THE issue before the Bench is - Whether unutilised Modvat Credit is allowable as deduction u/s 43B. And the verdict is NO.
Facts of the case
The Assessee purchased raw materials and inputs that went into the manufacture of automobiles. The purchase price paid by the Assessee for raw material or 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 RG23 register so that the Assessee could utilize that separate account or credit for payment of excise duty at the time of clearance of the automobiles manufactured by it from its factory. The controversy that arose was that as of 31st March 1999, the unutilized MODVAT credit stood, in the Assessee's books of accounts, at Rs. 69,93,00,428. That amount, having been paid by the Assessee on the raw material or 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. The contention of the Assessee was that although the said amount was shown as unutilized MODVAT credit, it had been paid by the Assessee and should therefore be allowable as a deduction in terms of Section 43B of the Act.
However, the contention of the Revenue was that however, the Assessee might
be the person who pays the excise duty, the liability was that of the manufacturer and that did not mean that the Assessee was the one who was liable to pay excise duty on such raw material or inputs. As per the Revenue, it was merely the incidence of excise duty that had shifted from the manufacturer to the purchaser and not the liability to pay the same. Accordingly, the AO made disallowance on that account. On Assessee's appeal, the CIT(A) upheld the decision of the AO. On further appeal by the Assessee, the Tribunal also upheld the disallowance and dismissed the appeal filed by the Assessee.
After hearing the parties, the High Court held that,
++ guidance Note issued by the ICAI 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;
++ it must be noted at this stage that after hearing the arguments on 21st September 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 31st March 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 such amount of Rs. 15,73,38,110. It is further pointed out that out of the such 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 assessee to the customs authorities and therefore, this amount should also be allowed under Section 43B of the Act;
++ the Court would only like to observe that it would be for the AO to give effect to the order pertaining to the such amounts paid by the Assessee to be made in respect of those goods already consumed as on 31st March 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;
++ it is also to be noted that in para 35 of the 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. 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 forpayment of excise duty would not arise at all;
++ 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 case of Cartini India Limited 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;
++ 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.
