DEPRECIATION AND CENVAT CREDIT

[Dr. Sanjiv Agarwal]

The objective of Rule 4(4) of CENVAT Credit Rules is to avoid double benefit to the assessee, both under Income Tax and CENVAT Credit Rules. According to Income Tax Act, 1961, depreciation is allowed to the assessee as a charge to profit and loss account as an expenditure on capital assets used in business at specified percentage to ignore levy of tax on it. If the assessee is a manufacturer of exempted goods or provider of exempted services, since he cannot claim credit, he can only claim depreciation. Otherwise, he has a choice to either claim depreciation or CENVAT credit.

CENVAT Credit on capital goods can be availed on the amount of duty as reduced by the depreciation already debited in accounts. However, credit can be availed if one can revise the profit and loss account of earlier period by reversing the charge of depreciation.

As per Rule 4 of CENVAT Credit Rules, 2004, an assessee is allowed to take CENVAT Credit of amount not exceeding 50 per cent of the excise duty paid on capital goods in the financial year of its receipt and the balance in the subsequent financial years. It also provides that CENVAT Credit in respect of capital goods shall not be allowed on that part of its value which the assessee includes in the value of the capital goods for the purpose of claiming depreciation under Section 32 of the Income Tax Act, 1961. These provisions do not bar the assessee from claiming depreciation of the unavailed amount of credit in the year of receipt of the capital goods in income tax returns for the relevant assessment year. In Suprajit Engineering Ltd v. CCE 2006 (11) TMI 493 - CESTAT, BANGALORE ,  it was held that assessee had not violated the rules for the simple reason that they had availed depreciation only in respect of that portion of duty on which they had not taken CENVAT credit. In Roods Cast Pvt. Ltd. v. CC, Coimbatore 2007 (6) TMI 50 - CESTAT, CHENNAI , it has been held that depreciation of unavailed credit under Income Tax Act, 1961 can be claimed in the year of receipt of goods.

It may be noted that the order in Suprajit case is being interpreted in many quarters wrongly in respect of second financial year wherein balance 50 per cent credit can be availed on which depreciation has already been charged in first year. In fact, the assessee has the option to choose between depreciation under Income tax and CENVAT credit under Central Excise. While he can claim 50 percent credit and depreciation on balance unavailed portion in first year, the same cannot be done in second year as the amount left for credit will be after charging depreciation. In second year, since depreciation has been charged on that amount in preceding year, no CENVAT credit can be claimed.

In Prasad Machinery Pvt Ltd. v. CCE (Appeals) Ahmedabad 2007 (9) TMI 76 - CESTAT, AHMEDABAD, where assessee on being pointed out of mistake revised the income tax return without claiming the benefit of depreciation, it was held that CENVAT credit should be allowed as disallowance of CENVAT Credit on capital goods would lead to a situation where both the benefits, i.e., CENVAT Credit and depreciation would be lost and that is not the intention of Central Excise law. In view of above, it is clear that any one benefit can be claimed and if one return is revised, other benefit can be availed. In CCE, Nagpur v. Maharashtra Electrosmelt Ltd. 2007 (6) TMI 224 - HIGH COURT OF JUDICATURE OF BOMBAY AT NAGPUR, court held that only when the assessee has actually availed depreciation on capital goods, the assessee is not entitled to credit. Thus, where income tax returns were revised wherein depreciation was not claimed, CENVAT Credit was held to be admissible.

In CCE, Pune v. Bajaj Auto Ltd. 2007 (6) TMI 168 - CESTAT, MUMBAI it was held that credit was admissible to an assessee as it had filed revised income tax return reducing the claim to the extent of credit availed on capital goods.

In EEI Capsules Ltd v. CCE, Bhopal 2012 (5) TMI 451 - CESTAT, NEW DELHI , it was held that since

100 percent Cenvat credit was taken on receipt of capital goods and had availed depreciation for income-tax on full value of capital goods including duty element, however Cenvat credit was allowed to be taken only on 50 percent on receipt of capital goods, therefore liable to pay interest.

Third proviso had been added in Rule 3(5) w.e.f. 13.11.2007 vide N. No. 39/2007-CE (NT) dated 13.11.2007. It allows a reduction at the rate of 2.5 per cent for each quarter of a year from the date of taking CENVAT credit. This is a liberal proviso as earlier Rule 3(5) did not take into account the factor of depreciation at all and assessee were supposed to reverse the full credit already taken on removal of such capital goods. Now, if the assets are removed after being used, assessee will be required to pay an amount equal to CENVAT Credit taken on such capital goods as reduced by 2.5 percent for each quarter or part thereof from the date of taking CENVAT Credit. This proviso specifically provide for situation where capital goods are removed after use. Accordingly, entire amount of CENVAT credit need not be paid but it shall be reduced by 2.5 percent for each quarter of year or part thereof from date of taking credit. On utilization of CENVAT Credit after removal of capital goods for payment of duty, Rule 3(4) does not cover such a situation and as such, CENVAT Credit may not be utilized for payment of duty on removal of capital goods after use. The quarters shall be reckoned from the date of taking credit and not from any other date e.g., date of purchase of capital goods or date when the assets is put to use.

In CCE v. Krishna Sahakari Sakkare Karkhane Niyamit 2012 (9) TMI 781 - KARNATAKA HIGH COURT, since assessee claimed Cenvat credit on capital goods and also took depreciation thereon but later rectified its income tax return with a view not to claim depreciation, it was held that as incorrect depreciation claimed initially was later rectified, Cenvat credit was in order.

Thus, the assessees should take only one benefit choosing between depreciation and Cenvat credit.