Credit on capital goods along with depreciation claim under Income Tax Act is clearly prohibited.

PJ-Case law-2013/14-1583

Case: - M/s INDIA LEAF SPRINGS MFG CO PVT LTD Vs COMMISSIONER OF CENTRAL EXCISE, HYDERABAD

Citation: -2013-TIOL-598-CESTAT-BANG

Brief facts: -This appeal filed by the assessee is directed against denial of CENVAT credit of Rs.2,72,913/- to them for the period from 2005-06 to 2007-08 and imposition of equal amount of penalty on them. The CENVAT credit in question was taken on certain capital goods, some of which were received in the factory in 2005-06 and other goods 2006-07. In respect of the capital goods received in 2005-06, the appellant took 50% of the duty paid thereon as cenvat credit amounting to Rs. 1,75,172.26. For income tax purposes, this amount was deducted from the value of the capital goods and depreciation was claimed on the balance amount. In respect of the same goods, the appellant took the balance 50% of CENVAT credit (Rs. 1,75,172.26) in 2006-2007 but this amount was not deducted from the value of the goods for claiming depreciation for income tax purposes. Insofar as the capital goods received in the factory in 2006-07 are concerned, 50% of the duty paid thereon was taken as cenvat credit amounting to Rs. 1,00,626/- and equivalent amount was deducted from the value of the goods for claiming depreciation for income tax purposes. However, though the balance 50% cenvat credit was taken in 2007-08, no deduction was made from the value of the goods for claiming depreciation for income tax purposes. These are the facts which were noted by the department in the relevant show-cause notice dated 25/06/2010 for the purpose of denial of the entire cenvat credit to the party on the ground of contravention of Rule 4(4) of the CENVAT Credit Rules 2004. The show-cause notice also alleged against the party suppression of facts with intent to avail cenvat credit wrongly, and, on this basis, invoked the extended period of limitation prescribed under the proviso to Section 11A (1) of the Central Excise Act. It also demanded interest on duty under Rule 14 of the CENVAT Credit Rules 2004 read with Section 11AB of the Act. Further, the notice proposed a penalty on the party under Rule 15 of the CENVAT Credit Rules read with Section l1AC of the Act. All the proposals were contested by the party. But the order passed by the adjudicating authority went against them. Aggrieved, the party preferred an appeal to the Commissioner (Appeals) but without any success. The present sustained the Order-in-original.

Appellant contention:- It is submitted by the learned counsel for the appellant that the mistake of having simultaneously availed CENVAT credit and claimed depreciation in 2006-07 and in 2007- 08 in respect of the capital goods received in the factory in 2005-06 and 2006-07 respectively was rectified by the appellant while filing income tax returns for the subsequent financial years. In other words, the contravention, if any, of Rule 4(4) of the CENVAT Credit Rules 2004 was undone and therefore the denial of the entire CENVAT credit taken on the capital goods is not justified. In this connection, the learned counsel claims support from the decision in the case of Commissioner of Central Excise, Coimbatore Vs. Enner Spinning Mills [2009 (246) ELT 263 (Tri-Chennai)]= (2009-TIOL-814-CESTAT-MAD). In any case, according to the learned counsel, there is no justification for imposing penalty on his client. In this context, it is submitted that nothing was suppressed with intent to avail undue cenvat credit. The clerical mistake committed by the party was promptly rectified as soon as it was notified to them by the department.

Respondent contention: - It is submitted by the learned Dy. Commissioner (A.R.) that Rule 4(4) of the CENVAT Credit Rules 2004 does not envisage partial deduction of cenvat credit from the value of capital goods for the purpose of claiming depreciation under Section 32 of the Income Tax Act. The assessee ought to have, in the financial year of receipt of the capital goods, deducted the entire cenvat credit amount from the value of the goods for claiming depreciation. It is further submitted that any "corrective action" taken by them long after the wrong availment of CENVAT credit would not nullify the effect of violation of the mandate of Rule 4(4). In support of this argument, reliance is placed on Yee Kay Technocrat (P) Ltd. Vs. Commissioner of Central Excise, Delhi-IV [2011 (267) E.L.T. 92 (Tri.-Del). In answer to a query from the Bench, the Dy. Commissioner (A.R.) has claimed that there is nothing wrong with the penalty imposed on the appellant. Rule 15(2) of the CENVAT Credit Rules 2004 is said to be applicable to the facts of this case. The learned counsel for the appellant has vehemently contested this claim by submitting that no ingredient necessary for imposing penalty under Rule 15(2) was alleged in the show-cause notice.

Reasoning of judgement:-It is not in dispute that, in the year of receipt of capital goods in the factory, only an amount equal to 50% of cenvat credit was deducted from the value of the goods for the purpose of claiming depreciation for income tax purposes. Even this "principle" was not followed in the next financial year. This procedure adopted by the appellant was clearly in contravention of Rule 4(4) of the Cenvat Credit Rules 2004, which reads thus "The cenvat credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer or provider of output service claims as depreciation under section 32 of the Income-tax Act, 1961 (43 of 1961)."

As per the above provision, a manufacturer of excisable goods claiming CENVAT credit of the duty paid on capital goods received in his factory must not claim, for income tax purposes, any depreciation of the value of the goods including the duty paid thereon. In other words, the entire amount of duty paid on the capital goods, should be deducted from this value for purpose of claiming depreciation under the Income Tax Act. Admittedly, the appellant deducted 50% of the duty paid thereon from the value of the goods for the purpose of claiming depreciation for income tax purposes. This is not what was envisaged under Rule 4(4). It is also pertinent to note that even the procedure adopted in the year of receipt of capital goods in the factory was not followed in the subsequent financial year. It is this omission which is referred to as a "mistake" and it is this "mistake" which is said to have been rectified in the next financial year. It is also curious to note that the appellant has not cared to produce any income tax assessment order to substantiate the plea of rectification of the so-called "mistake". Suffice it to say that the appellant, by their commissions and omissions, were acting in blatant contravention of the mandate of Rule 4(4) as rightly held in the case of Yee Kay Technocrat (P) Ltd., Vs. Commissioner of Central Excise, Delhi-IV (supra). Such contravention of the Rule cannot be nullified by any "corrective measures" taken before Income Tax authorities. In the case of Ennar Spinning Mills (supra), a different factual matrix was considered by this Tribunal. The complicated procedure adopted by the appellant was not to be seen in that case. Moreover, the issue with its complexion found in the instant case was not raised in the cited case of Ennar Spinning Mills (supra). Therefore, the case law cited by the learned counsel is no precedent for the instant case. For the reasons already noted, it has to be found that the appellant wrongly availed cenvat credit while simultaneously claiming depreciation for income tax purposes in the year of receipt of capital goods in the factory as also in the subsequent financial year. The credit wrongly availed has to be denied, which is what was done by the lower authorities. Coming to the penalty-related issue, Tribunal finds that the show-cause notice invoked Rule 15 of the Cenvat Credit Rules 2004 read with Section 11AC of the Central Excise Act. Though, for the purpose of invoking the extended period of limitation, the notice alleged suppression of facts with intent to avail CENVAT credit wrongly, it did not allege any of the ingredients of Rule 15(2) in support of the proposal for penalizing the party. From the conduct of the party, it appears that they misunderstood the mandate of Rule 4(4) of the Cenvat Credit Rules 2004. The party appears to have thought that the cenvat credit taken by them could be maintained by taking "corrective action" before the Income Tax Authorities in subsequent years. The facts of this case do not disclose any mens rea, for the purpose of penalizing the party. It is also significant to note that sub-rule (2) of Rule 15 was not specifically invoked in the show-cause notice, though the mention of Section 11AC might suggest that the show-cause notice purported to invoke the said sub-rule. In any case, considering the facts and circumstances of this case, Tribunal is not inclined to sustain the penalty on the appellant.

Decision:-Appeal partly allowed.

Comment:- The essence of this case is that it is crystal clear law that simultaneous availment of cenvat credit on capital goods along with depreciation claim under the Income Tax Act is not possible.

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PJ-Case law-2013/14-1583

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