MSL DRIVELINE SYSTEMS LIMITED,MUMBAI vs. ACIT 2(2)(2), MUMBAI

The principal grievance of the assessee is directed against the addition of ₹38,26,165/- made by the Assessing Officer by MSL Driveline Systems Limited invoking the provisions of section 145A of the Act on account of MODVAT / CENVAT credit allegedly relatable to inventory. The assessee has also assailed the action of the learned CIT(A) in not adjudicating the ground on merits on the erroneous premise that relief had already been granted by the Assessing Officer under section 154 of the Act.

Briefly stated, the assessee is engaged in the business of manufacturing and supply of automotive components such as propeller shafts, axle shafts, clutch repair kits and allied products. For the year under consideration, the assessee filed its return of income declaring a total income of ₹26,21,07,940/-. The assessment was completed under section 143(3) of the Act, wherein the Assessing Officer made an addition on account of MODVAT credit forming part of inventory by applying section 145A.

Before us, the learned counsel for the assessee submitted that the learned CIT(A) failed to adjudicate the issue on merits on a mistaken assumption that the Assessing Officer had already rectified the assessment order under section 154 and granted relief, which is factually incorrect. It was submitted that no such rectification order exists on record and, therefore, the appellate order suffers from a serious jurisdictional infirmity.

It was further submitted that the issue is squarely covered in favour of the assessee by a consistent line of decisions of the Tribunal in the assessee’s own case for earlier assessment MSL Driveline Systems Limited years, including assessment years 2011–12 and 2014–15. The assessee has been consistently following the exclusive method of accounting, which is in accordance with the Guidance Note on Accounting Treatment for CENVAT issued by the Institute of Chartered Accountants of India, and it has been repeatedly held that there is no impact on profits whether inclusive or exclusive method is followed, provided proper reconciliation is furnished.

We have carefully considered the rival submissions, perused the orders of the authorities below, and examined the material placed on record. The relevant portion of the assessment order, wherein the computation of income and the basis for making the impugned addition have been set out, is reproduced hereunder:

“Penalty notice u/s 270A is being issued for misreporting of income. 5. Subject to the above remarks, the total income of the assessee-company is computed as under:- Particulars Amount Amount Profit and gains 26,82,30,009 from business or profession Add: Modvat credit on 38,26,165 27,20,56,174 inventory Gross Total 27,20,56,174 income Less: Deduction u/s. VIA Total taxable 26,80,56,174 income Rounded off to 26,80,56,170 MSL Driveline Systems Limited Tax on Total 8,04,16,851 Income @30% Computation of Total income u/s.115 JB Book Profit u/s 115JB Rs. 33,77,76,942/- Tax payable under MAT @18.5% - Rs.6,24,88,734/- 6. Assessed under section 143(3) of the Income-tax Act, 1961. Tax liability and interest u/s. 234A, 234B, 234C, 234D, wherever applicable, are computed and credit for pre-paid taxes is given as per ITNS-150A, which is an integral part of this order Demand Notice/Refund is being issued accordingly. Penalty notice u/s 270A is being issued for misreporting of income.

From the above, it is evident that the Assessing Officer has made the impugned addition in a mechanical manner by invoking section 145A, without undertaking the necessary corresponding adjustments or examining whether the alleged deviation had any real impact on the profits of the assessee.

The assessee has consistently explained that it follows the exclusive method of accounting, whereby purchases and inventories are recorded net of CENVAT and sales tax, excise duty on finished goods is separately provided, and sales are accounted inclusive of excise duty. It has been demonstrated through reconciliation statements that the impact on profits is nil, a position which has been judicially accepted in the assessee’s own case for several earlier years.

The relevant findings of the Tribunal for assessment year 2014–15, having a direct and material bearing on the issue under consideration, are reproduced hereunder:

1. “10. Issue No. 4 relates to the allowance of CENVAT credit and VAT set-off amounting to ₹1,18,25,509/-. The relevant findings of the learned CIT(A) are contained in para 5.2 of his order, wherein reliance has been placed on the decision of the Tribunal in the assessee’s own case for assessment year 2010-11 in ITA No. 3343/Mum/2014. In the said order, the Tribunal held that the assessee had demonstrated through a reconciliation statement that there is no impact on the net profit whether taxes are accounted under the exclusive method or the inclusive method. It was observed that the tax authorities had not found any infirmity in the reconciliation statement furnished by the assessee. Accordingly, the matter was restored to the file of the Assessing Officer with a direction to examine the reconciliation statement and take a decision in accordance with law.

Having regard to the above, we now proceed to record our findings. It is manifest that section 145A is a computation provision intended to ensure uniformity in valuation and not a charging provision designed to create artificial income. The Assessing Officer has not pointed out any defect in the method of accounting regularly followed by the assessee, nor has he demonstrated that the alleged adjustment has resulted in understatement of income.

The Tribunal, in the assessee’s own case for earlier years, has consistently held that where reconciliation establishes MSL Driveline Systems Limited neutrality of profit, no addition can be sustained merely on the basis of inclusive valuation under section 145A. It is also significant that, in the earlier years, the Assessing Officer himself has accepted the assessee’s contention while giving effect to the Tribunal’s orders, thereby lending finality to the issue.

In the year under consideration, there is no change either in facts or in law. The Revenue has not brought on record any distinguishing feature warranting a departure from the settled position. Judicial consistency and discipline demand that the view consistently taken in the assessee’s own case be followed.

The action of the learned CIT(A) in not adjudicating the issue on merits, on the assumption that relief had already been granted under section 154, is found to be factually incorrect and legally untenable. The statutory duty to decide the appeal on merits could not have been avoided on such a premise.

In view of the foregoing discussion and respectfully following the binding precedents in the assessee’s own case, we hold that the addition of ₹38,26,165/- made by the Assessing Officer under section 145A of the Act on account of MODVAT / CENVAT credit is unsustainable and is hereby deleted.