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TMI Blog2016 (1) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the sales in the name of changing the method of accounting to comply with the provisions of section 145A of the Income-tax Act, 1961, without strictly following the provisions thereunder. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has overlooked the fact that the change of accounting method made by the assessee is arbitrary as the assessee still continues to maintain a separate personal ledger account of excise duty liability and CENVAT credit, which has not been routed through the Profit & Loss Account, in contradiction to its stated change over to "Inclusive Method" of accounting under section 145A of the Income-tax Act, 1961. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have appreciated the fact that though the section 145A was inserted by Finance (No.2) Act, 1998 w.e.f. 01-04-1999, the assessee changed its accounting method only in A.Y.2005-06, the year under consideration, i.e. after 6 years of following the "Exclusive Method", only with a view to reduce the taxable income by Z 1,25,34,122/-." 4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacturing and Export and trading of fabric. The AO from the perusal of clause 11 of the Audit report noted that, Auditors have mentioned that "all the purchases and sales were accounted inclusive of excise duty as per the past practice of accounting these items as net of excise duty. Opening Modvat of excise duty is adjusted against sales. This has resulted in lower profit amounting to Rs. 1,25,34,122/-". In response to the show cause notice, the assessee submitted that the method of accounting has been changed to be in line with section 145A, whereby now the assessee has changed the accounting of excise duty from exclusive to inclusive method. This has resulted in higher purchases and higher sales. The opening balance of CENVAT credit lying as current assets in the book of the company has been adjusted against excise credit payable during the year and accordingly, excise duty payable for the year and sales is reduced by this amount. Such a change was purely bona fide so as to bring in conformity with section 145A. Relevant accounting entry made in this year was shown in the following manner:- "From December 2004 onwards company has stopped own production and accordingly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that the opening Modvat credit which was already taxed in earlier years, no adjustment on account of change in accounting policy is warranted". 6. However, Ld. AO rejected the assessee's contention and held that assessee itself had mentioned in the aforesaid reply that unutilized modvat credit of Rs. 70,34,659/- was not included in sales and further, Rs. 81,09,075/- was only notional excise duty shown as sales as the assessee was exempted from excise duty. That apart, the assessee was still maintaining a separate excise account for export sales which has not been passed through the profit & loss account even after the changing the method of accounting during the year. Thus, he held that, assessee had not included excise duty in all his purchases and sales and hence he added back a sum of Rs. 1,25,24,122/- which was the effect of change of method by the assessee. 7. Before the CIT(A), the assessee submitted that the actual amount of the credit was at Rs. 1,15,47,370/- and the figure noted by the Auditor was a mistake. Regarding maintaining of separate excise duty for accounting of exports sales, it was submitted that the assessee had excise duty element in two capacities; firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was violation of section 145A. When the appellant changed the method of accounting to inclusive method, naturally it had to account the purchase and sales including excise duty element. The excise duty of the opening stock which according to the appellant amounting to Rs. 30,60,519/- had also to be considered. The appellant has stated that it pays duty at 24% when purchases are made and gets 10% rebate on processing of fabrics. Therefore it follows that there would always be more debits of excise duty than credits during a year and when purchase and sales are accounted with or without excise duty the profits would be different. It being less in a situation where excise duty portion is included and also where an assessee gets a rebate as claimed by the appellant. The appellant has explained that the actual amount of difference was Rs. 1,15,47,370/- and not Rs. 1,25,34122/- The amount of Rs. 1,15,47,370/- being amount of profit reduced with the appellant changed its method of accounting comprises of brought forward MODVAT Credit of Rs. 70,34,659/- and Rs. 45,12,711/- being the difference towards excise duty paid of Rs. 1,96,57,120/- and MODVAT Credits Rs. 1,51,44,409/- of the curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming the balance amount of Rs. 39,74,140/- out of sum of Rs. 70,34,659/- which is to be adjusted in the relevant assessment year, she submitted that the said amount had already suffered tax in the earlier years when the amount of purchases had been suffered taxed in the earlier years as it had been claimed at the figure exclusive of excise duty though paid but not been claimed due to exclusive method. So far as his observation that the provisions of section 145A came into force w.e.f. 01.04.1999, therefore, adjustment cannot be made in the impugned year, she submitted that Ld. CIT(A) had himself accepted that the change of method of accounting is as per the accounting principle and once that is so then logical effect have to be given in the year of change. Here in this case already this amount has suffered tax in the earlier years by not claiming it. Thus, no disallowance is called for. Sum and substance of her arguments put forth before us can be summarized as under:- (i) The export sales are exempt from excise duty and therefore excise duty on the same is not routed through profit & loss account. This has no impact on the issue of deletion of Rs. 1,25,47,370/-. (ii) The chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to bring the goods to its location and the condition as on the date of valuation. In the earlier years the assessee had been assessed under scrutiny proceedings right from assessment year 2001-02 to 2004-05, wherein, the assesee's exclusive method for accounting excise duty has been accepted. If the change in the accounting has been made bona fidely then, there would definitely be some impact in this year but it gets revenue neutral in the subsequent years. In the "inclusive method" of accounting, now the assessee had to account for the excise duty stock of Rs. 30,60,519/- in the opening stock and also consider the unutilized credit for the earlier years. The assessee had pointed out that, excise duty on purchases were at 24% and 10% on the processing of fabrics which results into more element of excise duty margin by 14%. This prior period accumulation has to be given credit during the year, when purchases and sales are accounted with or without excise duty, and if such exercise is carried out there would be difference in profits. So far as the amount of Rs. 81,09,050/- which the AO held it to be a notional duty, the Ld. CIT(A) on a correct appreciation of facts has given c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... started its manufacturing activity way back in the year 1998 and claimed deduction u/s 80IB in AY 2001-02. The assessee has been undertaking the activities from the earlier years which had been accepted to be manufacturing. In support, certain decisions were also relied upon. However, the AO rejected the assessee's claim after analyzing the usage of raw materials and the finished products and the process as given in para 5.5 of the order and held that the activity carried out by the assessee cannot be treated as manufacturing. 15. Before the CIT(A), exhaustive submissions were made which are dealt and incorporated by CIT(A) in para 5.2 to 5.5. The sum and substance of assessee's contention before the CIT(A) that the assessee has used huge electricity charges on running of machines which was at Rs. 1,13,95,513/- and fuel and oil charges of Rs. 45,81,112/-. Apart from that, the assessee has claimed huge deprecation on plant and machinery and the value of gross block as on 01.04.2004 was Rs. 2,69,31,301/-. It was submitted that, only weaving and final processing was outsourced, otherwise all the other activities like, crimping, sizing, warping is done by the assessee from its own plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the fact that manufacturing activity is taking place. 3. The ld. DR has also fairly accepted that the first four steps carried out by the assessee company require specialized machinery and involve heavy expense on power, i.e. electricity and fuel. He also explained the stages of production and stated that these four steps are required for strengthening of yarn without which it cannot be processed into fabric. 4. There is no dispute about the facts that the assessee company purchases raw yarn and also that it is sent out for weaving process. But the yarn cannot be woven or processed till it undergoes the four stages of production i.e. crimping, twisting, sizing and warping. This intermediate activity is the manufacturing operation carried out by the assessee company. 5. Reliance was placed on the synopsis of case laws forwarded during the course of hearing. Special attention was directed to CBDT circular dated 23.11.1995 referred to by jurisdictional High Court, stating that twisting and crimping of yarn is also manufacturing and the case of Emptee Polyarn in which it was held that the yarn subjected to crimping, twisting, weaving is distinct from the original yarn and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing activities and this Circular has been referred and relied upon by the jurisdictional High Court as stated above. The finished product here is definitely a different product having different value: Even if the weaving part has been outsourced, it does not ipso facto leads to conclusion that assessee is not engaged in manufacturing. The other activities are the vital process through which the raw material is converted into finished products. Time and again, various Courts have held that, if the original commodity undergoes a change which is a commercially different product and no longer is regarded as original commodity and is recognized a distinct article, then it has to be held that "manufacturing" had taken place. Moreover, as pointed by Ld. Counsel right from assessment years 2001-02 to 2004-05, assessee has been allowed deduction u/s 80IB continuously in 3 years by the department even when, the assessee's case has been assessed under scrutiny proceedings u/s 143(3). If similar facts are permeating in this year also, then as a matter of consistency different view cannot be taken in this year. The fundamental aspect of allowing deduction u/s 80IB has been examined a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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