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October, 08th 2013
$~Part-IIB (R-40)

+              INCOME TAX APPEAL NO. 130/2000

                                 Date of decision: 26th September, 2013


                                                         ..... Appellant
                           Through Mr. N.P. Sahni, Sr. Standing
                           Counsel & Mr. Ruchesh Sinha, Advocate.


                                                        ..... Respondent
                           Through Nemo.


       This appeal by the Revenue, which pertains to Assessment

Year 1995-96, was admitted for hearing vide order dated 30th January,

2001 on the following substantial questions of law:-

               "(i) Whether ITAT was justified in not
               deciding the issue which was before it namely
               whether Rs.3,95,11,874/- being the excise
               duty on raw material consumed during the
               year is allowable u/s. 37(1) as claimed by the
               respondent before A.O.?

ITA No. 130/2000                                             Page 1 of 6
               (ii) 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

2.     The assessment order records that there was accumulation of

unutilised input MODVAT credit of Rs.3.95 crores. The assessee had

claimed this as a deduction in the computation of income. This claim

was made in the revised return. Assessee premised that they had paid

excise duty        and additional customs duty and this constitutes an

expense under Section 37(1) of the Income Tax Act, 1961 (Act, for

short). The claim was rejected by the Assessing Officer observing

that the MODVAT credit had not been utilised and could have been

utilised in the next year.

3.     Commissioner of Income Tax (Appeals) recorded the statement

of the assessee that excise duty and additional customs duty paid on

the raw material formed part of the cost of the raw material and had

to be allowed when the raw material has been consumed. Under the

excise rules, additional customs duty and excise duty paid on raw

material formed part of MODVAT credit, which was utilised at the

time of clearance of goods, subject to fulfilling conditions. The CIT

ITA No. 130/2000                                             Page 2 of 6
(Appeals) observed that the assessee had received refund of

MODVAT credit in the subsequent assessment year 1996-97, but it

could not be ascertained whether the refund was against the

MODVAT credit available as on 31st March, 1995. He also observed

that while valuing the closing stock on 31st March, 1995, excise duty

paid on input and utilised in the finished goods was not taken into

consideration and as per note No. 4 of the accounting policy and note

on accounts, excise duty payable on finished goods was accounted for

at the time of removal of goods. He observed that whether the cost of

raw material utilised for manufacture of finished goods included

customs duty or not was not very clear. He further held that the

respondent-assessee had got refund and the addition should be


4.     Income Tax Appellate Tribunal by the impugned order

accepted the appeal of the assessee. It was noted that during the

relevant previous year the respondent-assessee had consumed raw

material of Rs. 146.03 crores, which included MODVAT amount of

Rs.24.02 crores. Out of this, the assessee had utilised MODVAT

credit of Rs.19.46 crores and the balance Rs.3.95 crores was claimed

as a deduction under Section 37(1) of the Act as it was forming part

of raw material. The Assessing Officer held that credit in respect of

ITA No. 130/2000                                          Page 3 of 6
MODVAT had accrued and was still available and, therefore,

deduction under Section 37(1) was rejected. It was noticed that the

refund received from the excise department of Rs.7.16 crores was

offered for taxation in the Assessment Year 1996-97 by the

respondent-assessee and was accordingly taxed.          The tribunal

observed 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. It was also stated that

the claim for refund had to be examined by the excise department and

there was substantial reduction from the refund claim as made. It was

observed that to get the refund the assessee had to make application

and only then refund was possible.

5.     The issue in question is covered by the decision of the Supreme

Court in CIT versus Indo Nippon Chemicals Company Limited ,

(2003) 11 SCC 452 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

ITA No. 130/2000                                           Page 4 of 6
duty paid raw material and it should amount to income, which is

liable to be taxed under the Act. However, 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. This decision was followed by the Supreme Court in

Commissioner of Income Tax versus Shriram Honda Power

Equipment Limited, (2013) 352 ITR 481 and in the case of the

respondent-assessee in Civil Appeal No. 6449/2012.

6.     The facts stated by Commissioner of Income Tax (Appeals)

create some doubt and suspicion whether net method was followed by

the assessee, but the Assessing Officer has not commented adversely

about the same in the assessment order.             Findings of the

Commissioner of Income Tax (Appeals) are tentative and not firm.

In the income tax appeal and the grounds taken, there is no allegation

or averment that the respondent-assessee was following "gross

method" and not the "net method" or was following two different

methods at the time of purchase/opening stock and valuation of the

ITA No. 130/2000                                            Page 5 of 6
stock in hand. As noted above, SLP preferred by the Revenue in the

case of the respondent was admitted as Civil Appeal No. 6449/2012

but has been dismissed.

7.     In view of the aforesaid position and also noticing the fact that

the MODVAT credit paid was brought to tax in the next year, we do

not see any ground or reason to interfere with the order of the

tribunal.    Questions of law are accordingly answered against the

Revenue and in favour of the respondent-assessee.

       The appeal is disposed of. No costs.

                                       SANJIV KHANNA, J.

                                       SANJEEV SACHDEVA, J.
       SEPTEMBER 26, 2013

ITA No. 130/2000                                             Page 6 of 6
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