IN THE ITAT CHANDIGARH BENCH ‘B’
Mohan Spg. Mills
Assistant Commissioner of Income-tax
IT Appeal No. 1212 (Chd.) of 2011
[Assessment Year 2006-07]
APRIL 25, 2012
Ms. Sushma Chowla, Judicial Member – The present appeal filed by the assessee is against the order of Commissioner of Income Tax (Appeals)-II, Ludhiana dated 19.10.2011 relating to assessment year 2006-07 against the order passed under section 143(3) of the Income-tax Act (in short ‘the Act’).
2. The assessee has raised the following grounds of appeal:
“1. The order passed u/s 250(6) of the Income Tax Act, 1961 is against law and facts on the file in as much the Ld. Commissioner of Income Tax (Appeals) was not justified to arbitrarily uphold the action of the Ld. Assessing Officer in disallowing a sum of Rs. 35,94,577/- written off as irrecoverable by the appellant on account of Cenvat credit.
2. He was further not justified to arbitrarily uphold the disallowance of Rs. 17,064/- out of interest account.”
3. The brief facts of the case are that during the course of assessment proceedings the Assessing Officer noted that the assessee had written back the CENVAT credit of Rs. 35,94,577/- and claimed the same as an expenditure. The explanation of the assessee in this regard was that during the preceding years i.e. the financial years 2003-04 and 2004-05, the excise duty paid on raw material i.e. ployster fibre/acrylic fibre were between 12% to 16% as against the rates applicable on the finished products varying between 8% to 12%. The assessee was thus having credit of excise MODVAT which was reflected under the head CENVAT. The said CENVAT credit accumulated over the years was to be adjusted only against the sale of excisable finished products. The plea of the assessee was that it had not carried on any production after December, 2005/January, 2006 and the entire machinery was sold by the assessee. Thus, the said CENVAT credit became irrecoverable and the same was written off during the year under consideration. The Assessing Officer observed that sections 28 to 44 of the Act dealt with the profits and gains of business and profession and deductions allowable under sections 31 to 37 of the Act are enumerated by the Assessing Officer in the table at pages 3 and 4 of the assessment order. The Assessing Officer was of the view that the claim of CENVAT irrecoverable does not fall as an expense under any of the above said sections. The Assessing Officer referred to sub-section of sections 36 and 37 at length and was of the view that the claim of the assessee had to be justified either under section 36(1)(iii)/36(2) (bad debts) or section 37(1) of the Act. The Assessing Officer further observed that the amount claimed as irrecoverable had never been accounted for in computing the income of the assessee in any other previous year, nor was a part of the sales nor part of the debtors during the year or any previous year/s. The Assessing Officer thus held that the claim of CENVAT irrecoverable did not fall in the category of bad debts. With regard to section 37, the Assessing Officer observed that it covers any expenditure laid down or extended wholly and exclusively for the purposes of business or profession and the same had to be allowed as an expense. The Assessing Officer noted that the assessee was in the process of closing down its business and profession but the claim of CENVAT irrecoverable was nowhere an expense carried out for the purposes of business. The said CENVAT had to be claimed against the sales. It was further held that section 37 of the Act allows only expenses which have been carried out for the purposes of business. The Assessing Officer observed that the CENVAT written off was not an actual expenditure but an entry routed to reduce the profit of the business. The Assessing Officer disallowed sum of Rs. 35,94,577/-.
4. The CIT (Appeals) upheld the order of the Assessing Officer holding that the expenditure claimed by the assessee was not incurred in the year under consideration or was relevant to the year under consideration and hence not allowable under section 37 of the Act. The addition made by the Assessing Officer was thus confirmed by the CIT (Appeals). Another addition made on account of disallowance of interest relatable to interest free advances was also upheld by the CIT (Appeals).
5. The assessee is in appeal against the order of the CIT (Appeals). The learned A.R. for the assessee at the outset pointed out that ground No.2 is not pressed. In respect of ground No.1 the contention of the learned A.R. for the assessee was that the assessee firm was suffering losses and it had closed down its business during the year under consideration. The CENVAT credit remaining in the account of the assessee was written off as business expenditure under section 37 of the Act. The learned A.R. for the assessee further contended that said amount was reflected in the Balance Sheet.
6. The learned D.R. for the Revenue pointed out that the expenditure claimed by the assessee under section 37 of the Act was an entry routed to reduce the profits of business. Further plea of the learned D.R. for the Revenue was that the said expenditure does not relate to the year under consideration. The expenditure has not been incurred for the purposes of business and the same is not allowable as an expenditure. It was further contended by the learned D.R. for the Revenue that closing down of business could not be equated for the purposes of business.
7. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in respect of the deduction claimed on account of CENVAT amounting to Rs. 35,94,577. The assessee was engaged in the business of manufacturing and trading of yarn and fibre. The yarn manufactured by the assessee was an excisable item. The assessee was paying excise duty on the raw material purchased i.e. acrylic yarn/fibre and polyster yarn/fibre. In turn, assessee was liable to pay duty on its manufactured items. The rate of excise duty payable on the raw material was higher and the assessee was depositing the excise duty in PLA account which in turn was adjustable against the excise duty payable on the finished products. The excise duty payable on the finished products was on the lower side and consequently over the period of years the assessee had credit of excise duty resulting in accumulation of CENVAT.
8. During the year under consideration in the month of December, 2005/January, 2006, the assessee closed its manufacturing unit and surrendered its excise registration number. The credit available in the CENVAT account which was adjustable only against the excise duty payable on the products manufactured by the assessee remained un-adjusted in the absence of any excisable finished goods. The said credit available in the CENVAT account was only adjustable against the liability of the assessee vis-à-vis to the excise department and in case of its non adjustment the claim of the credit in the CENVAT account in the said circumstances had to be foregone. The said amount was claimed as business expenditure by the assessee on account of fact that the business of the assessee was closed during the year and consequently CENVAT being non adjustable against the non production of excisable items, was written off. The question arises in the present appeal whether the said writing off the CENVAT credit is allowable as business expenditure in the hands of the assessee.
9. Under the provisions of section 37(1) of the Act, deduction of an item on expenditure is allowable where the following conditions are satisfied:
(i) The expenditure should not in the nature described under sections 30 to 36;
(ii) The expenditure must have laid out wholly and exclusively for business;
(iii) The expenditure must not be personal in nature;
(iv) The expenditure must not be capital in nature.
10. Various tests have been laid down by various High Courts and the Apex Court in relation to the allowability of expenditure under section 37(1) of the Act while computing the income from profits and gains of business or profession. In the facts of the present case, the assessee had paid CENVAT on purchase of raw material which was deposited in its PLA account for claiming the benefit of set off against the excise duty payable on the manufactured items i.e. branded yarn. The assessee was paying higher rate of excise duty on the raw material purchased by it as against the rate of excise duty applicable on the manufactured items, consequently credit of excise duty was available with the assessee. The said excise duty paid from year to year was not claimed as an expenditure but was carried forward from year to year to be adjusted against the excise duty payable by the assessee on its manufactured items. However, during the year under consideration the assessee closed down its manufacturing unit and consequently the benefit of the CENVAT credit remained un-adjusted. Once the manufacturing unit of the assessee is closed down, admittedly the benefit of CENVAT credit not availed of against the excise duty payable on manufactured items, cannot be utilized by the assessee and the said write off of CENVAT credit, is allowable as an expenditure in the year under consideration on the closure of the business. The write off of CENVAT credit by the assessee in its books of account is thus allowable as business expenditure under the provisions of section 37(1) of the Act relatable to the year, in which the manufacturing activities are closed down by the assessee. Accordingly, we direct the Assessing Officer to allow the claim of the assessee in respect of write off of CENVAT credit of Rs.35,94,577/-. Ground No.1 raised by the assessee is thus allowed.
11. Ground No.2 raised by the assessee is not pressed and hence the same is dismissed as not pressed.
12. In the result, the appeal filed by the assessee is partly allowed.