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ACIT –Cir -8 (2) , Mumbai Versus Harnam Syntex P Ltd. and M/s Harnam Syntex P Ltd. Versus DCIT –Cir -8 (2) , Mumbai

2016 (1) TMI 1079 - ITAT MUMBAI

Change in method of accounting for the excise duty from exclusive method to inclusive method - old brought forward CENVAT credit balance from the sales in the name of changing the method of accounting to comply with the provisions of section 145A - Held that:- 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 ₹ .....

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₹ 1,96,74,139/-. The balance remaining on current purchases is ₹ 1,15,47,370/- and this has been duly accounted for in the manner provided u/s 145A in this year. The Ld. CIT(A) already given relief on account excise portion of the opening stock of ₹ 30,60,519/- as it was part of the brought forward MODVAT credit of ₹ 70,50,659/-. However, the sum of ₹ 39,74,140/- which has been confirmed by the CIT(A) cannot be upheld in principle because these are accrual over the .....

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d the benefit of excise duty on this amount in the earlier year and hence relief has to be given in this year. Thus, with this limited direction of verification the issue raised vide revenue’s ground are treated as dismissed whereas the amount of ₹ 39,74,140/- as confirmed by the CIT(A) is treated as partly allowed for statistical purposes.

Deduction u/s 80IB - Held that:- As pointed by Ld. Counsel right from assessment years 2001-02 to 2004-05, assessee has been allowed deducti .....

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by the assessee amounts to manufacturing and accordingly, the assessee is entitled for claim of deduction u/s 80IB. Thus, the ground raised by the assessee is allowed. - ITA No. : 4151/Mum/2011, ITA No. : 4458/Mum/2011, ITA No. : 4459/Mum/2011 - Dated:- 4-1-2016 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Appellant : Ms. Ritika Agarwal For The Respondent : Shri Nitin Waghmode PER AMIT SHUKLA, JM: The aforesaid appeals have been filed by the assessee by t .....

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e additions made by the Assessing Officer without appreciating the fact that the assessee had erroneously reduced the old brought forward CENVAT credit balance 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 b .....

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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 overlooking the fact that the method of accounting followed by the assessee with regard to adjustment of CENVAT credit neither .....

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facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of ₹ 39,74,140/- out of Modvat Credit on the ground that the amount represented liability of the earlier assessment years. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the amount under reference even though pertained to the transactions of earlier years became eligible for deduction in the year under consideration on account .....

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undertaking any manufacturing activity even though the claim was allowed by the department in the preceding year. 5. In doing so the Ld. CIT(A) failed to appreciate that the appellant owned Plant & Machinery of substantial value and was incurring expenses under the head Wages and Electric Expenses for carrying out various manufacturing activities. The Appellant craves to add, alter or delete all or modify any or all the above grounds of appeal . 4. From the plain reading of above, it is app .....

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ractice 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 ₹ 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 bal .....

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t to purchase account. Details of Central Excise duty year wise as under: As on 31.03.2003 NIL As on 31.03.2004 ₹ 70,34,659/- This excess balance remained due to excess duty paid on purchases. Summary of Central Excise Duty (CENVAT A/c.) Debit Opening balance Add: Excise Duty paid on purchases during the year 70,34,659 1,96,74,139 2,67,08,798 Less: Excise Duty paid on capital goods 9,376 2,66,99,422 Less: Excise Duty paid on goods returned 7,643 2,66,91,779 Less: Cinvat Credit taken during .....

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ncome Tax Act, 1961. As per this accounting systems all purchases and sales were accounted inclusive of excise duty. This is in line with the requirement of Income Tax Act, 1961. Since closing stock of earlier year is to be taken as opening stock of current year, no adjustment is made to this item. In case the adjustment is to be made on account of excise duty component in opening stock the value of opening stock would have been higher by ₹ 30,59,4261- and consequently profit for the year .....

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ld he higher by ₹ 1,15,47,370/- as given in attached statement. In Audit Report due to typographical error this amount is reported as ₹ 1,25,34,122/-. Since the company had changed its accounting policy in line with the accounting standard prescribed under section 145A and also due to fact 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 .....

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held that, assessee had not included excise duty in all his purchases and sales and hence he added back a sum of ₹ 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 ₹ 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 .....

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the AO has completely erred himself in concluding that, the change of accounting to inclusive method have not been reflected. It was further submitted that, the assessee had taken into account brought forward amount of excise duty of ₹ 70,34,659/- which comprised of ₹ 30,49,426/- in relation to the goods in the opening stock and the balance represented unadjusted MODVAT credit brought forward from the earlier years. This amount of ₹ 70,34,659/- was adjusted against MODVAT cred .....

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ses 1,96,57,120 3 Less: Modvat Credit on sale 1,51,44,409 Balance 1,15,47,370 8. The Ld. CIT(A) after calling for the remand report and the considering the assessee s submission, partly sustained the addition of ₹ 39,74,140/- and deleted the balance amount of ₹ 85,59,982/- after observing and holding as under:- The submission has been carefully considered and materials on record perused. The change in method of accounting made by the appellant is claimed to be in line with provisions .....

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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 ₹ 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 wi .....

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and ₹ 45,12,711/- being the difference towards excise duty paid of ₹ 1,96,57,120/- and MODVAT Credits ₹ 1,51,44,409/- of the current year as regards the amount of ₹ 45,12,711/-, there is no dispute as it is a net effect of the change in method of accounting in the year under consideration. Regarding the brought forward MODVAT Credit of ₹ 70,34,659/- the appellant has stated that an amount of ₹ 30,60,519/- relates to excise duty portion of the opening stock and .....

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1.4.99. Thus, if the adjustment is required then in those years the assessment of every assessment year being separate and takes into account the effect of transactions of that particular year, the effect of adjustment required in earlier years cannot be brought into in a different assessment year though it is as per accounting principle. Hence, out of total disallowance of ₹ 1,25,34,122/- amount of ₹ 39,74,140/- is sustained and balance of ₹ 85,59,982/- is deleted . 9. Before .....

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the finished goods was at 10% leading to a margin of 14%. This amount is further divided into 2 parts; first, relatable to opening stock of ₹ 30,60,599/- and other part, relatable prior to year, of accumulation of ₹ 39,74,140/-. The other component of the figure of ₹ 1,15,47,370/- i.e. (1,15,47,370 - 70,34,659) included sum of ₹ 45,12,711/- which is on account of current years difference in excise duty paid on inputs less payable on sales claimed in the profit and loss a .....

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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 i .....

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ich intimation u/s 143(i)(a) was issued. In all these years excise duty has been accounted for an exclusive method and amount claimed has been accepted as such after due verification. It is not proper to say that the assessee should be penalized for not changing method of accounting in earlier years, especially when the accounts and records have been accepted as correct in the past years. (iii) The amount of ₹ 70,34,659/- has become due and accrued as a claim in the AY 2005-06 itself due t .....

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is was further reduced from the amount of excise duty of ₹ 1,96,74,139/- already paid on inputs during the year. Thus balance remaining unclaimed on account of current year s purchases is ₹ 1,15,47,370/-. This can be seen from the page 3 of the assessment order. (v) It has been demonstrated on page 7 of written submissions dated 20.04.2015 that whether the MODVAT credit of ₹ 70,34,659/- is added to opening stock or reduced from the sales, the net arithmetical result is the same .....

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a fide and is in line with provision of section 145A, which provides that the valuation of purchase and sale of goods and inventory shall be further adjusted to include amount of any tax, duty, cess or fee actually paid or incurred by the assessee 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 .....

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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 ₹ 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 correct finding, which can not be interfered with as t .....

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ar. The Ld. CIT(A) already given relief on account excise portion of the opening stock of ₹ 30,60,519/- as it was part of the brought forward MODVAT credit of ₹ 70,50,659/-. However, the sum of ₹ 39,74,140/- which has been confirmed by the CIT(A) cannot be upheld in principle because these are accrual over the years and when there is change in the method of accounting in the assessment year 2005-06, the entire amount gets due in this year which has to be allowed. However such a .....

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raised vide revenue s ground are treated as dismissed whereas the amount of ₹ 39,74,140/- as confirmed by the CIT(A) is treated as partly allowed for statistical purposes. 12. In the result, the revenue s grounds are treated as dismissed and assessee s grounds are treated as partly allowed for statistical purpose. 13. Now we will come to ground no. 4 and 5 of the assessee whereby, the assessee have challenged deduction u/s 80IB of ₹ 59,60,478/-. 14. The brief facts are that, the asse .....

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e 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 incorpora .....

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the other activities like, crimping, sizing, warping is done by the assessee from its own plant and machinery and labours. The assessee was also claimed excise duty and is registered as SSI unit itself shows that manufacturing activity is being taken place. However, the CIT(A) upheld the action of the AO after observing and holding as under :- The submission of the appellant has been carefully considered and the material on records perused. As per the Audit report and statement attached to the r .....

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t;. The appellant in its submission has not stated clearly what the manufacturing process was, the details of machinery involved, the nature of products produced as a result of the process. The appellant should have produced Central excise registers or some other records /to support the claim that manufacture was involved. The appellant has stated that had a small scale unit in Sarigam (Valsad Dist.) where it is involved in crimping, twisting, sizing, warping and weaving . It was also stated tha .....

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which are summarized in the following way:- 1. The assessee has full-fledged factory where it has carried out manufacturing activity as borne out from the use of plant & machinery and various expenses incurred by it which have been accepted as such by the AO. 2. This manufacturing activity has been carried out by the assessee since AY 2001-02 which was the first year in which deduction u/s 80IB had been granted. The fact that the assessee company is liable for excise duty for its operations .....

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ases 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 .....

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nied in the instant year without any new or adverse fact coming to light. 17. Apart from that, various decisions were also relied upon, the compilation of which have been filed in the separate paper book, along with the synopsis thereof. She drew our attention to the decision in the case of CIT vs Bipali Textiles Pvt Ltd, reported in [1991] 189 ITR 61, wherein, Hon ble Bombay High Court after referring to CBDT Circular dated 22.11.1955 which had clarified that the activities of twisting and crim .....

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rough job work, because weaving is a major part which has been outsourced. Crimping and twisting is only a minor part. Therefore, it has been rightly held that, assessee is not engaged in manufacturing and sales and therefore the deduction u/s 80IB should not be allowed. 19. After considering the rival contentions and on perusal of the relevant finding given in the impugned order, we find that it is an undisputed fact that the assessee has a SSI Unit in the District of Walsad, Gujarat. The activ .....

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ed by the CBDT on 22.11.1995, even the activities of twisting and crimping of yarn has been treated as 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 .....

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