2017 (9) TMI 2049 - AT - Income Tax

ITAT Rules CENVAT Receivable Not Income, Rejects Section 145A and 14A Disallowance Claims

Dy. Commissioner of Income Tax (OSD) Circle-8, Ahmedabad Versus Voltamp Transformers Ltd.

Dy. Commissioner of Income Tax (OSD) Circle-8, Ahmedabad Versus Voltamp Transformers Ltd. - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the addition made by the Assessing Officer under section 145A of the Income Tax Act by including unutilized CENVAT credit receivable in the value of closing stock is justified. Whether the disallowance made under section 14A read with Rule 8D of the Income Tax Rules regarding expenditure incurred in relation to exempt income is justified. Whether the disallowance under section 14A read with Rule 8D should be added back to the book profit computed under section 115JB of the Income Tax Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Inclusion of CENVAT Credit Receivable in Closing Stock under Section 145A Relevant Legal Framework and Precedents: Section 145A of the Income Tax Act mandates that taxes, duties, cess, or fees related to stock should be included in the value of closing stock. Accounting Standard 2 (AS-2) on Valuation of Inventories permits valuation of stock either at cost or net of certain credits, depending on accounting policy. Supreme Court ruling in CIT vs. Indo Nippon Chemicals Ltd. held that unutilized MODVAT/CENVAT credit is not income and cannot be included in stock valuation on a gross basis. Gujarat High Court ruling in ACIT vs. Narmada Chematur Petro Chemicals Ltd. emphasized that excise duty is a post-manufacturing cost and cannot be included in closing stock unless reflected as a cost item. Supreme Court decisions in Chainrup Sampatram vs. CIT, CIT vs. Hindustan Zinc Ltd., and CIT vs. Dynavision Ltd. affirm the principle that no debit entry corresponding to credit means credit cannot be recognized. Court's Interpretation and Reasoning: The assessee's accounting policy debited purchases net of CENVAT credit and valued closing stock accordingly, consistent with AS-2. The unutilized CENVAT credit is not income but a receivable balance to be utilized against future excise duty liability; hence, it should not be included in stock valuation. The CIT (A) had earlier deleted a similar addition for AY 2009-10 following the ITAT's direction to verify the accounting policy and facts, which was revenue neutral. The 3CD audit report under Section 44AB corroborated that excise duty paid on inputs was set off against excise payable on finished goods and not debited to Profit & Loss account, supporting the assessee's valuation method. The AO's addition under section 145A was thus found inconsistent with both accounting principles and judicial precedents. Key Evidence and Findings: Assessee's submission of reconciliation statements demonstrating revenue neutrality of the exclusive method. Audit report confirming that excise duty on inputs was not charged to P&L account and hence not part of stock valuation. Prior ITAT order for AY 2009-10 directing AO to verify facts and accounting policy, which was followed by CIT (A) for AY 2010-11. Application of Law to Facts: The Court applied the principle from Supreme Court and High Court rulings that unutilized CENVAT credit is not income and cannot be included in stock valuation unless reflected as a cost. The assessee's accounting treatment was consistent with accepted accounting standards and judicial precedents. Treatment of Competing Arguments: The AO argued for inclusion of CENVAT credit in closing stock under section 145A. The assessee relied on accounting standards and judicial precedents to exclude such credit from stock valuation. The CIT (A) and ITAT had earlier accepted the assessee's method for prior years, which was followed in the present year. Conclusion: The addition of Rs. 4,23,71,333/- under section 145A on account of disallowance of CENVAT receivable was rightly deleted. The appeal of the department on this ground is dismissed. Issue 2: Disallowance under Section 14A read with Rule 8D Relevant Legal Framework and Precedents: Section 14A read with Rule 8D provides for disallowance of expenditure incurred in relation to income which does not form part of total income (exempt income). Judicial precedents, including CIT vs. Torrent Power Ltd., provide guidance on the calculation and applicability of such disallowance. Court's Interpretation and Reasoning: The AO computed disallowance under Rule 8D as Rs. 51,52,843/- based on average investment and interest-free funds. The assessee had already suo moto disallowed Rs. 15,45,480/- relating to exempt income. The presence of sufficient interest-free funds in the form of capital and reserves (Rs. 373.62 Crore) against investments (Rs. 41.08 Crore) indicated that no interest expenditure was attributable to exempt income. The CIT (A) had partly allowed the ground in favor of the assessee. Key Evidence and Findings: Details of capital and reserves and investment in mutual funds as per AO's record. Assessee's voluntary addition of expenditure relating to exempt income. Application of Law to Facts: Where sufficient interest-free funds are available, disallowance under section 14A is not warranted. Treatment of Competing Arguments: The AO insisted on disallowance under section 14A read with Rule 8D. The assessee argued presence of interest-free funds and voluntary disallowance of expenditure. The CIT (A) and the Tribunal found merit in the assessee's submissions. Conclusion: The disallowance of Rs. 51,52,843/- under section 14A read with Rule 8D was not justified and was deleted. Issue 3: Addition of Disallowance under Section 14A to Book Profit under Section 115JB Relevant Legal Framework and Precedents: Section 115JB provides for computation of book profit for Minimum Alternate Tax (MAT) purposes. Clause (f) of Explanation 1 to section 115JB(2) requires certain disallowances, including those under section 14A, to be added back to book profit. Judicial precedents including CIT vs. Gujarat State Fertilizers & Chemicals Ltd. clarify the scope and applicability of such add-backs. Court's Interpretation and Reasoning: The AO added back Rs. 51,52,843/- disallowed under section 14A to book profit under section 115JB. The CIT (A) partly allowed the ground in favor of the assessee. The Tribunal noted the presence of sufficient interest-free funds and followed the Jurisdictional High Court ruling which held that such disallowance is not warranted if interest-free funds cover investment. Key Evidence and Findings: Capital and reserves of Rs. 373.62 Crore against investments of Rs. 41.08 Crore. Relevant judicial pronouncements on the treatment of disallowance under section 14A for MAT computation. Application of Law to Facts: Since no expenditure was attributable to exempt income due to sufficient interest-free funds, the addition to book profit under section 115JB was not justified. Treatment of Competing Arguments: The AO relied on statutory provisions mandating addition of disallowance to book profit. The assessee relied on judicial precedents and facts showing no interest expenditure attributable to exempt income. Conclusion: The addition of Rs. 51,52,843/- to book profit under section 115JB was not warranted and the ground raised by the department was dismissed.