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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether CENVAT credit was required to be reversed under Rule 3(5B) of the CENVAT Credit Rules, 2004 merely because the value of inventory was reduced by an ad hoc provisional accounting entry which was reversed on the next working day, when the inputs continued to remain available for use in manufacture.
Analysis: The dispute turned on the meaning of "write off" and "provision to write off" in Rule 3(5B). The accounting entry was made only to comply with inventory valuation principles under the prescribed accounting standards, which require stock to be shown at the lower of cost or net realizable value. Such an entry was temporary, book-based, and reversed immediately, while the inputs were neither removed from the factory nor shown to have ceased to be capable of use in manufacture. The rule contemplates reversal only where inputs or capital goods before being put to use are actually written off fully or partially, and the proviso preserves credit where the goods are subsequently used. The factual position here was that actual write-off, when it occurred, had already been neutralized by reversal of credit, and the impugned demands rested only on provisional stock valuation entries.
Conclusion: Rule 3(5B) was not attracted, and reversal of CENVAT credit on the basis of the provisional inventory write-down was not justified.
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