TaxTMI 
TaxTMI 
2015 (12) TMI 767
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....ing Officer in not specifying/ carrying forward the unabsorbed depreciation and brought forward business losses of the Appellant. 3) The learned Commissioner of Income Tax(Appeals) erred in directing the Assessing Officer to make addition on account of the provisions of Section 145A of the Act. 4) The learned Commissioner of Income Tax(Appeals) erred in directing the Assessing officer to invoke the provisions of Section 145A of the Act without making any adjustment to the opening stock of the Appellant. 5) The learned Commissioner of Income Tax(Appeals ) erred in not directing the Assessing Officer to re-compute the opening stock, purchases, sales and closing stock in accordance with the provisions of Section 145A of the Act." 3. The Brief facts of the case are that the assessee company is engaged in the business of chemicals. The case of the assessee company was selected for scrutiny for framing assessment u/s 143(3) of the Income Tax Act,1961(Hereinafter called "the Act") read with Section 143(2) of the Act. The assessee company e-filed its return of income on 30.10.2007 declaring total income of (-) Rs. 4,46,07,722. Notice u/s 143(2) of the Act was ....
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....ed to the depreciation allowable u/s 32(1) of the Act next year.The AO then referred to the provisions of Section 71, 72 and 32 of the Act and reconciled the said Sections in a manner to come to conclusion that the depreciation of the current year is not to be allowed to be set off against the income under the head 'long term capital gains' vide assessment orders dated 18.12.2009 u/s 143(3) of the Act. 6. Aggrieved by the afore-stated assessment order dated 18.12.2009, the assessee company filed first appeal with the CIT(A) . The assessee company relied upon the following case laws in support of its contentions: 1. CIT v. Jaipuria China Clay Mines Private Limited-59 ITR 555(SC), 2. Rajapalayam Mills Limited v. CIT -115 ITR 777(SC), 3. Garden Silk Wvg Factory-189 ITR 512(SC), 4. CIT v. Virmani Inds. P. Ltd. & Ors.-216 ITR 607(SC), 5. Rallies India Limited in ITA No. 4898/M/2006. In the light of the above decisions , the assessee company argued that the assessee company has set off the depreciation allowance for the year under consideration computed as per provisions of Section 32(1) of the Act against the long term capital gains for....
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....d depreciation of Rs. 3,20,97,526/- against the long term capital gains earned by the assessee company during the year. The Ld. Counsel relied upon the judgment of Hon'ble Supreme Court in CIT v. Virmani Industries Private Limited in (1995)216 ITR 607(SC) , judgment of Hon'ble Bombay High Court in the case of Ambika Silk Mills Company Limited v. CIT in (1952) ITR 58 (Bom.) and the decision in the case of Rallis India Limited v. JCIT in ITA No. 4889/Mum/2006 to contend that the assessee company is entitled for set-off of un-absorbed depreciation allowance against the long term capital gain earned by the assessee company.While on the other hand the Ld. DR relied upon the orders of the authorities below. 10. We have considered the rival contentions and perused the material on record including case laws. We have observed that the assessee company has set off unabsorbed depreciation of Rs. 3,20,97,526/- against the long term capital gains earned during the year which has not been allowed by the AO and the same was confirmed by the CIT(A). 11. We have observed that this issue has been decided by the co-ordinate bench of the Tribunal in ITA No. 4898/Mum/06 in the case of Rallis Indi....
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....use (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and- (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year ; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed ." Section 32(2) as it exists from AY 2002-03 till date: "[(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under subsection (1) in any previous year, owing to there being no profits or gains chargeable for that previous year71, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall....
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....depreciation allowance, the allowance to the extent to which it is not absorbed would be set off against the profits of any other business and if a part of the depreciation allowance still remains unabsorbed , it would be liable to be set off against the profits and gains chargeable under any other head of and it is only if some part of the depreciation allowance still remains that it can be carried forward to the next assessment year. But where any part of the depreciation remains unabsorbed after being set off against the total income chargeable to tax, it can be carried forward to the following year and set off against the year's income and so on for succeeding years. The method adopted by the statute for achieving the result is that the carried forward depreciation allowance is deemed to be part of and stands on exactly the same footing as the current depreciation for the assessment year and is this allowable as a deduction." 7.4 While deciding the issue, the Hon'ble Supreme Court has followed the earlier decisions of the Apex Court in the case of Jaipuria China Clay Mines (P) Ltd. in 59 ITR 555, Rajapalayam Mills Ltd. in 115 ITR 777 which were rendered by the Bench co....
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....und No 3 to 5 which are mainly with respect to the CIT(A) directing the AO to invoke the provisions of Section 145A of the Act by making additions to the closing stock and that too without making corresponding adjustments to the opening stock , purchase and sale of the assessee company. 13. The AO observed that the assessee company has not included excise duty in the valuation of the closing stock as per mandate of Section 145A of the Act whereby the assessee company should have included excise duty component of purchase price of raw material while valuing the closing stock of raw material, WIP and finished goods. The assessee company submitted that the non inclusion of the same will have no effect on its profits which contention was rejected by the AO. The AO held that the plain reading of Section 145A of the Act makes it clear that after computing profit and gains of business or profession as per the method of accounting regularly employed by the assessee company , the profits shall be further adjusted to include excise duty component of cost paid by the assessee company not withstanding any right (i.e. cenvat) arising as a consequence to such payment and hence excise componen....
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....se duty and sales tax is to be added to closing stock of Raw material,Work-in progress and Finished goods held by the assessee company at the year end as per Section 145A of the Act while no corresponding adjustment in the opening stock of Raw material, Work-in-progress and Finished goods is to made relying on the decision of Melmould Corporation v. CIT 202 ITR 789(Bom.). 14. Aggrieved by the assessment order of the AO, the assessee company filed first appeal with the CIT(A) and the CIT(A) held that the assessee company should have prepared its profit and loss account as per provisions of Section 145A of the Act whereby the excise duty and VAT/sales tax are to be included in purchase, sale and closing stock while no adjustment is required in the opening stock and resultant change , if any is to be added to the income of the assessee company. The CIT(A) held that the anomaly may arise due to the fact that the assessee company has utilized PLA A/c instead of Cenvat/VAT credit available for payment of the Duty to the Government A/c. The amount of payment made out of the PLA A/c to the extent of the Cenvat/VAT credit was still available in the Cenvat/VAT Register shall be added to t....
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....envat credit available and are accounted for in the books of accounts by the assessee company exclusive of cenvat credit available and consequentially the assessee company has valued stock net of cenvat without including taxes, duties , cess, fee etc as provided u/s 145A of the Act while the authorities below have held that the closing inventories as on year end shall include taxes, duties, fee, cess as provided u/s 145A of the Act and no adjustment in the opening stock is called for . Before we proceed further it is important to understand the entire background to understand the dispute in the present appeal in the right perspective. Firstly, we refer to the provisions of Section 145A of the Act as applicable for assessment year 2007-08 are reproduced below: "Section - 145A, Income-tax Act, 1961 - 2006 ^2[Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be- (a) in accordance with the method of accounti....
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....nufactured by the enterprise. For example , Custom duty payable on import of raw materials broadly has three elements of duties apart from education and secondary education cess viz. (a) Basic Custom Duty (b) Counter veiling Duty (CVD) (c) Special Additional duties(SAD). The basic custom duty paid on import of raw materials for manufacture of finished goods is not allowed as a credit of taxes to be set off against the excise duty payable on the finished goods manufactured by the enterprises under the current value added tax regime known as cenvat credit scheme and hence is to be absorbed as cost component by the enterprise while in the case of the CVD & SAD component in custom duty paid by the enterprise on import of raw materials for manufacture of finished goods, the same are allowed as cenvat credit to be set off/ utilized for payment of excise duty on the finished goods. Similarly, Central Sales Tax(CST) paid on purchase of raw material from another state , no offset is allowed against the State VAT or CST on finished goods sold by the enterprise as per current schemes pertaining to sales tax and hence is to be absorbed as part of component of cost by the enterprise while State....
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....d Service Tax , popularly known as 'GST' which is likely to be rolled out shortly which is likely to further unify and merge various indirect taxes both Central and State levies into an unified tax to be known as 'GST' and allow credit of various indirect taxes across goods and services both Central and State levies as per scheme to be notified which will further help in cutting down transaction costs and bring in transparency into the system. The Hon'ble Supreme Court in the case of Eicher Motors v. UOI, 1999(106) E.L.T. 3 (S.C.) has observed that credit once validly taken by the manufacturer cannot be effaced. The relevant extract of decision of Hon'ble Supreme Court is as under:- * "5. Rule 57-F(4-A) was introduced into the Rules pursuant to the Budget for 1995-96 providing for lapsing of credit lying unutilised on 16-3-1995 with a manufacturer of tractors falling under Heading No. 87.01 or motor vehicles falling under Heading Nos. 87.02 and 87.04 or chassis of such motor vehicles under Heading No. 87.06. However, credit taken on inputs which were lying in the factory on 16-3-1995 either as parts or contained in finished products lying in stock on 16-3-1995 was allowed.....
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.... the inputs already used in the manufacture of the final products but the final products have already been cleared from the factory before 16-3-1995. Thus the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product. The basic postulate that the Scheme is merely being altered and, therefore, does not have any retrospective or retroactive effect, submitted on behalf of the State, does not appeal to us. As pointed out by us that when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation is sought to be altered, necessarily it follows that the right, which had accrued to a party such as the availability of a scheme, is affected and, in particular, it loses sight of the fact that the provision for facility of credit is as good as tax paid till tax is adjusted on future goods on the basis of the several commitments which would have been made by the assesses concerned. Therefore, the Scheme sought to be introduced cannot be made app....
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....rvices itself that these taxes on inputs and services on procurement paid by the enterprise shall be set off against the liability for excise duty payable on finished goods manufactured by the enterprises to avoid cascading effect of multiple taxes at multiple stages. The Cenvat Credit Rules also permit refund of taxes and duties on inputs and services used in case of export of goods on fulfillment of stipulated conditions as stipulated under excise laws, rules and regulations. The Accounting Standard AS-2 issued by the Institute of Chartered Accountants of India(ICAI) which is a mandatory standard stipulates that the Cost of Inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of purchase is defined in the AS-2 which consists of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Thus AS-2 which is a mandatory standard requires that duties and taxes paid on purchase are to form part of cost of pu....
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....te on tax audit u/s 44AB of the Income Tax Act,1961 at para 23.23 has demonstrated with practical examples that under both the methods i.e. 'inclusive method' also called as 'gross method' or 'exclusive method' also called as 'net method', the gross profits in trading account shall be the same . It is difficult to believe that the enterprise will make profits on taxes, duties , cess and fee payable to Government in the midst of prevailing law's concerning and with reference to doctrine of unjust enrichment. The relevant extracts from the Guidance note on Tax Audit u/s 44AB of the Income Tax Act,1961 issued by ICAI are reproduced below: "23.11 It may be pointed out that the "inclusive method" is not permitted by AS-2 which is made mandatory from accounting year beginning on or after 01.04.1999. Further, in the Guidance Note on Accounting for CENVAT the second method (inclusive method) has been withdrawn with effect from accounting year commencing from 1.4.1999. In view of the above, the adjustments under section 145A will have to be made in all cases where 'exclusive method' is followed. 23.12 In this connection, it is worthwhile to note that the Memorandum....
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....on is claimed for any tax, duty, cess or fee on the items covered by these two paragraphs by way of debit in the profit and loss account, either in the earlier year or in the year under report, adjustment for the same should be made in such a manner that no double deduction is claimed for the same expenditure. Similarly, adjustment should be made for any item of income to ensure that the same item is not treated as income twice. ..... ...... 23.22 Section 145A of the Income-tax Act provides that the valuation of purchase and sales of goods and inventory for the purpose of computation of income from business or profession shall be made on the basis of method of accounting regularly employed by the assessee but this shall be subject to certain adjustments. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. The adjustment provided for in this section should be made while computing the income for the purpose of preparing the return of income. Therefore, the recommended method for accounting of VAT will not result in non-compliance of section 145A of the Income-tax Act. ....
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....viz. 'gross method' or 'net method' will be same as observed by Apex Court in the judgment of Indo Nippon Chemicals Co. Ltd.(supra) and also demonstrated by ICAI in its guidance note as detailed above. The ICAI in view of divergence between AS-2 and mandatory requirements of Section 145A of the Act has stipulated in the guidance note on tax audit at para 23.22 that books of accounts are to be maintained by the enterprise following 'exclusive method' also called as 'net method' , while due to mandatory requirement of Section 145A of the Act while preparing return of income to be filed with Revenue , it is stipulated by ICAI to follow 'inclusive method' also called as 'gross method but the gross profits under both the methods will yield same profits which in any case will not cause any prejudice to the Revenue. The provisions of Section 43B of the Act also protect the interest of Revenue that the taxes, duties , fee and cess payable as at the year end by the taxpayer shall only be allowed as deduction from the income under the Act if the same are actually paid to the credit of Government before the due date of filing of return of income as stipulated u/s 139(1) of the Act. The Excise....
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.... opinion that such taxes, duties, fees, cess (by whatever name called) having bearing on bringing the goods to the place of its location and conditions as on the date of valuation of the goods has to be included in the cost of purchase and valuation of the goods irrespective of whether the enterprise is following 'exclusive method' or 'inclusive method' of accounting to satisfy the mandatory requirement of Section 145A of the Act . Similarly , for valuation of finished goods manufactured by the enterprises , the excise duty on finished goods manufactured by the enterprises is to be added to value of finished goods as the excise duty on finished goods is actually paid or incurred by the taxpayer to bring the goods to the place of its location and conditions as on the date of valuation irrespective of whether the enterprise is following 'exclusive method' or 'inclusive method' of accounting. As per Section 145A of the Act as it exists in the statute, the assessee company has to mandatorily prepare its accounts as per 'inclusive method' or 'gross method' to compute profit chargeable to tax in accordance with Section 145A of the Act while filing return of income with the Revenue . T....