submitted before us that the assessee company is follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gains of business or profession shall be- (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation.- For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.] The Section 145A of the Act was introduced by the Finance Act(No. 2) Act,1998 w.e.f. April 1,1999 and starts with a non-obstante clause that notwithstanding anything contained in Section 145 of Act , the valuation of purchase and sales of goods and inventory for the purposes of determining the income chargeable under the head Profits and gains of business or profession shall be in accordance with the method of accountancy regularly employed by the taxpayer and shall be further adjusted to include the amount of any tax, duty , cess or fee (by whatever name ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales tax and hence is to be absorbed as part of component of cost by the enterprise while State VAT paid on purchase of raw material from supplier within the State is allowed to be set-off against the VAT/CST payable on sale of finished goods to avoid cascading effect of taxes. 2. The second categories of taxes, duties , cess and fees having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods are known as Value Added Taxes -These Value added taxes were introduced in India in 1986 to avoid cascading effect of taxes with an objective to reduce transaction cost and bring transparency in the system . The scheme allowed setting off of duties paid on procurements of inputs against the duty payable on finished goods manufactured by the enterprise thereby restricting the levy of tax to value addition done by the enterprise in manufacturing the finished goods. The scheme when launched in 1986 was called Modified Value Added tax scheme (popularly known as MODVAT scheme) which allowed credit/set off of duties paid on specified inputs used in manufacture of excisable goods against the excise duty liability of the enterprise on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either as parts or contained in finished products lying in stock on 16-3-1995 was allowed. Prior to the 1995-96 Budget, the Central excise/additional duty of customs paid on inputs was allowed as credit for payment of excise duty on the final products, in the manufacture of which such inputs were used. The condition required for the same was that the credit of duty paid on inputs could have been used for discharge of duty/liability only in respect of those final products in the manufacture of which such inputs were used. Thus it was claimed that there was a nexus between the inputs and the final products. In the 1995-96 Budget, the MODVAT Scheme was liberalised/simplified and the credit earned on any input was allowed to be utilised for payment of duty on any final product manufactured within the same factory irrespective of whether such inputs were used in its manufacture or not. The experience showed that credit accrued on inputs is less than the duty liable to be paid on the final products and thus the credit of duty earned on inputs gets fully utilised and some amount has to be paid by the manufactured by way of cash. Prior to the 1995- 96 Budget, the excise duty on inputs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been made by the assesses concerned. Therefore, the Scheme sought to be introduced cannot be made applicable to the goods which had already come into existence in respect of which the earlier Scheme was applied under which the assessees had availed of the credit facility for payment of taxes. It is on the basis of the earlier Scheme necessarily that the taxes have to be adjusted and payment made complete. Any manner or mode of application of the said Rule would result in affecting the rights of the assesses. 6. We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is a mandatory standard requires that duties and taxes paid on purchase are to form part of cost of purchases but other than those duties and taxes subsequently recoverable by the enterprise from the taxing authorities meaning thereby that the cenvat credit of duties and taxes paid on inputs which is recoverable from the revenue authorities by way of set off against the excise duty payable on finished goods manufactured by the enterprise shall not form part of the cost of purchase of the inventories in bringing the same to their present location and condition. Thus, the ICAI stipulated enterprises to follow exclusive method also called as net method of accounting ( which in the instant case , the assessee company is also following) whereby the taxes and duties paid which are recoverable from revenue authorities shall not be included in the cost of purchases and in valuing inventories . On the other hand Section 145A of the Act requires following the inclusive method also called as gross method of accounting whereby it requires the valuation of purchase, sale and inventory to be further adjusted to include the amount of any tax, duty, cess or fee actually paid or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve method' is followed. 23.12 In this connection, it is worthwhile to note that the Memorandum explaining the provisions of section 145A inserted by the Finance (No.2) Bill, 1998 states as follows: Computation of value of inventory. The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which MODVAT* credit is available has been the matter of considerable litigation. In order to ensure that the value of opening and closing stock (bold for emphasis) reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will accordingly apply in relation to assessment year 1986-87 and subsequent years. [Clause 45] *Now CENVAT. (Section 145A was initially proposed to be applicable in relation to assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting of VAT will not result in non-compliance of section 145A of the Income-tax Act. 23.23 The adjustments envisaged by section 145A will not have any impact on the trading account of the assessee. In other words both under exclusive method of accounting and inclusive method of accounting, the gross profit in the trading account will remain the same. The present regime of value added taxation has progressed way ahead now as compared to the year 1998 when Section 145A of the Act was introduced whereby now the Cenvat Credit Scheme is allowing across the board credit of various taxes, duties, cess, fee as per applicable laws, rules and regulation like excise duty on inputs, CVD/SAD on import of inputs, service tax on services utilized for manufacturing of finished goods, excise duty on capital goods etc. paid to be set off against liability of excise duty on finished goods manufactured by the enterprise without any one to one co-relation which is likely to be further revolutionized with the introduction of GST shortly with an intent and purpose of eliminating cascading effect of taxes levied at multiple stages to reduce transaction cost and bring in transparency into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of filing of return of income as stipulated u/s 139(1) of the Act. The Excise laws , rules and regulation also requires the records to be maintained in an prescribed manner whereby cenvat credit availed and utilized can be clearly demarcated to establish that correct cenvat credit is availed and utilized by the Enterprise. The Income Tax Act,1961 cannot work in vaccum in isolation but has to progress along-with the rapid development taking place in the economy as it is a living Act and harmonization of various laws is the need of the hour to reduce complexities and bring in the ease of doing business, of course , without compromising / sacrificing with the basic intent and mandate of the Income Tax Act, 1961 to collect correct taxes as per provisions of the Act. During the last few decades, things have radically and drastically changed in the economy the way businesses are conducted as now e-commerce and international transactions have taken primacy in the economy which are now the key areas of challenge under the Income Tax Laws. It is for the Parliament to frame and amend laws to keep pace with the fast changing environment in the economy. We have seen above that Section 145A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Section 145A of the Act while filing return of income with the Revenue . Thus as per Section 145A of the Act as it exists in the statute, we hold that the assessee company has to compulsorily value the purchase and sale of goods and inventory for the purposes of determining the income chargeable to tax under the head profit and gains of business or profession in accordance with the method of accounting regularly employed and further adjusted to include taxes, duties, cess or fee(by whatever name called) under any law for the time being in force, actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation notwithstanding any right arising as a consequence to such payment.This is the mandate of Section 145A of the Act which we hold is mandatory. At this stage we are reminded of the decision of the Privy Council, in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56 that while considering the effect of altering the method of valuation, Privy Council held that whenever there is a change in the valuation at one end (on 31-3-2007 in the instant case), then there must necessarily be a corresponding change ..... X X X X Extracts X X X X X X X X Extracts X X X X
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