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2015 (12) TMI 767 - ITAT MUMBAI

2015 (12) TMI 767 - ITAT MUMBAI - TMI - Set off of unabsorbed depreciation - Held that:- Perusal of the wordings of Section 32(2) as applicable to assessment year 2007-08 i.e. the impugned assessment year will reveal that the wordings are similar to the wordings as applicable for assessment year 2002-03. Respectfully following the decision of Hon’ble Supreme Court in the case of CIT v. Virmani Industries Private Limited (1995 (10) TMI 1 - SUPREME Court ) we hold that the assessee company is enti .....

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o called ‘net method’ which is one of the accepted method of accountancy whereby the taxes paid on purchase of raw material are not included in the cost of purchase on the premise that the assessee company is entitled for Cenvat credit on the same to be adjusted against the excise duty liability on finished goods manufactured by the assessee company , while the basic fallacy in contention of the Revenue is that the Revenue is contemplating adding the excise duty paid to the value of closing inve .....

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ame cannot be applied in a piecemeal and ad-hoc manner to a few handful chosen and selected transactions as is done by the revenue in the instant case which will lead to distortion of income chargeable to tax which is not permissible under the Act.

Our above observations and discussions in preceding para’s are equally applicable to VAT/sales tax on the raw materials, WIP and finished goods. Thus the interest of justice will be best served , if the matter is restored to the file of the .....

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company, being ITA No. 5045/Mum/2011, is directed against the order dated 29-03-2011 passed by the learned Commissioner of Income Tax (Appeals)- 13, Mumbai (Hereinafter called the CIT(A) ), for the assessment year 2007-08. 2. The assessee company has raised the following grounds of appeal in the memo of appeal filed with the Tribunal:- 1) The learned Commissioner of Income Tax(Appeals) erred in confirming the action of the Assessing Officer in denying the set off in respect of the current year s .....

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eals) 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 .....

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o (-) ₹ 32,92,004/-. The loss is reduced in the revised return as compared to the original return of income filed with Revenue due to declaration of additional income being long term capital gain of ₹ 4,27,50,000/- on sale of tenancy rights in office premises at Janki Niwas, Dadar, Mumbai. 4. During the course of assessment proceedings the learned Assessing Officer (Hereinafter called the AO ) observed that the assessee company has shown Business Loss of ₹ 4,46,09,522/- which i .....

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to be computed as per Section 29 of the Act i.e. Section 32 is to be given effect for computing business loss. Section 32(2) of the Act restricts the allowable depreciation to the profits and gains of business. Therefore, in the opinion of the AO, the current year s allowable depreciation cannot exceed the business income. Hence as per AO, the assessee s claim of set off depreciation against capital gains cannot be allowed. The AO then referred to provisions of Section 29 and 32(2) of the Act to .....

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g depreciation allowance u/s 32 of the Act) and if the income under the head profit and gains of business is not sufficient for the depreciation allowance, then the same is to be treated as per the Section 32(2) of the Act i.e. to be added 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 al .....

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ory-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 the year and such set off is allowable as per provisions of Section 71 of the Act.The assessee company contende .....

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are specifically confined to profits and gains of business only and thus , current year depreciation which could not be set off against the profits and gains of business shall be carried forward to be adjusted as per provisions of Section 32(2) of the Act r.w.s. 72(2) of the Act and Section 32(2) of the Act also stipulates that current year depreciation can be set off only against profits and gains of business and not other heads of income. The CIT(A) also held that the case laws relied upon by .....

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in appeal before the Tribunal. 9. The Ld. Counsel of the assessee company submitted that the assessee company has set off unabsorbed depreciation of ₹ 3,20,97,526/- against the long term capital gains earned during the year. The AO has not allowed set-off of unabsorbed depreciation against the long term capital gains earned during the year by the assessee company on the grounds that Section 32(2) of the Act restricts the allowable depreciation to the extent of the profits and gains of bus .....

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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 .....

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assessment year 2002-03 in favour of the taxpayer by holding that the taxpayer is entitled to set off of unabsorbed carry forward depreciation against the income computed under the head long term capital gain of the year under consideration and the relevant para s are as under: 7. Before proceeding further, we would like to see the provisions of Section 32(2) as existed prior to AY 1997-98, existed from AY 1997-98 to AY 2001-02 and existed from AY 2002-03 onwards, which are as under: Section 32 .....

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effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years. Section 32(2) as it existed from AY 1997-98 to AY 2001-02: [(2) Where in the assessment of the assessee full effect cannot be given to any allowance under claus .....

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(ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (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 busine .....

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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 be added to the amount of the allowance .....

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year before the Hon ble Supreme Court i.e. AY 1956-57. 7.2 The facts before the Hon ble Supreme Court in the case of Virmani Industries Ltd.(supra) were as under: The assessee was engaged in the manufacture of soap and oil during the previous year relevant to the assessment year 1956-57. The business was stopped in that year where after the factory was let out on hire. Ten years later, i.e. in the previous year relevant to the assessment year 1965-66, the assessee started the business of manufac .....

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This claim was rejected by the ITO and by the Appellate Assistant Commissioner. The Tribunal upheld the assessee s claim and the High Court affirmed the decision of the Tribunal. 7.3 On appeal before the Hon ble Supreme Court, the Hon ble Supreme Court has observed and has held as under: The words no profits or gains chargeable for that year in section 32(2) of the I T Act , 1961 are not confined to profits and gains derived from business. They refer to the totality of the profits or gains comp .....

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ains 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 a .....

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isting of three judges. The Hon ble Supreme Court has also observed that since the Bench headed by three Hon ble judges, therefore, the decisions of earlier Bench are binding on them. At page 216 in para f , the Hon ble Supreme Court has observed that ; We have extracted the relevant observations from both the judgments hereinabove , which say that the unabsorbed depreciation allowance has not only to be set of against other heads of income in the relevant previous year but where it is carried f .....

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is not relevant for AY 2002-03 . As stated above, the wordings of Section 32(2) are similar to the wordings of sec. 32(2) existing prior to AY 1997-98. Therefore, we have no hesitation in holding that the decision of the Apex Court is squarely applicable on the facts of the present case. Accordingly, we direct the AO to allow the set off of carry forward unabsorbed depreciation against the income computed under the head long term capital gain of the year under consideration. We order accordingl .....

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and decision of Co-ordinate Bench in the case of Rallis India Limited v. JCIT in ITA no. 4898/Mum/2006 , we hold that the assessee company is entitled to set off of unabsorbed depreciation against long term capital gain earned during the year by the assessee company.We order accordingly. 12. The other grievance of the assessee company are contained in Ground 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 additi .....

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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 .....

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s a rebate on excise duty payable on sale/clearance of goods manufactured by assessee company calculated on the basis of excise duty rate applicable on raw material which is actually paid by manufacturer of raw material. The AO held that reliance of the assessee company on the guidance note issued by the ICAI for tax audit cannot override the specific provisions of the Act as contained in Section 145A of the Act. The AO referred to the inclusive method and exclusive method as per guidance note i .....

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. Thus, in nutshell, the AO held that this mechanism of advance credit allows the assessee to claim benefit of set off of Cenvat in respect of entire duty paid though the corresponding goods may still remain in closing stock as raw material or finished goods on which no liability to pay duty has arisen. Thus, the AO based on the average rate of duty on purchases work out excise duty of ₹ 84,64,424/- on value of closing stock of raw material, WIP and Finished goods held by the assessee comp .....

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g 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 .....

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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 the Cenvat/VAT set off/utilized during the year . The VAT is payable at the time of sales and not on closing stock of finished goods . Thus, the CIT(A) rejected the appeal of the assessee company on this ground and held that the addition on account of duty following the provisions of Section 145A of the Act is called for. The CIT(A) further held th .....

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ved by the orders of the CIT(A) , the assessee company is in appeal before the Tribunal. The Ld. Counsel of the assessee company reiterated submissions as made before the authorities below and submitted before us that the assessee company is following exclusive method also called net method of accounting whereby cost of purchases are accounted for without taking into effect excise duty and VAT paid on raw material as the assessee company is entitled for credit under value added tax scheme of Gov .....

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t its contentions while the ld. DR relied upon the orders of the authorities below. 16. We have heard both the parties and perused the material on record including case laws relied upon by the both the parties. We have observed that the whole controversy revolves around the method of accounting employed by the assessee company and valuation of purchases, sales and inventories as the assessee company is following exclusive method also called as net method of accounting consistently whereby purcha .....

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ening 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 .....

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this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.] The Section 145A of the Act was introduced by the Finance Act(No. 2) Act,1998 w.e.f. April 1,1999 and starts with a non-obstante clause that notwithstanding anything contained in Section 145 of Act , the valuation of purchase and sales of goods and inventory for the purposes of determining .....

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tion, any tax , duty , cess or fee under any law in force shall include all payment notwithstanding any right arising as a consequence to such payment. It is important to understand the structure of various taxes, duties , cess and fees which have bearing on bringing the goods to the place of its location and conditions as on the date of valuation. There are broadly two categories of taxes, duties , cess and fees based on chargeability prevalent in India having bearing on bringing the goods to t .....

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gainst the final excise duty payable on the finished goods manufactured 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 payab .....

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ase 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 VAT paid on purchase of raw material from supplier within the State is allowed to be set-off against the VAT/CST payable on sale of finished goods to avoid cascading effect of taxes. 2. The second categories of taxes, duties , cess an .....

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ng the levy of tax to value addition done by the enterprise in manufacturing the finished goods. The scheme when launched in 1986 was called Modified Value Added tax scheme (popularly known as MODVAT scheme) which allowed credit/set off of duties paid on specified inputs used in manufacture of excisable goods against the excise duty liability of the enterprise on manufacture of goods as per provisions of Excise Laws , rules and regulations. The scheme was expanded and credit of duty paid on capi .....

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new CENVAT Credit Rules, 2004 allowed both manufacturers and service providers to take input credit on goods and services apart from capital goods allowing cross sectorial availment and utilization of credit. The Cenvat Credit Rules permit adjustment of excise duties paid on inputs , CVD/SAD on imports of raw material , excise duties on capital goods and service tax on input services against the excise duty payable on finished goods manufactured by the enterprise without one to one co-relation .....

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d 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 w .....

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al products, in the manufacture of which such inputs were used. The condition required for the same was that the credit of duty paid on inputs could have been used for discharge of duty/liability only in respect of those final products in the manufacture of which such inputs were used. Thus it was claimed that there was a nexus between the inputs and the final products. In the 1995-96 Budget, the MODVAT Scheme was liberalised/simplified and the credit earned on any input was allowed to be utilis .....

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ercial vehicles varied from 15% to 25%, whereas the final products attracted excise duty of 10% or 15% only. The value addition was also not of such a magnitude that the excise duty required to be paid on final products could have exceeded the total input credit allowed. Since the excess credit could not have been utilised for payment of the excise duty on any other product, the unutilised credit was getting accumulated. The stand of the assessees is that they have utilised the facility of payin .....

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, the credit attributable to inputs already used in the manufacture of the final products and the final products which have already been cleared from the factory alone is sought to be lapsed, that is, the amount that is sought to be lapsed relates to 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 manufactu .....

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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 applicable to the goods which had already come into e .....

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the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impu .....

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declare that the said Rule cannot be applied except in the manner indicated by us above. No orders as to costs Thus in nut-shell , it can be said that the cenvatable duties and taxes paid on procurement of inputs and services which are used in or in relation to manufacture of finished goods are allowed to be set off against the liability of excise duty determined on the finished goods manufactured by the enterprise and Hon ble Apex Court has already held that cenvat credit once validly taken ca .....

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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 .....

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are to form part of cost of purchases but other than those duties and taxes subsequently recoverable by the enterprise from the taxing authorities meaning thereby that the cenvat credit of duties and taxes paid on inputs which is recoverable from the revenue authorities by way of set off against the excise duty payable on finished goods manufactured by the enterprise shall not form part of the cost of purchase of the inventories in bringing the same to their present location and condition. Thus .....

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ale and inventory to be further adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the taxpayer to bring the goods to the place of its location and condition as on the date of valuation notwithstanding any right arising as a consequence to such payment of taxes, duties, cess or fee. Hon ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Limited in (2003) 261 ITR 275(SC) has observed that under both the methods viz gross method or net method a .....

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t method , in which the raw material purchased is valued at the actual cost,that is the actual purchase price and , on this, Modvat credit would be available. If this method is to be adopted, then uniformly the same method must be adopted while valuing the unconsumed stock at the end of the year. Whichever method one adopts, the result would be the same. Similarly , ICAI has also in the guidance note on tax audit u/s 44AB of the Income Tax Act,1961 at para 23.23 has demonstrated with practical e .....

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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' .....

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and closing stock (bold for emphasis) reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of the inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force. The proposed amendment which is clarificatory in nature shall take effect retrospectively from the 1st day of April, 1986 and will according .....

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closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also. Question for consideration is whether the opening stock as on 1.4.1998 should be adjusted as required under section 145A. It is now well settled that if any adjustment is required to be made by a statute, effect to the same should be given irrespective of any consequences on the computation of income for tax purposes. Section 145A starts with the non obstante clause .....

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r 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 .....

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urpose 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. 23.23 The adjustments envisaged by section 145A will not have any impact on the trading account of the assessee. In other words both under exclusive method of accounting and inclusive method of accounting, the gross profit in the trading account will remain the same. The present regime of value added taxation has progressed way .....

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without any one to one co-relation which is likely to be further revolutionized with the introduction of GST shortly with an intent and purpose of eliminating cascading effect of taxes levied at multiple stages to reduce transaction cost and bring in transparency into the system and Apex Court has already held in the case of Eicher Motors (supra) that cenvat credit once validly taken cannot be effaced and creates an accrued right in favour of enterprise, it becomes apparent that exclusive method .....

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id on raw materials, input services once validly taken cannot be effaced and shall be paid back to the enterprise by the Government by way of set off against the excise duty liability on finished goods manufactured by the enterprise and these cenvat credit is more akin to current assets rather than part of the cost of purchases and inventory being taxes recoverable from Government by way of adjustment against the excise duty payable on finished goods manufactured by the enterprise , more-so the .....

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lled 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 .....

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,1961 cannot work in vaccum in isolation but has to progress along-with the rapid development taking place in the economy as it is a living Act and harmonization of various laws is the need of the hour to reduce complexities and bring in the ease of doing business, of course , without compromising / sacrificing with the basic intent and mandate of the Income Tax Act, 1961 to collect correct taxes as per provisions of the Act. During the last few decades, things have radically and drastically cha .....

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e of excisable goods apart from capital goods but now with Cenvat Scheme in operation which allows both manufacturers and service providers to take input credits on goods and services apart from capital goods across cross sectors without any one to one correlation and the Apex Court already holding in Eicher Motor(supra) that cenvat credit once validly taken cannot be effaced and creates an accrued right in favour of the enterprise,there is a need to align Section 145A of the Act with the presen .....

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e absorbed in the Profit and Loss Account by the enterprise as one of the components and item of the cost, we are of the considered 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 .....

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ive 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 . Thus as per Section 145A of the Act as it exists in the statute, we hold that the assessee company has to compulsorily value the purchase and sale of goods and inventory for the purpose .....

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Section 145A of the Act which we hold is mandatory. At this stage we are reminded of the decision of the Privy Council, in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56 that while considering the effect of altering the method of valuation, Privy Council held that whenever there is a change in the valuation at one end (on 31-3-2007 in the instant case), then there must necessarily be a corresponding change at the other end (on 1-4-2006 as in the instant case) otherwise, th .....

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ssessment year, the taxpayer chose to change method of valuation of closing inventory at cost whereby overheads were not included in the valuation of inventory and then in the context and light of change of method of valuation of inventory by the taxpayer itself , the Hon ble Bombay High Court held that there is no change called for in the opening stock while changing the method of valuation of closing stock at cost excluding overhead as otherwise it will lead to chain reaction as in the earlier .....

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