2017 (7) TMI 616 - HC - Income Tax

Court Upholds Decision: Unutilized Cenvat Credit Not Added to Closing Stock

The Commissioner of Income Tax -6 Versus M/s. Diamond Dye Chem Ltd.

The High Court upheld the Tribunal's decision in a case concerning the addition of unutilized Cenvat credit to closing stock for Assessment Year 2008-09. ... Addition on account of unutilized Cenvat credit to closing stock - Held that:- The Apex Court in the case of Indo Nippon Chemicals Co. Ltd. (2003 (1) TMI 8 - SUPREME Court ) while affirming the order of High Court, has observed that the income was not generated to the extent of Modvat credit or unconsumed raw material. Merely because the Modvat credit was irreversible credit offered to manufacturers upon purchase of duty paid rawmaterials, that would not amount to income which was liable to be taxed under the Act. It is also held that whichever method of accounting is adopted, the net result would be the same. Considering the above, the amount of the unutilized Cenvat credit could not have been directly added to the closing stock. The Tribunal has not committed any error. Issues:1. Addition of unutilized Cenvat credit to closing stock for Assessment Year 2008-09.Analysis:The appellant argued that the unutilized Cenvat credit related to purchase and sale of goods and inventory, not to capital goods or services as per Section 145A of the Income Tax Act. The Assessing Officer had added the amount to closing stock, but the Tribunal, relying on a previous year's order, deleted the addition without considering the current case's specifics. The appellant contended that since the unutilized credit meant excess payment, it was rightly added to closing stock. However, the respondent maintained that their exclusive accounting method, where Cenvat credit is not added to sales and purchases but shown separately, did not impact the profit. They cited the judgment in Commissioner of Income Tax Vs. Indo Nippon Chemicals Co. Ltd. (261 ITR 275) to support their stance.The High Court considered that the assessee was liable for excise duty and had received credit for duty paid on raw materials used in manufacturing excisable goods. The assessee followed an exclusive method of valuing raw materials, deducting Modvat credit from purchase price. Referring to the Indo Nippon Chemicals Co. Ltd. case, the Court noted that income was not generated to the extent of Modvat credit or unconsumed raw material. The Court emphasized that regardless of the accounting method, the net profit remained the same. Therefore, the Court concluded that the unutilized Cenvat credit should not have been directly added to closing stock, affirming the Tribunal's decision.In light of the above analysis, the High Court dismissed the appeal, stating that the Tribunal did not err in its decision. No costs were awarded in the matter.