THE DCIT(OSD) CIRCLE-8,, AHMEDABAD vs. VOLTAMP TRANSFORMERS LTD.,, AHMEDABAD

आदेश / O R D E R

PER SHRI MAHAVIR PRASAD, JUDICIAL MEMBER : This is an appeal by the department against the order of the Commissioner of Income Tax(Appeals)-XIV, Ahmedabad, dated 04/06/2014 for the Assessment Year (AY) 2011-12, on the following Grounds: i. Whether the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad is right in law and on facts in deleting the addition

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 2 - of Rs.4,23,71,333/- u/s.145A of the Act by AO on account of disallowance of CENVAT receivable. ii. Whether the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad is right in law and on facts in deleting the addition of Rs.51,52,843/- made by AO. On account of disallowance u/s.14A r.w.r. 8D” iii. Whether the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad is right in law and on facts in deleting the addition of Rs.51,52,843/- being disallowance u/s.14A r.w.r. 8D to the Book profit computed U/s.115JB of the Act. 2. The relevant facts as culled out from the materials on record are as under:- In this case, during the course of assessment proceedings, it was observed that the assessee had shown the amount receivable on account of unutilized/closing balance on account of MODVAT/CENVAT credit under “Loans and Advances” and the same was not included in the value of closing stock. Since the provisions of section 145A of the Act requires that the taxes/duty/cess/fees related to stock need to be included in the value of closing stock, so vide order sheet entry dated 20/01/2014, the assessee was requested to explain the reasons for exclusion of MODVAT/CENVAT from closing stock and show cause why the same should not be included in the value of closing stock as per provisions of section 145A of the Act.

2.2 In response to the same the assessee vide its letter dated 31/01/2014 has submitted as under:

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 3 - “1. As per balance sheet as on 31.03.2011 Cenvat Credit receivable is Rs.3,18,09,545 and service tax receivable is Rs.1,05,61,788 under section 145A. It is proposed to add the same under section 145A. In this connection, it may please be noted that as per AS-2 on Valuation on Inventory, the purchases are debited net off CENVAT and the closing stock of Raw Material and WIP is valued net off CENVAT since the cost of purchases does not include CENVAT paid and therefore, the closing stock is also valued net off CENVAT. The company does not have any stock of Finished Goods as on 31st March, 2011 and therefore there is no question of inclusion of CENVAT in the stock of Finished Goods.

1.1 The same is the case with service tax receivable. This represents that the assessee has paid excess service tax as against the Cenvat credit receivable. The service tax receivable has not relation with the valuation of closing stock and therefore the same should not be added under section 145A.

1.2 It may please further be noted that cenvat credit receivable and service tax receivable are not the income of the assessee and therefore it cannot be added [CIT Vs. Indo Nippon Chemicals Ltd 261ITR 275 (Supreme Court)].

1.3 The assessee furnished the Audit Report under section 44AB along with Annexure to the Assessing Officer. The copy of reconciliation statement to show that the exclusive method followed is revenue neutral is enclosed.

1.4 Further, the unutilized balance of CENVAT is not an income and is used against Excise Duty Payable in the subsequent year and therefore the same cannot be treated as income. The details of the CENVAT credit utilized is given in Schedule 6 to the Tax Audit Report. It may also be noted that the cost of Raw Material debited to Profit & Loss Account does not included excise duty paid on purchases and therefore the question of inclusion of unutilized excise duty in the closing stock does not arise. 1.5 Therefore cenvat credit receivable [which includes service tax receivable] cannot be considered as income as held by Supreme Court

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 4 - in the case of CIT Vs. Indo Nippon Chemicals Ltd 261 ITR 275 (Supreme Court), It was held as under:-"Held (i) that merely because the modvat credit was an irreversible credit available to manufactures upon purchase of duty paid raw material and that would not amount to income which was liable to be taxed under the Act: income was not generated to the extent of the modvat credit on unconsumed raw material and (ii) that it was not permissible for the AO to adopt the gross method for valuation of raw materials at the time of purchase and the net method for valuation of stock on hand."

The above referred judgment was delivered prior to insertion of section 145A but the principles laid down a very important. It has laid down that if there is cenvat credit receivable, it cannot be considered as income.

1.6 The attention is drawn to the recent Gujarat High Court Judgement in the case of ACIT Vs. Narmada Chematur Petro Chemicals Ltd 372 ITR 369 (Guj). The High Court has observed as under:

"According to the settled legal position and accepted principles of accounting, closing stock has to be valued, at the option of the assessee, at cost or market price, whichever is lower. Duty of central excise is levied on the goods manufactured i.e. excisable goods manufactured by an assessee. It is not a part of manufacturing cost. It can be termed a post manufacturing cost. Therefore, unless and until it is entered on one side, as an item of cost, it cannot be taken as a component of the value of the closing stock on the other side. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account"

1.7 The Gujarat High Court has followed the principle laid down by the Supreme Court in the case of Chainrup Sampatram Vs CIT 24 ITR 481 and the said principles are reiterated by Supreme Court in the case of CIT Vs. Hindustan Zinc Ltd. 291 ITR 391. The principles are reproduced on Page no. 377 in para No. 16 of the Report. The above referred principles that if there is no debit that there is no credit are affirmed by Supreme Court in the case of CIT vs. Dynavision Ltd 348 ITR 380.

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 5 -

1.8 It may please be noted that the CIT(A) has deleted the above referred addition for AY. 2009-10. The ITAT, Ahmedabad in Para No.7.1 on page No.8 held as under: " In result, on the same lines we deem it proper to restore this ground back to the stage of the AO to verify the facts as also the accounting policy adopted by the assessee in respect of modvat/cenvat incentives and if find according to the law laid down, than not to disturb the method of accounting of the assessee in this regard. We direct accordingly. This ground may be treated as allowed but for statistical purpose." 1.9 The kind attention is drawn to Para No.12(b) of the 3CD Report under Section 44AB which is reproduce for ready reference: "Excise/vat paid on input is set off against the excise payable on finished goods and no portion of excise/vat paid on input is debited to P&L Account, and hence such excise /vat is not considered for the purpose of valuation of closing stock"

2.3 Assessee’s submission were considered carefully but not found acceptable by the learned AO and addition of Rs.4,23,71,333/- was made u/s.145A of the Act.

2.4 Ld. CIT(A) held that the “It may please be noted that the CIT(A) has deleted the above referred addition for A.Y. 2009-2010. The ITAT, Ahmedabad in Para No. 7.1 on Page No.8 held as under: "In the result, on the same lines we deem it proper to restore this ground back to the stage of the AO to verify the facts as also the accounting policy adopted by the assessee in respect of modvat/cenvat incentives and if find according to the law laid down, than not to disturb the method of accounting of the assessee in this regard. We direct accordingly. This ground may be treated as allowed but for statistical purpose."

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 6 -

The CIT(A) has also followed the above referred ITAT Order for A.Y. 2009-2010 while passing the order for A.Y. 2010-2011 and deleted the addition. The copy of CIT(A) Order for A.Y. 2010-2011 is enclosed. 2.5 The kind attention is drawn to Para No. 12(b) of the 3CD Report under Section 44AB which is reproduced for ready reference: "Excise / vat paid on input is set off against the excise payable on finished goods and no portion of excise / vat paid on input is debited to P & L A/c. and hence such excise / is not considered for the purpose of valuation of closing stock." 2.6 From the above, it is clear that the assessee is covered by ITAT Order and has fulfilled the requirements of ITAT Order for A.Y.2009-10 and also CIT(A) Order for A.Y. 2010-11 therefore for A.Y.2011-12 the appeal should be allowed and that there is need to give any direction to the AO.

2.7 In our opinion, this issue is covered by the ITAT order dated 22/03/2013 in ITA No.1676/Ahd/2012 Para No.7.1 on Page No.8 and Para No.6.3 of AO on Page No.14 it is stated that AO has verified the revenue neutral statement and in the matter of CIT vs. Indo Nippon Chemicals Ltd.261 ITR 275. It is held that modvat receivable is not income. In the result, this ground of department is dismissed.

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 7 - under Rule 8D(2)(iii) works out to be Rs.51,52,843/-, being 0.5% of Average investment (being Rs.103,05,68,638/-) and the disallowance u/s.14A of the act as computed in accordance with the provisions of Rule 8D of the Income Tax Rules works out to Rs.66,98,323/-. However, since Rs.15,45,480/- has already been disallowed total disallowance comes to Rs.51,52,843/-. Hence the said sum of Rs.51,52,843/- is disallowed and added back to the total income. In this, ld. CIT decided ground in favour of the assessee.

3.2 We have gone through the relevant record and noticed that there is an interest free fund on the form of Capital & Reserve is as under: Capital : Rs.10.12 Crore Reserve : Rs.363.50 Crore

Investment in Mutual Fund as on 31/03/2011 is 41.08 Crore on Page No.4 of the AO. The assessee is covered by CIT vs. Torrent Power Ltd. 363 ITR 474 (Guj.). The assessee has suo moto added expenditure of Rs.15,45,480/- relating to exempt income under section 14A as per statement of income.

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 8 - act. Therefore, the total addition of Rs.51,52,843/- was added to the total income of the assessee.

4.2 Against the said order, when matter came before the CIT(A) who partly allowed this Ground of the assessee.

4.3 In our considered opinion, this case is covered by the judgment of the Jurisdictional High Court, CIT vs. Gujarat State Fertilizers & Chemicals Ltd. [2013] 36 taxmann.com 230 (Gujarat). Hon’ble High Court held that, as under: “Section 37(1), r.w.s. 28(iv) and 41(1), of the Income-tax Act, 1961 – Business expenditure – Allowability of [Corporate debt restructuring expenses] – Assessment year 2004-05 – Whether, where assessee incurred expenditure on payment to financial consultants, who negotiated with banks and financial institutions in connection with scheme of corporate debt restructuring, for waiver of interest, same was allowable as revenue expenditure, and was not capital in nature – Held, yes – Whether, principal amount of loan waived was not taxable under section 41(1) or 28(iv) as there had been no allowance or deduction of such amount in any preceding year – Held, yes [Paras 4.3 & 5.5][In favour of assessee]”

4.4 However, sufficient interest free fund – capital and reserve Rs.373.62 Crore against investment of Rs.41.08 Crore and same is mentioned at Page No.4 of the AO.

ITA No.2544/Ahd/2014 DCIT vs. Voltamp Transformers Ltd. Asst.Year –2011-12 - 9 -

Sd/- Sd/- एन.के. �ब�लैया महावीर �साद (लेखा सद�य) (�या�यक सद�य) ( MAHAVIR PRASAD ) ( N.K. BILLAIYA ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad; Dated 26/09/2017 Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-XIV, Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad True Copy 1. Date of dictation 18-09-2017 (dictation-pad 5 pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member …25/09/2017 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S…………….. 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………