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TMI Blog2016 (1) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... ning on current purchases is ₹ 1,15,47,370/- and this has been duly accounted for in the manner provided u/s 145A in this year. The Ld. CIT(A) already given relief on account excise portion of the opening stock of ₹ 30,60,519/- as it was part of the brought forward MODVAT credit of ₹ 70,50,659/-. However, the sum of ₹ 39,74,140/- which has been confirmed by the CIT(A) cannot be upheld in principle because these are accrual over the years and when there is change in the method of accounting in the assessment year 2005-06, the entire amount gets due in this year which has to be allowed. However such an allowance is subject to limited verification by the AO, whether the assessee has forgone the MODVAT credit as per Excise law and rules and instead availed the benefit under the Income-tax Act in this year and further if the said amount has already subjected to tax in the earlier years in a way that the assessee had not claimed the benefit of excise duty on this amount in the earlier year and hence relief has to be given in this year. Thus, with this limited direction of verification the issue raised vide revenue’s ground are treated as dismissed whereas the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise duty liability and CENVAT credit, which has not been routed through the Profit Loss Account, in contradiction to its stated change over to Inclusive Method of accounting under section 145A of the Income-tax Act, 1961. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have appreciated the fact that though the section 145A was inserted by Finance (No.2) Act, 1998 w.e.f. 01-04-1999, the assessee changed its accounting method only in A.Y.2005-06, the year under consideration, i.e. after 6 years of following the Exclusive Method , only with a view to reduce the taxable income by Z 1,25,34,122/-. 4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in overlooking the fact that the method of accounting followed by the assessee with regard to adjustment of CENVAT credit neither complies with the provisions of section 145A of the Act nor with the judicial pronouncement of the Hon'ble Delhi High Court in the case of CIT Vs. Mahavir Aluminum Ltd 297 ITR 77 (Del). 2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the A.O. be restored. 3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 122/- . In response to the show cause notice, the assessee submitted that the method of accounting has been changed to be in line with section 145A, whereby now the assessee has changed the accounting of excise duty from exclusive to inclusive method. This has resulted in higher purchases and higher sales. The opening balance of CENVAT credit lying as current assets in the book of the company has been adjusted against excise credit payable during the year and accordingly, excise duty payable for the year and sales is reduced by this amount. Such a change was purely bona fide so as to bring in conformity with section 145A. Relevant accounting entry made in this year was shown in the following manner:- From December 2004 onwards company has stopped own production and accordingly transferred unutilized CENVAT credit to purchase account. Details of Central Excise duty year wise as under: As on 31.03.2003 NIL As on 31.03.2004 ₹ 70,34,659/- This excess balance remained due to excess duty paid on purchases. Summary of Central Excise Duty (CENVAT A/c.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 145A and also due to fact that the opening Modvat credit which was already taxed in earlier years, no adjustment on account of change in accounting policy is warranted . 6. However, Ld. AO rejected the assessee s contention and held that assessee itself had mentioned in the aforesaid reply that unutilized modvat credit of ₹ 70,34,659/- was not included in sales and further, ₹ 81,09,075/- was only notional excise duty shown as sales as the assessee was exempted from excise duty. That apart, the assessee was still maintaining a separate excise account for export sales which has not been passed through the profit loss account even after the changing the method of accounting during the year. Thus, he held that, assessee had not included excise duty in all his purchases and sales and hence he added back a sum of ₹ 1,25,24,122/- which was the effect of change of method by the assessee. 7. Before the CIT(A), the assessee submitted that the actual amount of the credit was at ₹ 1,15,47,370/- and the figure noted by the Auditor was a mistake. Regarding maintaining of separate excise duty for accounting of exports sales, it was submitted that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanged the method of accounting as the AO misunderstood the adjustments made to the MODVAT credits of the year by the brought forward and unutilized MODVAT credit and credit to the sales only of the balance of ₹ 81,09,750/-, The AO also referred to excise duty refund which had been separately accounted for to support the stand that there was violation of section 145A. When the appellant changed the method of accounting to inclusive method, naturally it had to account the purchase and sales including excise duty element. The excise duty of the opening stock which according to the appellant amounting to ₹ 30,60,519/- had also to be considered. The appellant has stated that it pays duty at 24% when purchases are made and gets 10% rebate on processing of fabrics. Therefore it follows that there would always be more debits of excise duty than credits during a year and when purchase and sales are accounted with or without excise duty the profits would be different. It being less in a situation where excise duty portion is included and also where an assessee gets a rebate as claimed by the appellant. The appellant has explained that the actual amount of difference was ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her part, relatable prior to year, of accumulation of ₹ 39,74,140/-. The other component of the figure of ₹ 1,15,47,370/- i.e. (1,15,47,370 70,34,659) included sum of ₹ 45,12,711/- which is on account of current years difference in excise duty paid on inputs less payable on sales claimed in the profit and loss account due to change in the method of accounting u/s 145A. As regards the finding of the CIT(A) for confirming the balance amount of ₹ 39,74,140/- out of sum of ₹ 70,34,659/- which is to be adjusted in the relevant assessment year, she submitted that the said amount had already suffered tax in the earlier years when the amount of purchases had been suffered taxed in the earlier years as it had been claimed at the figure exclusive of excise duty though paid but not been claimed due to exclusive method. So far as his observation that the provisions of section 145A came into force w.e.f. 01.04.1999, therefore, adjustment cannot be made in the impugned year, she submitted that Ld. CIT(A) had himself accepted that the change of method of accounting is as per the accounting principle and once that is so then logical effect have to be given in the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. We have carefully considered the rival contentions and also perused the relevant finding given in the impugned orders. So far as the change in method of accounting for the excise duty from exclusive method to inclusive method the same is purely bona fide and is in line with provision of section 145A, which provides that the valuation of purchase and sale of goods and inventory shall be further adjusted to include amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to its location and the condition as on the date of valuation. In the earlier years the assessee had been assessed under scrutiny proceedings right from assessment year 2001-02 to 2004-05, wherein, the assesee s exclusive method for accounting excise duty has been accepted. If the change in the accounting has been made bona fidely then, there would definitely be some impact in this year but it gets revenue neutral in the subsequent years. In the inclusive method of accounting, now the assessee had to account for the excise duty stock of ₹ 30,60,519/- in the opening stock and also consider the unutilized credit for the earlier years. The assessee had pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to ground no. 4 and 5 of the assessee whereby, the assessee have challenged deduction u/s 80IB of ₹ 59,60,478/-. 14. The brief facts are that, the assessee is engaged in the business of manufacturing of fabrics with a small scale unit at Valsad District, Gujarat where it carries out the activities of crimping, twisting, sizing, warping and weaving work. In response to the show cause notice as to why such activity should be treated as manufacturing and claim for deduction u/s 80IB be allowed, the assessee submitted that, it has started its manufacturing activity way back in the year 1998 and claimed deduction u/s 80IB in AY 2001-02. The assessee has been undertaking the activities from the earlier years which had been accepted to be manufacturing. In support, certain decisions were also relied upon. However, the AO rejected the assessee s claim after analyzing the usage of raw materials and the finished products and the process as given in para 5.5 of the order and held that the activity carried out by the assessee cannot be treated as manufacturing. 15. Before the CIT(A), exhaustive submissions were made which are dealt and incorporated by CIT(A) in para 5.2 to 5.5. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the submissions from the exhaustive submissions, which are summarized in the following way:- 1. The assessee has full-fledged factory where it has carried out manufacturing activity as borne out from the use of plant machinery and various expenses incurred by it which have been accepted as such by the AO. 2. This manufacturing activity has been carried out by the assessee since AY 2001-02 which was the first year in which deduction u/s 80IB had been granted. The fact that the assessee company is liable for excise duty for its operations is testament to the fact that manufacturing activity is taking place. 3. The ld. DR has also fairly accepted that the first four steps carried out by the assessee company require specialized machinery and involve heavy expense on power, i.e. electricity and fuel. He also explained the stages of production and stated that these four steps are required for strengthening of yarn without which it cannot be processed into fabric. 4. There is no dispute about the facts that the assessee company purchases raw yarn and also that it is sent out for weaving process. But the yarn cannot be woven or processed till it undergoes the four stage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for processing the yarn are crimping, twisting, sizing, warping and weaving. It is also undisputed fact that it has been registered under Excise Department and excise duty is payable on the manufactured product by the assessee. It has also incurred huge expenses like, electricity, fuel under the head manufacturing expenses and has substantial investment in plant and machinery used for this purpose which as on 01.04.2004 were approximately 2.07 crores. As clarified by the CBDT on 22.11.1995, even the activities of twisting and crimping of yarn has been treated as manufacturing activities and this Circular has been referred and relied upon by the jurisdictional High Court as stated above. The finished product here is definitely a different product having different value: Even if the weaving part has been outsourced, it does not ipso facto leads to conclusion that assessee is not engaged in manufacturing. The other activities are the vital process through which the raw material is converted into finished products. Time and again, various Courts have held that, if the original commodity undergoes a change which is a commercially different product and no longer is regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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