CENVAT CREDIT IS NOT INCOME LIABLE TO BE TAXED

[Mr. M. GOVINDARAJAN]

Rule 3 of CENVAT Credit Rules, 2004 allows the manufacturer or producer of final products or provider of output service to take credit on certain taxes paid by them in the course of their manufacturing/providing output service and utilize against the payment of excise duty/service tax, subject to conditions as provided in Rule 4.  Rule 5 provides for refund of CENVAT credit.

The issue to be discussed in this article is whether the unutilized CENVAT credit could have been directly added to the income of the assessee with reference to decided case laws.

In ‘Commissioner of Income Tax V. Indo Nippon Chemicals Company Limited’ – 2003 (1) TMI 8 - SUPREME Court  the assessees are manufacturing units liable to excise duty Under the MODVAT scheme, they get credit for the excise duty already paid on the raw-materials purchased by them and utilized in manufacture of excisable goods. When they manufacture the goods and sell them, the proportionate part of the MODVAT credit is set off against their excise duty liability. In each of these cases, the Assessing Officer took the view that the MODVAT credit that is available should be treated as an income or an advantage in the nature of income, and, therefore, added back the said amount to the income of each of these assessees. The Commissioner of Income-tax, in some of the cases, agreed with the view of the Assessing Officer, and, in some cases, differed. However, when the matter came to the Tribunal, the Tribunal uniformly took the view that the MODVAT credit could not be added back to the income of the assessee.  The High Court, in the appeal filed by the Revenue, held that it was unable to accept the view of the Assessing Officer that merely because MODVAT credit is an irreversible credit available to the manufacturers upon purchase of duty paid raw material, it would amount to income which is liable to be taxed under the Act.   The income was not generated to the extent of MODVAT credit or unconsumed raw material.

In ‘Commissioner of Income Tax V. Diamond Dye Chemicals Limited’ – 2017 (7) TMI 616 - BOMBAY HIGH COURT  the Revenue filed the present appeal before the High Court on account of deleting the addition of ₹ 1,14,11,300 on account of unutilized CENVAT credit to the closing stock.    The appellant submits the following arguments before the High Court-

• The unutilized CENVAT credit pertain to purchase and sale of goods and inventory and not any capital goods and services as per the provisions of section 145A of the Income Tax Act, 1961;
• The Tribunal erred in deleted the said addition;
• The Assessing Officer had considered the reply of the assessee and thereafter had added the amount of ₹ 1,14,11,300/- to the closing stock;
• The Tribunal, relying on the order passed by the High Court in an earlier assessment year, has passed the order without actually considering the factual matrix involved in the present case;
• The Assessing Officer had considered the deficiencies in the order of earlier assessment year and thereafter has passed the order;
• The assessee had unutilized CENVAT credit meaning thereby that excess amount was paid, the same was rightly added to the closing stock.

The assessee respondent submitted the following before the High Court-

• The assessee respondent follows exclusive method of accounting in which the amount of CENVAT credit is not added to the sales and purchases but are shown separately;
• Whether exclusive method of accounting is adopted or inclusive method of accounting is adopted, the net result would be the same and there is no difference in profit.

The High Court considered the arguments put forth by both the parties.   The High Court found that it is not disputed that the assessee was liable to excise duty.  The assessee got credit in the excise duty already paid on the raw materials purchased by it and utilized in the manufacturing of excisable goods.  The assessee was adopting the exclusive method i.e., valuing raw materials on the purchase price minus the MODVAT credit.  The same would be permissible.  The High Court further held that merely because the credit was irreversible credit offered to manufacturers upon purchase of duty paid raw materials 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.  The High Court, considering the above, held that the amount of unutilized CENVAT credit could not have been directly added to the closing stock.  The Tribunal has not committed any error.  The High Court dismissed the appeal filed by the Revenue.