Commissioner of Income Tax vs Nahar Spinning Mills Ltd.

Rakesh Kumar Garg, J.—This judgment will dispose of Income Tax Appeal Nos. 503, 370, 387 and 399 of 2007 as similar question of law is involved in all these appeals. However, the facts are taken from Income Tax Appeal No. 503 of 2007.

The revenue has filed the present appeal u/s 260A of the Income Tax Act, 1961 (hereinafter referres to as the ''Act'') against the order dated 12-8-2005 passed by the Tribunal Chandigarh Bench, Chandigarh in ITA No. 750/Chandi/2002 for the assessment year 1999-2000 raising the following substantial question of law:

Whether on the facts and the circumstances of the case, the Hon''ble Tribunal was right in law in holding that no undue advantage has been taken by the assessee by adjusting the unutilized modvat credit in the revaluation of opening stock.

The respondent assessee, which is a company, had filed its return of income for the assessment year 1999-2000 showing income of Rs. 9,83,21,890. The assessee is a manufacturer and exporter of cotton yarn, woollen hosiery garments and also trades in cotton yarn. The assessment was framed by the Assistant Commissioner, Central Circle-V, Ludhiana on 28-3-2002 at an income of Rs. 14,94,37,679.

Aggrieved against the aforesaid assessment order, the assessee preferred an appeal before Commissioner (Appeals), Ludhiana, who vide his order dated 26-8-2002 allowed the appeal partly deciding some issues in favour of the assessee.

Feeling aggrieved by the order of Commissioner (Appeals), Ludhiana, the revenue preferred an appeal before the Tribunal, Chandigarh who vide consolidated order dated 12-8-2005 in appeal in ITA Nos. 750/Chandi/2002 and 523 & 294/Chandi/2003 for the assessment year 1999-2000 and 2000-01 have confirmed the order of Commissioner (Appeals) Ludhiana and dismissed the appeals of the revenue.

In support of his contentions, counsel for the revenue had contended that Section 145A provides for valuation of the closing stock and it has not provided any adjustment to be made in the valuation of the opening stock. According to the learned Departmental Representative the assessee has got undue benefit by revaluation of the opening stock, which is not intended by the legislature.

The Tribunal while dismissing the appeal filed by the revenue relied upon its earlier decision in the case of Assistant Commissioner v. Nahar Spinning Mills Ltd. in ITA No. 750/Chandi/2002. The relevant part of the findings of fact given by the Tribunal in the case of Assistant Commissioner v. Nahar Spinning Mills Ltd. in ITA No. 750/Chandi/2002 is reproduced:

We have given our careful consideration to the rival contentions. The issue before us is as to whether the method adopted by the assessee in valuation of the closing stock and adjustment of the opening stock gives a distorted picture of profits earned by the assessee in the year under appeal. Their Lordships of the Supreme Court in the case of CIT v. British Paints India Ltd. : [1991]188ITR44(SC) held that the assessing officer is entitled to reject the method of accounting adopted by the assessee if the same is such from which true profits cannot be deducted therefrom. Therefore, the issue before us is as to whether the method adopted by the assessee is such from which the true profits cannot be deducted. It may appear that provisions of Section 145A being applicable only in respect of the closing stock, the adjustment made by the assessee in the opening stock may present a distorted picture of profits in the year under appeals. So however when we peep deep on this issue, we are satisfied that the method adopted by the assessee does not present distorted picture of profits earned by the assessee. It is necessary to bear in mind that in the present case, the assessee had earlier followed the system of accounting by which purchases of inputs were debited net of modvat credit available to the assessee. The amount paid on account of excise duty by the assessee on inputs was credited to the modvat credit account. As and when the assessee was liable to pay excise duty on finished products, credit was taken from the modvat credit available and necessary adjustment was made in the books of account. The assessee had the option of adopting different method of accounting i.e. debiting the purchases including the element of excise duty paid. In that event closing stock was also required to be valued including the element of excise duty paid. So however, the assessee neither debited the excise duty element in the purchases of inputs, nor was the excise duty taken into account in valuation of the closing stock. In the year under appeal, the assessee has made adjustment on account of unutilized modvat credit in the valuation of the opening stock. It could be argued that by enhancing the value of the opening stock in the year under reference, the assessee has escaped taxation in the preceding year insofar as the value of the closing stock in that year was disclosed at lesser value. So however, it is not so. If the adjustment was made in the preceding year according to the method of accounting adopted in the year under appeal by virtue of Section 145A, there would be no effect on the profits of business computed in that year as in that year; the purchases would have been debited including the element of excise duty and the same element would be included in the value of the closing stock. As a result of this adjustment, the profits of the preceding year would not be effected at all insofar as the amount of excise duty would be debited to purchases and equal amount credited to the closing stock valuation. We are, therefore, satisfied that the adjustment made by the assessee in the year under appeal, does not adversely effect the computation of profits in the year under appeal or in the preceding year. We are, therefore, satisfied that no undue advantage has been taken by the assessee by adjustment of unutilized modvat credit in the revaluation of opening stock. Moreover, this adjustment is only for the first year of the change in the method and the revaluation of opening stock is in the light of peculiar background of modvat credit and the system of accounting adopted in respect of the same. We, therefore, find no merit in the appeal raised by the revenue.

We have heard learned Counsel for the revenue and perused the record.

At the outset, Mr. Sanjiv Bansal, advocate appearing for the revenue has very fairly conceded that the controversy in the matter stands settled by a judgment of the Apex Court in Commissioner of Income Tax Vs. Indo Nippon Chemicals Co. Ltd., wherein it has been held that merely because the modvat credit was an irreversible credit available to the manufacturers upon purchase of duty-paid raw material, that would not amount to income which would be liable to be taxed under the Act. The said income was not generated to the extent of the modvat credit on unconsumed raw material. It has been further held in this case that the assessing officer is bound to adopt the method of computation of income regularly employed by the assessee. However, if he comes to the conclusion that the method of accounting employed by the assessee makes it impossible to correctly compute the income, then the assessing officer is entitled to adopt any other suitable accounting method. It has also held that whatever method the assessing officer adopts, the method has to be consistent with the accepted principles of accountancy. It is not open to the assessing officer to treat outgoings as income u/s 145 of the Act. Thus, in view of the judgment of the Apex Court reported as Indo Nippon Chemicals Co. Ltd. (supra) and the fairs and taken by the counsel for the revenue, no substantial question of law arises in these appeals for determination of this Court.

Thus, in view of the settled position of law, the aforementioned appeals are dismissed.