Case Law Details
Maruti Udyog Ltd. Vs. CIT (Delhi High Court)
Issue: Whether the ITAT has committed an error of law in upholding the dis allowance of Rs. 3,08,79,171 in respect of Sales Tax Recoverable account, under Section 43B of the Income Tax Act?
Held by Delhi High Court
The treatment of advance payment of sales tax, as far as Section 43B, is concerned is no different from the treatment of MODVAT credit under the excise law. It is not in dispute, therefore, that in principle the answer to question (ii) will govern question (iii) as well.
The facts are the Assessee pays sales-tax on the purchase of raw materials and computers used in the manufacture of cars. Though, the sales- tax paid is part of the cost of raw material, the Assessee debits the purchases net of sales-tax; the sales-tax paid is debited to a separate account titled ‘Sales-tax Recoverable A/c‟. Under the Haryana General Sales Tax Act 1973, the Assessee cold set off such sales-tax against its liability on the sales of the finished goods i.e. cars. Whenever the goods are sold, the tax on such sales is credited to the aforesaid account.
In view of the ITA‟s finding on question (ii) which has been affirmed by this Court above, the finding of the ITAT on question (iii) to the effect that no deduction can be allowed in terms of Section 43 B of the amount standing to the credit of the ‘Sales-tax Recoverable A/c‟is also hereby upheld.
Incidentally, here again the ITAT accepted the Assessee‟s alternate plea, in para 37 of the impugned order, that the amount “representing advance payment of sales-tax in preceding year should be allowed deduction in the year under consideration since the same has been adjusted against the liability incurred on sales in this year.” The ITAT‟s direction that the AO should allow the alternate claim after verification if such claim had not been allowed in the preceding year is affirmed.
FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-
1. This is an appeal by Maruti Udyog Limited (‘the Assessee’) under Section 260A of the Income Tax Act, 1961 (‘Act‘) against the order dated 11th October 2004 by the Income Tax Appellate Tribunal (‘ITAT‘) in ITA No. 1240/Del/2003 for the Assessment Year (‘AY‘) 1999-00.
2. By an order dated 24thApril 2006, while admitting this appeal, the Court had framed as many as nine substantial questions of law.
Question (i)
3. Question (i) reads as under:
“Whether the ITAT erred in law in confirming the dis allowance of the amount of Rs. 3,27,83,128/- deposited by the Appellant in its Central Excise Personal Ledger Account (PLA) before 31st March 2000, i.e. the end of the relevant accounting year, even though the Assessee has already incurred liability of excise duty of Rs. 12.27 crores?
Facts relevant to Question (i)
4. The Assessee is engaged in the manufacture of automobiles, chargeable to excise duty under the Central Excise Act, 1994 (‘CE Act‘). In terms of the Central Excise Rules (‘CE Rules‘), the Assessee was required to deposit, from time to time, the amounts representing excise duty payable on the automobiles manufactured by it in its Central Excise Personal Ledger Account (‘PLA‘). This PLA is debited by the excise authorities with the amounts of excise duty payable at the time of clearance of the manufactured automobiles from the Appellant‟s factory.
5. As of 31stMarch 1999, which was the last day of the accounting year relevant to the AY in question, a sum of Rs. 3,27,83,128 stood as balance in the PLA of the Appellant for vehicles. This amount has yet to be appropriated towards excise duty payable by the Assessee. According to the Assessee, as of this date, i.e. 31st March 1999, the excise duty liability already incurred in respect of the automobiles that stood manufactured and were lying in stock, came to an amount which was more than Rs. 12 crores. The Assessee thus claimed that the duty liability drawn was therefore nearly four times as much as the said balance remaining in the PLA.
6. The Assessee claimed that as per the figures in its balance sheet, the exact amount of excise duty liability already incurred by it as on 31st March 1999 worked out to Rs. 12.27 crores. The Assessee has placed on record that the value of the vehicles already manufactured by it as on 31st March 1999 was Rs. 60.31 crores which formed part of the executing stock and on which the excise duty was nearly Rs. 12.31 crores.
Assessment order and subsequent appeals
7. The Assessing Officer (‘AO‘), in the undated assessment order received by the Assessee on 2nd April 2002, disallowed the above balance in the PLA as deduction on the ground that the Assessee had not enhanced its profit by the said amount and that the said amount would be allowed as deduction only if it had been debited to the profit and loss account (‘P&L Account‘).
8. The Assessee took up the matter in appeal before the Commissioner of Income Tax (Appeals) [‘CIT (A)‘]. In the order dated 12th/ 13th March 2003, dismissing the appeal on this issue, the CIT (A) held that Section 43B of the Act would apply in regard to a deduction which was otherwise allowable under the Act. It was held that in the present case, since the goods were still to be manufactured “there was no question of any liability on account of excise dues”. It was further observed that the amount in PLA balance was not an expense since the goods were to be still manufactured and Section 43B “cannot convert a pure and simple advance into an item of expenditure”.
9. The Assessee then carried the matter in appeal before the ITAT. In the impugned order dated 11th October 2004, the ITAT held that “advance payment of excise duty without incurring the liability in respect of such payment is not allowable as deduction under Section 43B.”
Section 43B of the Income Tax Act
10. The case of the Assessee is that the aforementioned sum standing as credit balance as on 31st March 1999 should be considered to be the payment of excise duty within the meaning of Section 43B of the Act and therefore, liable as deduction.
11. In light of this, it would be appropriate to consider the substance of Section 43B of the Act which reads as under:
“43B. Certain deduction to be only on actual payment– Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of –
(a) any sum payable by the Assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or
(b) any sum payable by the Assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
(c) any sum referred to in clause (ii) of sub-Section (1) of Section 36, or
(d) any sum payable by the Assessee as interest on any loan or borrowing from any public financial institution or a State Financial Corporation or a State Industrial Investment Corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or
(e) any sum payable by the Assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the Assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:
Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) which is actually paid by the Assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the Assessee along with such return:
Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been made otherwise than in cash, the sum has been realized within fifteen days from the due date.
Explanation 1- For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 2- For the purposes of clause (a), as in force at all material times, “any sum payable” means a sum for which the Assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
Explanation 3- For the removal of doubts it is hereby declared that where a deduction in respect of any sum referred to in clause (c) or clause (d) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 3A- For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (e) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1996, or any earlier assessment year) in which the liability to pay such sum was incurred by the Assessee, the Assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 4- For the purposes of this section,-
(a) “public financial institutions” shall have the meaning assigned to it in Section 4A of the Companies Act, 1956 (1 of 1956);
(aa) “scheduled bank” shall have the meaning assigned to it in the Explanation to clause (iii) of sub-section (5) of Section 11
(b) “State Financial Corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(c) “State Industrial Investment Corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of sub-section (1) of Section 36.”
12. Circular No. 550 was issued by the Central Board of Direct Taxes (CBDT) clarifying the background position to the introduction of the Explanation 2 to Section 43B of the Act. The said Circular reads thus:
“Amendment of Provisions Relating to Certain Deductions to be allowed only on Actual Payment
15.1 Under the existing provisions of section 43B of the Income-tax Act, a deduction for any sum payable by way of tax, duty, cess or fee, etc., is allowed on actual payment basis only. The objective behind these provisions is to provide for a tax disincentive by denying deduction in respect of a “statutory liability” which is not paid in time. The Finance Act, 1987, inserted a proviso to Section 43B to provide that any sum payable by way of tax or duty, etc., liability for which was incurred in the previous year will be allowed as a deduction, if it is actually paid by the due date of furnishing the return under section 139(1) of the Income-tax Act, in respect of the Assessment Year to which the aforesaid previous year relates. This proviso was introduced to remove the hardship caused certain taxpayers who had represented that since the sales tax for the last quarter cannot be paid within the previous year, the original provisions of section 438 will unnecessarily involve dis allowance of the payment for the last quarter.
15.2 Certain courts have interpreted the provisions of section 43B in a manner which may negate the very operation of this section. The interpretation given by these courts revolves around the use of the words “any sum payable” The interpretation given to these words is that the amount payable in a particular year should also be statutorily payable under the relevant statute in the same year. Thus, the sales tax in respect of sales made in the last quarter was held to be totally outside the purview of section 43B since the same is not statutorily payable in the financial year to which it relates. This is against the legislative intent and, therefore, by way of inserting an Explanation it has been clarified that the words “any sum payable” , shall means any sum, liability for which has been incurred by the taxpayer during the previous year irrespective of the date by which such sum is statutorily payable.”
Assessee’s submissions on Question (i)
13. It was asserted by the Assessee before the ITAT that since the amount deposited by it in the PLA as on 31st March 1999- which remained un-appropriated towards excise duty- was far less than the total amount of excise duty liability that had already been incurred in respect of automobiles manufactured by the Assessee which remained un-cleared from its factory, the entire balance in the PLA was allowable as a deduction under Section 43B of the Act having regard, in particular, to Explanation 2 to Section 43B.
14. Further, the Assessee, in its written submissions before the ITAT on this aspect, stated as under:
“In any case, without prejudice to the foregoing, even if the contention of the learned counsel for the Revenue is accepted, then also it is submitted that the entire balance in the PLA of Rs. 3.34 crores ought to be allowed, as the Assessee had on 31st March, 1999, manufactured motor vehicles of value of Rs. 60.31 crores (page 63/A) which motor vehicles were held as part of the dosing stock, and on which liability for excise duty to the tune of Rs. 12.31 crores approximately, had accrued. Thus even as per the position of law put forth by the learned counsel for the Revenue, the entire PLA balances of Rs.3.34 crores represented duty paid for which liability had been incurred (manufacture having taken place) and as such the same was allowable u/s 43B of the Act.”
15. It is stated that the Assessee has also filed before the ITAT a copy of the tax audit report for the year ending 31st March 1999. It showed that the total amount of excise duty for which liability had been incurred as on 31st March 1999 but which had not been paid as on that date, worked out to Rs. 12,27,93,785 which was paid subsequently on or before 19th May 1999.
The Assessee’s own case for AYs 1995-96 & 1996-97
16. The question framed also arose in the Assessee‟s own case for the AYs 1995-96 and 1996-97 before this Court in Commissioner of Income Tax v. Maruti Suzuki India Limited (2013) 255 CTR 140 (Del). One of the questions addressed by this Court in the said appeal was:
“Did the Tribunal fall into error in holding that the amounts deposited by the Assessee/ Respondent in the Excise Personal Ledger Account (PLA) could not be disallowed under Section 43-B of the Income Tax Act?”
17. After referring to the decisions in CIT v. C.L. Gupta (2003) 259 ITR 513 (All); CIT v. Modipon Ltd. (2011) 334 ITR 106 (Del) and Paharpur Cooling Towers Ltd. v. CIT (2011) 244 CTR (Cal) 502, this Court concluded as under:
“13. A plain reading of Section 43-B clarifies that,
(a) The deduction claimed by the Assessee must be “otherwise” allowable under the other provisions of the Act.
(b) The deduction must relate to any sum payable by way of tax, duty, cess or fee.
(c) The Assessee must have incurred liability in respect of such tax, duty, etc.
On fulfilling these conditions, the Assessee‟s claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term “liability to pay such sum was incurred by the Assessee”, together with the words “a sum for which the Assessee incurred liability” in Explanation 2, underline that payment must relate to the incurred liability to be called „any sum payable‟.
14. In the present case, the Assessee had no option but to keep the account in respect of each excisable product (evident from the mandate in Rule 173G that it “shall keep and account current”). The latter part of the main rule makes it clear beyond any doubt that the Assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit:
“…and the Assessee shall periodically made credit in such account-current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such Assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods”
The revenue‟s contention that the amounts in credit also relate to goods not manufactured, and therefore not relatable to any “liability incurred” is, in the opinion of this Court, without any basis. The arrangement prescribed by the rule is both a collection mechanism– dictated by convenience, as well as mandatory. It is convenient, for the reason that if the Assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearance, that would have been cumbersome to it as well as the revenue; it would also have led to problems of storage of goods, and slow down their supply and distribution. The Rule makers pragmatically directed that “sufficient” amounts ought to be maintained in the account, to cover the removals. Therefore, at any given point of time, there had to be an excess in the account, if the Assessee were to remove the goods. Each clearance mentions the quantum of goods, and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day‟s clearances. The point to be underlined is that there is no choice, and the amounts relate to the Assessee‟s duty liability, falling within the description under Section 43-B. The consequence of not allowing the amounts as deductions, are vividly brought out in the decision of the Allahabad High Court in C.L. Gupta & Sons (supra),
where it was held that:
“10. In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the Assessee in March, 1987, and therefore, in terms of Section 43B it is deductible only in the year in which it is actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the Assessee incurred the liability on the basis of the method of accounting regularly adopted by him and, therefore, in view of the clear provisions of law, the deduction cannot be allowed in the assessment year 1988-89. In our view, both the learned Income Tax Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) fell in error in holding that since the Assessee- firm debited the cost of goods imported including the duty paid on delivery of goods in the trading account in April, 1987, and before the actual deliver of the goods, the value of the goods and customs duty paid thereon was shown in the balance-sheet as document in hands, therefore, the deduction should be allowed in the assessment year 1988-89, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the Assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the Assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the Assessee incurred the liability to pay such tax, duty, etc. has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B of the Act. In this view of the matter, the appeal deserves to be allowed.”
18. The ITAT has, in the impugned order, opted not to follow the decision of C.L. Gupta (supra) which was affirmed by this Court in the Assessee‟s own case for AYs 1995-96 and 1996-97. Furthermore, the decision in Modipon (supra) has been upheld by the Supreme Court in its decision dated 24th November 2017 in C.A. No. 19763 of 2017 arising out of S.L.P.(C) No. 29816 of 2011.
Decision on Question (i)
19. The Court is of the view that the above decision of this Court in the Assessee‟s own case for AYs 1995-96 and 1996-97 covers the issue in favour of the Assessee.
20. For all the aforementioned reasons, Question (i) is answered in the affirmative, i .e. in favour of the Assessee and against the Revenue.
Question (ii)
21. Question (ii) reads as under:
“Whether the ITAT had committed an error of law in upholding the dis allowance of the amount of Rs. 69,93,00,428/- which represented MODVAT credit of excise duty that remained unutilized by 31st March 1999, i.e., the end of the relevant accounting year?”
Facts pertaining to Question (ii)
22. The Assessee purchased raw materials and inputs that went into the manufacture of automobiles. The purchase price paid by the Assessee for raw material/inputs included excise duty. To the extent that such excise duty had been paid as part of the purchase price, the Assessee was entitled to MODVAT credit in terms of Rule 57A of the CE Rules. The excise duty paid by the Assessee was kept in a separate account, maintained as the RG-23 register.
23. The Assessee could utilize this separate account/credit for payment of excise duty at the time of clearance of the automobiles manufactured by it from its factory. Illustratively, if the Assessee purchased steel, which is the raw material for the manufacture of automobiles, worth Rs. 100 and pays 10 as excise duty, which is reflected in the invoices raised by the steel manufacturer on the Assessee, it could utilize the said Rs. 10 towards payment of excise duty on the car manufactured at the time of clearance of such car from the factory gate. Therefore, if the car is worth Rs. 200 and excise duty is payable at the rate of 10% thereon, at the time of clearance of such car from the factory gate, the Assessee can utilize MOD VAT credit of Rs. 10 towards part payment of Rs. 20 custom duty while making direct payment of the remaining amount.
24. The controversy that arose was that as of 31stMarch 1999, the unutilized MOD VAT credit stood, in the Assessee‟s books of accounts, at Rs. 69,93,00,428. This amount, having been paid by the Assessee on the raw material/ input as excise duty, was not shown as expenditure and therefore, was not reflected in its P&L account. Instead, it was shown as a current asset in the balance sheet.
Assessee’s submissions on Question (ii)
25. The case of the Assessee is that although the said amount is shown as unutilized MODVAT credit, it has been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act. Mr. Ganesh, learned Senior Counsel for the Assessee, referred to Rule 57A to Rule 57I of the CE Rules and submitted that the liability to pay excise duty, although primarily on the manufacturer of the raw material, is passed on to the purchaser (in this case, the Assessee) and therefore, becomes the liability of the Assessee at the time of clearance of the raw material. He also referred to clause (e) of the first proviso to Section 11B (2) which envisages the refund of the excise duty being made not to the manufacturer but to the buyer to whom the duty may be passed on.
26. Mr. Ganesh also referred to the Accounting Standards-2 („AS-2‟) issued by the Institute of Chartered Accountants of India (“ICAI“) with regards to the treatment of cost of purchase as well as the Guidance Note issued by the ICAI on Accounting Treatment for MODVAT/ CENVAT. He submits that notwithstanding that the MODVAT credit may be shown as a “current asset” in the balance sheet and not taken in the P&L account as „expenditure‟, it would still be allowable as a deduction as long as the parameters of Section 43B of the Act are satisfied. He emphasized that the said amount constitutes excise duty paid by the “Assessee” under any law for the time being in force” namely, the CE Act.
27. Mr. Ganesh submitted that there could be a situation where an advance is paid to the manufacturer of the raw material by the Assessee which may have an excise duty component. However, till such time as there is a completed transaction of purchase, the liability does not arise. To that extent, deductions would be allowed under Section 43B of the Act only where it is a completed transaction, when it can be said that the advance no longer remains an advance but, in fact, constitutes payment for the completed transaction of purchase of the raw material. Till such time, the amount paid towards excise duty on the purchases would be shown as an “advance“ and not as a ‘current asset‘.
28. Mr. Ganesh submitted that for the purposes of Section 43B of the Act, the utilization of the MODVAT credit amounts to payment of excise duty as was emphasized by the Supreme Court in Eicher Motors Limited v. Union of India (1999) 2 SCC 361. He also relied upon the decision of the Supreme Court in Collector of Central Excise, Pune v. Dai Ichi Karkaria Limited (1999) 7 SCC 448. On the question of valuation of closing stock being inclusive of excise duty paid thereon, Mr. Ganesh submitted that this would make no difference to the liability of deduction of the excise duty paid under Section 43B of the Act.
29. Mr. Ganesh also relied upon the decision of the Supreme Court in Berger Paints India Limited v. Commissioner of Income Tax [2004] 266 ITR 99 (SC). He submitted that the ITAT erred in holding that the deduction would be allowed on the balance in the MOD VAT credit account only at the time of utilization of such credit for payment of excise duty, i.e. at the time of clearance of cars manufactured by the Assessee from the factory gate.
Revenue’s submissions on Question (ii)
30. Mr. Ruchir Bhatia, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that it was not in dispute that the Assessee was entitled to the claim of duty paid by it to the manufacturer of the raw materials/ inputs under Rule 57A to Rule 57I of the CE Rules. It is also not in dispute that the Assessee was entitled to utilize MODVAT Credit towards payment of excise duty leviable on the final products manufactured by it. Mr. Bhatia further submitted that the liability under the CE Act to pay excise duty is only on the manufacturer of the excisable goods. While the Assessee may be the person who pays the excise duty, the liability is that of the manufacturer. The Assessee is merely required to pay excise duty on the value of raw material/inputs. This does not ipso facto mean that the Assessee is the one who is liable to pay excise duty on such raw material/inputs. It is merely the incidence of excise duty that has shifted from the manufacturer to the purchaser and not the liability to pay the same.
31. Mr. Bhatia submitted that the decision in Dai Ichi Karkaria (supra) does not lay down that the purchaser of the raw material/ inputs is the person liable to pay excise duty for the purpose of Section 43B of the Act. Mr. Bhatia pointed out that on payment of excise duty to the supplier of raw material, the Assessee has two options. The first is to treat the excise duty as a part of the cost of the raw material and debit the entire amount to the purchases account and claim it as expenditure. In such a scenario, the Assessee does not claim excise duty paid by it to the raw material supplier as MOD VAT credit. The second option is to avail MODVAT credit on the raw material. In terms of Guidance Note 25 issued by the ICAI, the MODVAT credit is shown on the assets side as „current assets‟. Once the Assessee is liable to pay the excise duty on goods manufactured/ removed by it, the excise duty payable is shown as a „statutory liability‟under the head „current liabilities‟in the books of accounts. Thereafter, unutilized MODVAT credit under the head „current assets‟ is set off against this liability of excise duty payable. According to him, both options are mutually exclusive. If the excise duty paid is taken to the P&L account as expenditure there can be no claim by the Assessee as to MODVAT credit. The amount cannot, in accounting principles, be debited simultaneously to two different accounts, i.e. assets as well as expenditure. Mr. Bhatia relied on the decision of this Court in Oswal Agro Mills Limited v. Commissioner of Income Tax [2014] 363 ITR 486 (Del) which according to him answered the question squarely against the Assessee. He also referred to the decisions in Commissioner of Central Excise v. Nish Fibres 2010 (257) ELT 81 (Guj) and CCE v. Suprajit Engineering Limited 2010 (253) ELT 369 (Kar). Mr. Bhatia submitted that if Section 43B is read as a whole, it is plain that the deduction would be allowable only for that previous year in which the payment of excise duty is paid on the final product by utilising the MOD VAT credit.
Analysis and reasons
32. An analysis of Section 43B of the Act reveals that for the deduction there under to be allowed, the following conditions are required to be satisfied:
(a) there should be an actual payment of excise duty whether “by way of tax, duty, cess or fee, by whatever name”;
(b) such payment has to be “under any law for the time being in force”
(c) the payment of such sum should have been made by the Assessee;
(d) irrespective of the method of accounting regularly employed by the Assessee, deduction shall be allowed while computing the income tax for the previous year “in which sum is actually paid” by the Assessee;
(e) the expression ‘any such sum payable‘ refers to a sum for which the Assessee “incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
33. There are two kinds of payment envisaged by Section 43B of the Act. Tax payable could be in the form of excise duty on the raw material/ inputs purchased by the manufacturer. The second kind of payment could be of excise duty that is payable by manufacturer on the final product at the time of clearance of such final products from the factory.
34. In Eicher Motors (supra), a challenge was raised to the validity of Rule 57F (4A) of the CE Rules under which credit which was lying unutilised as of 16th March 1995 with the manufacturers stood lapsed in the manner set out therein. The Supreme Court upheld the challenge by the manufacturers to the aforementioned Rule 57F (4A) of the CE Rules on the ground that under the MODVAT scheme as it existed on the date of change, i.e. 16thMarch 1995, MODVAT credit lying in the balance with the Assessee represented “a vested right accrued or acquired by the Assessee under the existing law”. It was observed as under:
“5 when on the strength of the Rules available, certain acts have been done by the parties concerned, incidents following thereto must take place in accordance with the Scheme under which the duty had been paid on the manufactured products and if such a situation 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 Assessee concerned.”
35. It was further explained that the MODVAT credit is “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.”
36. In Dai Ichi Karkaria (supra), the question that arose for consideration was whether the cost of the raw material was the price paid by the manufacturer to its seller, as contended by the Revenue, or is it the price of raw material minus the excise duty thereon which has been paid by the seller and for which the manufacturer is entitled to credit under the MODVAT scheme to be utilized against the payment of excise duty on products manufactured by him, including the intermediate product, as contended by the manufacturer. The Supreme Court analyzed the entire MODVAT scheme, in particular Rules 57A to 57I, and observed as under:
“18. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co- relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.
19. It is, therefore, that in the case of Eicher Motors Ltd. vs. Union of India (1999) 2 SCC 361 this Court said that a credit under the MODVAT scheme was as good as tax paid.”
37. Now turning to the treatment of the said payment of excise duty which has any MODVAT credit in the books of accounts, a reference may be made first to the AS-2 issued by the ICAI, para 7 of which reads as under:
“Costs of Purchase
7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.”
38. The ICAI has also issued a Guidance Note for treatment of MODVAT/CENVAT. Paras 16 and 18 of the Guidance Note reads thus:
“16. Specified duty paid on inputs may be debited to a separate account, e.g. MODVAT/ CENVAT Credit Receivable (inputs) Account. As and when MODVAT/CENVAT credit is actually utilized against payment of excise duty on final products, appropriate accounting entries will be required to adjust the excise duty paid out of MODVAT/ CENVAT Credit Receivable (inputs) Account to the account maintained for payment / provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of the specified duty on inputs. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of the specified duty on inputs. The debit balance in MODVAT/ CENVAT Credit Receivable (Inputs) should be shown on the assets side under the head „advances‟.
xxx
18. A question may arise as to when the ‘MODVAT/CENVAT‘ credit should be taken if documents evidencing payment of specified duty on inputs are received later than the physical receipt of the goods. According to the accrual concept of accounting, one may account for such credit, provided one is reasonably certain of getting the said documents at a later date.”
39. The above Guidance Note answers both issues raised by the Revenue. One is that it clarified that MODVAT Credit is treated as a separate account where appropriate accounting entries will be made to adjust the excise duty paid out of the said account. It is clear that the debit balance in MODVAT/CENVAT Credit Receivable (Inputs) has to be shown on the assets side, under the head „advances‟. According to the accrual concept of accounting (mercantile system), credit is taken even after the documents evidencing payment of specific duty on inputs are received later than the physical receipt of the goods.
40. Mr. Bhatia is right in pointing out that the Assessee has two options. One, to claim excise duty paid as explained, and the other, to claim it under MODVAT credit for utilization at a subsequent point in time. It is plain that the Assessee in the present case has not exercised the first option.
41.1 The Court now turns to the decision in Oswal Agro Mills (supra). The facts, in brief, in the above decision were that the Appellant therein was engaged in the manufacture and trade of products like de -oiled meals, industrial hard oil, edible oils etc. The Assessee entered into agreements with other entities for the purchase of imported palm stearin fatty acid („imported material‟) from the said importers. In terms of the said agreement, the imported material was to be purchased by the Appellant at landed cost, i.e. CIF price, customs duty, clearing charges, etc. and 3% of the total cost. Under Clause 11 of the agreements, any liability arising after the sale of the imported material in respect of customs duty, excise duty, penalty, sales tax, etc. would be paid by the appellant and included in the landed cost of imported material.
41.2 At the time of actual import of material, the Customs Department demanded 100% of the applicable customs duty as additional customs duty on the CIF value of the imported material. The additional demand was challenged by the importers before the Supreme Court. As an interim measure, the Supreme Court allowed the clearance of imported material on payment of 15% of the disputed additional customs duty. A stay was granted for the balance 85% subject to furnishing of bank guarantees by the importers in favour of the Customs Department. In terms of the agreement between the appellant and the importers, the appellant provided counter-guarantees for the bank guarantees provided by the importers for the unpaid disputed amount of 85% of the additional customs duty.
41.3 As far as the Appellant therein was concerned, the unpaid additional customs duty pertaining to the previous year relevant to AY 1987-88 was Rs. 1,64,87,375. The Appellant therein, following the mercantile system of accounting, claimed deduction on account of the said additional customs duty, in as much as the same was included in the landed cost of the imported material. The AO rejected the claim since the Appellant therein had failed to produce evidence by which it could be ascertained that the liability to pay the additional customs duty was crystallized during the period relevant to the AY.
41.4 After the CIT (A) also dismissed the appeal of the Appellant holding that the liability would arise only when the Supreme Court gave a verdict in favour of the Customs Department, the Appellant went before the ITAT. Rejecting the Appellant‟s appeal, the ITAT held that there was no actual payment and the liability was covered only by the bank guarantee which had not yet been appropriated or encashed and the same is still in the ownership of the Appellant and therefore, the claim for deduction could not be allowed as the bank guarantee cannot fulfill the requirements of expenditure so as to qualify for deduction from the total income. As far as Section 43B was concerned, it was held that even assuming it is a statutory liability, as the liability is eventually fastened upon the Appellant, the provision of bank guarantee in itself cannot be treated as payment as it has not been adjusted towards the customs duty.
41.5 This Court concurred with the ITAT and held that as long as the writ petitions were pending before the Supreme Court, the Appellant therein would have no obligation to pay any amount as the condition precedent for the Appellant to pay disputed amount would not be satisfied. The liability of the Appellant to pay the additional customs duty was contingent upon the importers being called upon to pay the same. Reference was made by this Court to the decision of the Supreme Court in Rotork Controls India P. Ltd. v. CIT [2009] 314 ITR 62 (SC) where three conditions were laid down while considering where a provision made for future claims against warrantees was allowable as a deduction. On the facts of the case, this Court held that subject liability was a contingent liability in respect thereof could not be allowed as a deduction for the AY in question.
41.6 Specific to Section 43B, the Court considered whether it was in fact an obligation of the Appellant therein to pay additional customs duty and whether such obligation could be considered to be a „statutory liability‟. Answering the said question in the negative, this Court observed:
“Although the Assessee is obliged to pay the additional customs duty as and when the importers are called upon to pay the same, nonetheless, it cannot be considered as a statutory liability because the same is not imposed on the Assessee by virtue of any statute. Customs duty is an incident of import of goods and an importer is obliged to pay the same under the Customs Act. Therefore, the liability to pay the additional customs duty is a statutory liability of the importers. However, in the hands of the Assessee, the liability to pay the quantum of custom duty imposed on the importers, either directly to them or on their behalf, cannot be considered as a statutory liability as this obligation is not imposed by any statute but from the contracts entered into between the Assessee and the importers. The liability in question is thus, clearly a contractual liability insofar as the Assessee is concerned.” (emphasis supplied)
41.7 The Court clarified that Section 43B of the Act would apply “only in cases of statutory liability” and held that:
“This provision would have no application insofar as the assessee is concerned, as the liability to pay the amount of additional customs duty on behalf of the importers as and when they are called upon to discharge the same is, clearly, a contractual liability and not a statutory liability. Therefore, the question whether the said liability should be considered as deductible under Section 43B of the Income Tax Act does not arise.”
42. In the considered view of the Court, the above decision should answer the question in the present case in favour of the Revenue and against the Assessee. The primary liability to pay excise duty is essentially on the manufacturers of the raw materials and inputs. As far as the Assessee is concerned, the liability to pay the said amount is only contractual.
43. It must be noted at this stage that after hearing the arguments on 21stS eptember 2017, an affidavit dated 6th November 2017 has been filed by the Assessee pointing out that out of the total amount of unutilized MODVAT credit of Rs. 69,93,00,428, an amount of Rs. 15,73,38,110 pertains to goods already consumed and which were, therefore, not includable in the closing stock of raw materials and inputs as on 31stMarch 1999. It is pointed out that this was noted by the CIT (A) in para 9.16 of the appellate order and that this finding was not questioned by the Revenue. It is accordingly submitted that even if the Revenue‟s contention on the interpretation of Section 43B was accepted, the Assessee is unquestionably entitled to deduction of the aforementioned amount of Rs. 15,73,38,110. It is further pointed out that out of the aforementioned unutilized MODVAT credit claimed as a deduction by the Assessee for the AY 1999-00, a further amount of Rs. 14,96,79,029 represents additional or countervailing duty which has been paid by the Assessee directly to the Customs Department on the import of raw materials, components and the inputs. This, according to the Assessee, is borne out by the RG-23 (Part-II) Register maintained by the Assessee and verified and audited from time to time by the excise authorities. It is asserted that the said amount “has actually been paid by the Appellant to the customs authorities (and not to the Appellant‟s suppliers)” and therefore, this amount should also be allowed under Section 43B of the Act.
44. The Court would only like to observe that it would be for the AO to give effect to the order pertaining to the aforementioned amounts paid by the Assessee to be made in respect of those goods already consumed as on 31stMarch 1999 and in respect of additional countervailing duty paid directly to the customs authorities. If indeed such payment has been made, the credit for the same would be allowable as a deduction under Section 43B of the Act.
45. However, it is also to be noted that in para 35 of the impugned order, the ITAT has accepted the alternate contention of the Assessee that unutilized MODVAT credit of an earlier year which has been adjusted in the year in question should be allowed as a deduction in as much as such adjustment would have to be treated as an actual payment of excise duty. In view of the Court agreeing with the ITAT on the non- allowability of unutilized MODVAT credit as a deduction under Section 43B of the Act for the AY in question, this Court also agrees with the ITAT‟s acceptance of the Assessee‟s alternate contention with regards to the unutilized MODVAT credit of the earlier year being allowable as a deduction in the AY in question to the extent that it has been adjusted by treating as actual payment of the credit for the AY in question. As the ITAT has already pointed out, the Assessee would be entitled to such deduction “subject to verification provided the same was not allowed as deduction in the earlier year.”
46. An attempt was made by Mr. Ganesh to contend that it should now be allowed to be treated as unutilized MODVAT credit as part of the closing stock. An attempt was then made by Mr. Ganesh to contend that the amount of excise duty paid by the Assessee should be treated as expenditure and allowed under Section 37 of the Act as business expenditure. As rightly pointed out by Mr. Bhatia, the Assessee appears to have followed an exclusive method of valuation of stock as opposed to an inclusive stock valuation method. Such a plea was not taken at any stage of the present case before the AO, CIT (A) or the ITAT. As rightly pointed out, if the amount paid has to be allowed as a deduction under Section 37 of the Act then the inclusive method of valuation of stock has to be followed. The Assessee must opt to either treat the same as expenditure or treat it as forming part of current assets. If the plea of deduction under Section 37 is to be allowed then the question of utilising the unutilized MODVAT credit for payment of excise duty would not arise at all.
47. It may be noted that after the insertion of Section 145A of the Act, with effect from 1st April 2010, an Assessee must now necessarily follow the inclusive method of valuation of stock. It was explained by the Bombay High Court in Cartini India Limited v. Assistant Commissioner of Income Tax [2007] 291 ITR 355 (Bom) that “as per the new provision of Section 145A of the Income-tax Act, 1961, the unutilized MODVAT credit had to be included in the closing stock of raw material and work in progress, whereas the excise duty paid on unsold finished goods had to be included in the inventory of finished goods.” However, Section 145A of the Act is prospective and does not apply to the AY in question.
48. The Court is not inclined to permit the Assessee to raise the alternative plea for more than one reason. In the first place, it is a plea taken for the first time in these proceedings. It appears to be an afterthought. Secondly, the ITAT has already accepted another alternate plea made before it by the Assessee by allowing deduction in respect of the unutilized MODVAT credit of the earlier AY, the Court is not inclined to disagree with the reasoning and conclusion of the ITAT. The assessee cannot be allowed to go back and forth on the above plea. There has to be consistency. Thirdly, balance sheet of the Assessee for AY 1999-00 shows that the turnover for the year was over Rs. 8,000 crores. The corresponding sum claimed as deduction representing the unutilized MODVAT credit is not very significant in comparison.
49. Consequently, Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee.
Question (iii)
50. Question (iii) as framed by the order dated 24thApril 2006 reads thus:
“(iii) Whether the ITAT has committed an error of law in upholding the dis allowance of Rs. 3,08,79,171 in respect of Sales Tax Recoverable account, under Section 43B of the Income Tax Act?”
The Court’s finding on Question (iii)
51. The treatment of advance payment of sales tax, as far as Section 43B, is concerned is no different from the treatment of MODVAT credit under the excise law. It is not in dispute, therefore, that in principle the answer to question (ii) will govern question (iii) as well.
52. The facts are the Assessee pays sales-tax on the purchase of raw materials and computers used in the manufacture of cars. Though, the sales- tax paid is part of the cost of raw material, the Assessee debits the purchases net of sales-tax; the sales-tax paid is debited to a separate account titled ‘Sales-tax Recoverable A/c‟. Under the Haryana General Sales Tax Act 1973, the Assessee cold set off such sales-tax against its liability on the sales of the finished goods i.e. cars. Whenever the goods are sold, the tax on such sales is credited to the aforesaid account.
53. In view of the ITA‟s finding on question (ii) which has been affirmed by this Court above, the finding of the ITAT on question (iii) to the effect that no deduction can be allowed in terms of Section 43 B of the amount standing to the credit of the ‘Sales-tax Recoverable A/c‟is also hereby upheld.
54. Incidentally, here again the ITAT accepted the Assessee‟s alternate plea, in para 37 of the impugned order, that the amount “representing advance payment of sales-tax in preceding year should be allowed deduction in the year under consideration since the same has been adjusted against the liability incurred on sales in this year.” The ITAT‟s direction that the AO should allow the alternate claim after verification if such claim had not been allowed in the preceding year is affirmed.
55. Consequently Question (iii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee.
Questions (iv) to (viii)
56. Questions (iv) to (viii) as framed by the order dated 24thApril 2006 are inter-connected and read thus:
“(iv) Whether the Tribunal erred in law in remanding to the AO the question or issue of the addition made to the Appellant‟s asses sable income on account of alleged excessive consumption of raw materials and inputs?
(v) Whether the said direction given by the ITAT is not directly contrary to and irreconcilable with the evidence and material on record and, therefore, perverse?
(vi) Has not the ITAT grossly erred in totally disregarding in evidence and materials on record which render the said remand order passed by the ITAT entirely unnecessary and superfluous?
(vii) Whether the ITAT erred grossly in law in holding that the Appellant‟s books of account were liable to be rejected and its income computed on best judgment basis?
(viii) Is not the impugned order of the ITAT laid down in a large number of judgments directly contrary to the settled legal position laid down in a large number of judgments, relating to the circumstances in which alone an assessee‟s books of account can be rejected by the AO and the assessee‟s income then determined on best judgment basis?”
Facts pertaining to Questions (iv) to (viii)
57. All of the above-stated questions relate to the issue of consumption of raw materials by the Assessee. As explained by the Assessee, for the manufacture of automobiles, the Assessee is required to purchase about 12,000 different items of raw materials, components and inputs. For the purpose of payment of excise duty thereon, the Assessee was required to maintain certain statutory records in terms of the CE Act and the CE Rules, i.e. RG23A Part I and II. As already noticed, the Assessee can utilize the MODVAT credit, as reflected in the RG23A Part I and II, for discharging its excise duty liability on the automobiles manufactured and cleared by it. The entries are maintained in RG23A in respect of the duty paid on the raw materials/ inputs received by the Assessee and thereafter issued for consumption in the process of manufacture.
58. According to the Assessee, the entries in the above RG 23A Register in respect of issue of raw materials/ inputs for consumption in the factory were made on the basis of „standard quantities‟as indicated in the engineering bill of materials formulated by the Assessee‟s engineering department in respect of each type of automobile manufactured by the Assessee. The Assessee states that the „standard quantities‟ of raw materials/ inputs shown as having been utilised for consumption, were less than the „actual quantities‟ of raw materials/ inputs issued for consumption in the process of manufacture because of unavoidable wastages, breakages and pilferages from the shop floor, and certain other factors including deficiencies in the excise duty records.
59. Resultantly, when a physical verification of the stock of such raw material/inputs was undertaken, it was found to be less than the stock as computed in the RG23A records which was based on the standard figures of consumption of materials (which were less than the actuals). At the end of each accounting year, when a physical inventory was taken of the raw materials/ components, it was found to be less than the inventories as per the RG23A records.
60. According to the Assessee, the above position was from 1986 to February 1999 when the MODVAT scheme was first introduced. Its officers succeeded in effecting a complete reconciliation to the extent of Rs. 1111 crores in respect of the period 1986-1999. According to the Assessee, “there thus remained a net difference between the RG23A inventory of raw materials/inputs and the actual physical inventory of raw materials/inputs to the extent of Rs. 643 crores” for the entire period of 13 years, i .e. 1986- 1999, in respect of over 11,000 items. The Assessee states that the above anomaly was voluntarily disclosed by it to the excise department. On their part, according to the Assessee, the excise authorities threatened to deny the MODVAT credit to the Assessee on goods valued at an aggregate amount of Rs. 643.34 crores. The excise department issued to the Assessee a show cause notice (“SCN“) dated 14th September 2001 in which the amount of excise duty equivalent to the MODVAT credit taken on the said raw materials and inputs was computed at Rs. 108.39 crores and demanded from the Assessee by exercising the power under the proviso of Section 11A (1) of the Central Excise Act. The SCN also proposed to levy interest and penalty from the Assessee as well as its directors/ officials.
61. Mr. Ganesh explained that with a view to avoiding the coercive steps as proposed in the SCN, the Assessee, on advice, filed an application before the concerned Settlement Commission praying for grant of immunity and offering to pay the said amount of Rs. 108.39 crores. The said application was accepted by the Settlement Commission and corresponding orders were passed granting immunity to the Assessee from prosecution, penalties etc.
Assessment order and subsequent appeals
62. The AO, in the assessment order for the AY 1999-00, referred to the above developments and proceeded to add to the Assessee‟s taxable income, the entire amount of Rs. 643.34 crores as ‘excessive consumption‘ of raw materials and components. After the CIT (A) dismissed its appeal, the Assessee went before the ITAT which held as under:
(a) The Assessee did not maintain a proper stock register.
(b) In the absence of the stock register, the Assessee ‘s trading result as par its books of account could be rejected.
(c) Though the RG23A Register can be considered to be a stock register, the RG23A maintained by the Assessee could not be considered as reliable evidence to support the consumption showed by the Assessee in its Profit and Loss Account.
(d) The formula for working of the consumption of the raw materials i.e. opening stock plus purchase minus closing stock could be applied for determining the profit and loss of the business only where there was no dispute regarding the correctness of the closing stock.
Assessee’s submissions on Questions (iv) to (viii)
63. Mr. Ganesh submitted that in arriving at the above conclusion, the ITAT overlooked the fact that the opening stock as on 1st April 1998 had also been physically verified by the Assessee as reflected in its balance sheet and the audit report and the said amount has also been accepted by the AO as such. The ITAT specifically noted the fact that the closing stock had been physically verified as on 28thFebruary 1999 and that, therefore, there was no dispute with regard to the closing stock figure as on 31st March 1999 which was arrived at after making the necessary adjustment of the entries in the month of March, 1999. Yet, the ITAT somehow still held the opening stock not to be correct and held that the derived figure of consumption of raw materials required to be verified.
64. Mr. Ganesh drew attention to a report prepared by Pricewaterhouse Coopers (“PwC Report“). The said report was based on a detailed technical evaluation and estimates drawn up by the technical experts with regard to the raw materials and components consumed by the Assessee in the AY ended 31st March 1999. The PwC Report was placed before the CIT (A) and was noticed by him in the order dismissing the Assessee‟s appeal and at that stage no error was pointed out by the Revenue regarding the calculations based on 33,198 cars actually manufactured by the Assessee in the AY in question. According to the PwC Report, the total consumption of raw materials in the AY worked out to Rs. 3729.47 crores as against the amount of Rs. 3714.80 crores reflected in the Assessee‟s books of accounts. This was derived by applying the formula opening stock plus purchases minus closing stock which showed that the Assessee‟s accounts.
65. Mr. Ganesh submitted that the ITAT needlessly remanded the matter to the AO for determining the actual consumption of raw materials for each model of car. He pointed out that this was the precise exercise undertaken by PwC in its report.
Proceedings in remand
66. At this stage, it requires to be noticed that pursuant to the remand order by the ITAT, the matter again went before the AO who reiterated the earlier order. The CIT (A) also dismissed the Assessee‟s appeal. When the matter went before the ITAT, by an order dated 31stOctober 2008 it allowed the Assessee‟s appeal on the reasoning that the AO had exceeded his jurisdiction in undertaking the exercise of determining the actual consumption of raw materials and inputs. According to the ITAT, all that the ITAT had done in the earlier round (i.e. in the order dated 11th October 2004 impugned in the present appeal) was to ask the AO to give “appeal effect“ to the order of the ITAT. As a result of the orders of the AO and CIT (A) were set aside and the appeal was decided in favour of the Assessee. Against the said order of the ITAT, the Revenue has come in appeal before this Court in ITA No. 693 of 2009.
67. While a separate order is being passed in the said appeal, it requires to be noticed at this stage that the said order dated 31stOctober 2008 of the ITAT in fact misunderstood the scope of its earlier remand order dated 11th October 2004. Further the ITAT erred in declining to examine the matter only because its earlier order dated 11th October 2004 was pending in appeal before this Court. This despite the fact that there was no stay granted by this Court of the earlier order dated 11th October 2004 of the ITAT.
68. The net result is that the questions framed in the aforesaid appeal of the Revenue i.e. ITA 693 of 2009 on the above issues will necessarily have to be answered in favour of the Revenue. However, the sequitur is that the issue as far as the present appeal is concerned, challenging the original order dated 21st October 2004 of the ITAT, remains alive and has to be decided.
Revenue’s submissions in Questions (iv) to (viii)
69. Mr. Sanjay Kumar, learned counsel for the Revenue, submitted that the ITAT‟s order remanding the matter to the AO for fresh determination may not have been necessary. Nevertheless, the burden was on the Assessee to show that the derived figure of consumption of raw materials was correct. It is submitted that the mere fact that the Assessee had paid excise duty of Rs. 108.39 crores, in the proceedings before the Settlement Commission would not ipso facto mean that its claim of actual consumption of raw materials has been accepted by the Revenue. The order passed by the Settlement Commission accepting the Assessee‟s offer to pay the differential excise duty only meant that the Assessee itself accepted that the figure of consumption of raw materials as put forth earlier by it in its accounts was erroneous.
The Court’s findings on Questions (iv) to (viii)
70. The Court is unable to accept the above submissions of the learned counsel for the Revenue. The Assessee had gone before the Settlement Commission and accepted that the figure of consumption of raw materials for the aforementioned AYs was erroneous to the tune of Rs. 643.34 crores. The Assessee had on that basis offered to pay excise duty of Rs. 108.39 The acceptance of this by the Settlement Commission meant that the above figure as disclosed by the Assessee as being the actual consumption of raw materials was accepted by the Excise Department to be correct. The second logical conclusion is that the said order of the Settlement Commission concerned the total figure of consumption for a period of 13 years i.e. 1986 to 1999. It obviously could not lead to the entire amount of Rs. 643.34 crores being added to the income of the Assessee for just one AY i.e. 1999-2000.
71. As regards the determination of the actual consumption of raw materials for this AY, the ITAT has by the impugned order proposed that the quantity of components and inputs require to be manufactured a car (model wise) be multiplied by the number of cars of that model actually manufactured. This indeed forms the basis of the exercise undertaken by PwC. The figures for this AY, as determined by the PwC Report, had been disclosed by the Assessee before the CIT (A). That has been accepted by the CIT (A) to be correct.
72. The Assessee is right in its contention that closing stock as on 31stMarch 1988 which has been accepted by the AO to be correct was in fact opening stock as on 1st April 1988. If the closing stock as determined by the PwC is correct, then the formula of opening stock plus purchases minus closing stock would give the figure as determined by PwC for the raw materials consumed during the AY in question. In the circumstances, there was no need for the ITAT to remand the matter to the AO for undertaking the very exercise which has already been performed and the results of which was found to be correct by the Revenue.
73. Further, there was no basis for the ITAT to have rejected the books of accounts maintained by the Assessee for this purpose. There was no finding returned by the AO that the books of accounts were not correctly The mere non-maintenance of the stock register cannot form the basis of rejection of the Assessee‘s books of accounts. As rightly pointed out by the Assessee, although a separate stock register may not have been maintained, a physical verification of the stock on yearly basis was undertaken and was reflected in the balance sheet of the Assessee. In a large number of decisions, including Pandit Bros. v. CIT (1954)26 ITR 159 (P&H), Bombay Cycle Stores Co. Ltd v. CIT (1958) 33 ITR 13 (Bom) and Veeriah Reddiar (S) v. CIT (1960) 38 ITR 152 (Ker), it has been held that the mere non- maintenance of stock register would not lead to the conclusion that profit of the Assessee could not be determined on the basis of the books of accounts maintained by it.
74. For all of the aforementioned reasons, the Court answers Questions (iv) to (viii) in the affirmative, i.e. in favour of the Assessee and against the Revenue, by holding that:
(a) the ITAT erred in remanding the question concerning consumption of raw materials and inputs to the AO for fresh determination;
(b) the direction given by the ITAT is directly contrary to and irreconcilable with the evidence and material on record;
(c) the ITAT disregarded the PWHC report which is already on record;
(d) the ITAT erred in rejecting the Assessee‟s books of accounts.
Question (ix)
75. Question (ix) framed by the order dated 24thApril 2006 reads as under:
“(ix) Has not the ITAT erred in law in failing to allow the software expenditure of Rs. 1,39,91,022 incurred by the Appellant as revenue expenditure.”
76. It is explained by the Assessee that the expenditure incurred on application software is in the nature of revenue expenditure. Factually, the Assessee had incurred, during AY 1999-00, a total expenditure of Rs. 1,39,91,022 on acquisition of the following items of software:
| 1. | ERP Application software | 91,36,496 |
| 2. | Enterprise management application software | 38,67,322 |
| 3. | Application software for creation and management parts |
8,25,000 |
| 4. | Director multimedia software | 48,000 |
| 5. | Software for civil engineering | 45,000 |
| 6. | Software for sales incentive monitoring | 30,600 |
| 7. | Software for designing titles for captive consumption |
13,650 |
| 8. | Software for keeping records of development Spare in production division | 12,954 |
| 9. | Software for bills of entry processing | 12,000 |
| Total | 1,39,91,022 |
77. As regards ERP software, part payments were made in the financial years 1996-97 and 1997-98. The Assessee had engaged the services of M/s. Arthur Anderson and Associates for the implementation of the software. However, during the course of implementation, it was realized that the said software did not fit with the business processes of the Assessee. By the FY 1998-99, the said ERP software was found to be useless. A decision was, therefore, taken to abandon the software and the expenditure incurred thereon was accordingly written off. It is pointed out that the application software was not operating system software. It could be loaded on to an existing computer system. It could be uninstalled depending upon the need and exigency of the Assessee‟s business. The write-offof the said expenditure pursuant to the decision taken during the AY was not, therefore, a capital loss but only a revenue loss.
78. The ITAT disallowed the said expenditure on the ground that it had not been „incurred‟in this year. It is submitted that the ITAT failed to note that the said expenditure was not claimed as such in any of the previous AY 1997-98 or 1998-99. The decision to write-off was taken during the AY and therefore, was rightly claimed only in this AY. The Assessee has filed an affidavit dated 20th November 2017 confirming that the sum of Rs. 91,36,946 was claimed by the Assessee as revenue expenditure for the first time in the year ended March 1999 relevant to AY 1999-2000 and not in any earlier year.
79. Mr. Ganesh placed reliance on the decisions in Binani Cement v. CIT (2016) 388 ITR 116 (Cal), Indian Aluminium Co. Ltd. v. CIT (2016) 384 ITR 386 (Cal), Chief Commissioner of Income Tax v. O.K. Play India Ltd. (2012) 346 ITR 57 (P&H), and Commissioner of Income Tax v. Varinder Agro Chemicals Ltd. (2009) 309 ITR 272 (P&H).
80. The Revenue has been unable to dispute that the assessee in fact did not claim the expenditure in any of the earlier AYs. The aforementioned decisions also fully support the case of the Assessee that the above expenditure is in the nature of a revenue expenditure and not a capital one.
81. Question (ix) is accordingly answered in the affirmative, i.e. in favour of the Assessee and against the Revenue.
Summary of conclusions
82. To summarise the conclusions:
(a) Question (i) is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue;
(b) Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee in the manner indicated in this judgment.
(c) Question (ii) is answered in the negative, i.e. in favour of the Revenue and against the Assessee in the manner indicated in this judgment.
(d) Questions (iv) to (viii) are answered in the affirmative, i.e. in favour of the Assessee and against the Revenue.
(e) Question (ix) is answered in the affirmative, i.e. in favour of the Assessee and against the Revenue.
83. ITA No. 31 of 2005 is disposed of in the above terms but with no order as to costs.
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