Income Tax Appellate Tribunal (ITAT) Mumbai in a recent judgment has reiterated that if the value of closing stock is increased by the unavailed CENVAT/MODVAT, the purchases should also be increased by a similar amount.

Case Details:
ITA No.1426/Ahd/2009 ITA No. 3921/mum/2009 AY : 2005-06
Indian Petrochemicals Corp Ltd. (Appellant) vs Addl Commissioner of Income Tax (Respondent)
Date of Order: 18-11-2015

Brief Facts of the Case:
The issue was related to the addition for unavailed Cenvat credit. The Assessing Officer (AO) took the view that the value of cenvat credit lying unutilized at the close of the accounting period ought to have been included in the value of closing stock as per the provisions of section 145A of the Income Tax Act, 1961. Accordingly he made the addition of difference between unutilised cenvat credit as on last day and the first day of the accounting period amounting to Rs.3,11,32,910/- to the value of closing stock.

In appeal to CIT(A), the assessee contended that it had followed the exclusive method of accounting, i.e. purchase, sale and closing stock of raw material had been accounted on the net value excluding cenvat credit. In the books of account, the assessee had not debit the cenvat paid on purchase of raw material to the Profit and Loss account but carried the same to cenvat account and at the time of sale the cenvat payable by the assessee was reduced by the amount of cenvat credit available from the purchase of raw material. In case such cenvat credit remained unutilized the same was reflected in the balance sheet as an asset being in the form of receivable. Accordingly it was also submitted that even if the inclusive method was followed the effect on the profit would be NIL. However, CIT(A) following the decision of his predecessor for the assessment year 2004-05, in which he had held that “………..However, no fault with the action of the AO in including this amount to the closing stock can be found. Under the circumstances, it is directed that the AO shall allow this duty/tax on actual payment basis in the year of payment u/s 43B of the Act”. confirmed the action of the AO and gave similar directions to the AO.

The ITAT observed that similar issue had come up before the Tribunal in the assessee’s own case and it has been decided in favour of the assessee. Accordingly ITAT decided the case in favor of the assessee.

Important Excerpts from ITAT Judgment
We find that the similar issue had come up before the Tribunal in the assessee’s own case (referred above) and it has been decided in favour of the assessee. For the sake of convenience, we reproduce the relevant findings of the Tribunal as under:

“93. At the time of hearing, the learned Counsel for the assessee submitted that above issue is covered in favour of the assessee by the judgment of Hon'ble Jurisdictional High Court in the case of CIT v/s Mahalaxmi Glass Works Pvt. Ltd., [2009] 318 ITR 116 (Bom.) and also by the judgment of Hon'ble Delhi High Court in CIT v/s Mahavir Alluminium Ltd. [2008] 297 ITR 77 (Del.), wherein it has been held that if there is a change in valuation of closing stock in one end, there must necessarily be a corresponding change at the other end otherwise the true profit would not be reflected.

94. On the other hand, the learned Departmental Representative relied on the order of the Commissioner (Appeals).

95. We have considered the submissions of the learned Representatives of the parties and the orders of the authorities below as well as the cases relied on by the learned Counsel for the assessee (supra). We are of the considered view that if the valuation of closing stock is increased by the unavailed CENVAT / MODVAT, the purchases should also be increased by a similar amount. During the course of hearing, it was contended that purchases has been debited exclusive of the excise duty element i.e., by adopting net method of purchases and, accordingly, the closing stock of raw materials is valued exclusive of the unavailed CENVAT / MODVAT credit. We observe that Hon'ble Delhi High Court has held in the case of Mahavir Alluminium Ltd. (supra), after considering the decision in the case of CIT v/s Allahabad New Cotton Mills Ltd., AIR 1930 PC 56, that whenever there is change in the valuation at one end, there must necessarily be a corresponding change at the other end otherwise the true picture would not be reflected. In the case of Mahavir Aluminium Ltd. (supra), the issue related to closing valuation of adjustment of unutilised MODVAT credit. The Tribunal allowed the adjustment and in appeal the Hon’ble High Court confirmed the order of the Tribunal. The Hon'ble Jurisdictional High Court, after considering its earlier decision in the case of Melmould Corporation Ltd. (supra), and the decision of the Hon'ble Delhi High Court in the case of Mahavir Aluminium Ltd. (supra), has held as under:–

“We are in respectful agreement with the reasoning and the finding given by the Delhi High Court.”

96. In view of the above, we hold that if the closing stock to be increased on account of unutilised MODVAT credit, the corresponding opening stock of that year is also to be increased, as the Department has not disputed the fact that the purchases have been debited exclusive of the excise duty element i.e., by adopting net method of purchases. If the value of closing stock is increased by the MODVAT, the purchases should also be increased by a similar amount. Therefore, the issue is squarely covered in favour of the assessee by the decision of the Hon'ble Jurisdictional High Court (supra). Hence, ground no.4, taken by the assessee is allowed by deleting the addition of Rs.91,29,312, made by the Assessing Officer.”

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