Whether Modvat credit can be denied if inputs still lying in factory even though they have written off in books of accounts?

PJ/Case Laws/2011-12/1422

Case:- KIRLOSKAR OIL ENGINES LTD. VERSUS CCE, NASIK

Citation:-2004 (178) E.L.T. 998 (Tri.-Mumbai)

Issue: -
-         Whether Modvat credit can be denied if inputs still lying in factory even though they have written off in books of accounts?
-         Whether extended period under proviso (1) of section 11A is invokable when facts mentioned in Balance sheet which is publicly available document?

Brief Facts: - M/s Prasant Khosla Pneumatic Ltd. had received certain components under Chapter X procedure without payment of duty and these components were to be used in the manufacture of ‘MAN’ diesel engine. Over a period of time these components became obsolete and could not be utilized and became unusable for the anticipated industrial product. Meanwhile, M/s Prasant Khosla Pneumatic Ltd. was amalgamated with M/s. Kiroloskar Oil Engines Ltd. w.e.f. 1-4-98. The value of the obsolete goods was written down in the balance sheet in July 2000. The appellant applied for the remission of the duty on the said obsolete components but no action was taken by jurisdictional commissioner. Afterwards on 2-10-01 after waiting for a period more than one year, the appellant disposed of the components which were received under chapter X procedure and paid duty under protest.

The appellant stated that in the books of accounts the value had been written down to show the present net value of the inputs and these inputs were lying in the factory at the time of issue of first show cause notice. Another show cause notice was issued on 20-4-2000 superceding the earlier SCN. They further submitted that on 17.08.2000, the inputs were cleared as such by reversing the credit.

The Original Authority had held that appellant was filing RT returns in respect of various components and the return for the quarter ending 30.06.2000 shows number of components lying in stock but mo remark was there that the goods had become obsolete and this fact was also not informed to the Department even when balance sheet was showing the fact regarding the written down value of the goods under Schedule 17.

In appeal, the Commissioner (A) held that there was suppression and the extended period is invokable and thus attracting the provisions of Section 11AB and 11AC of the Central Excise Act, 1944.

In further appeal, the appellant have not challenged that part of the order of the Original Authority by which he has confirmed the total duty as demanded. The challenge before the Tribunal is against invocation of the provisions of Section 11AB and 11AC of the Central Excise Act, 1944.

Appellant’s Contention: - Appellant contended that in the books of accounts the value had been written down to show the present net present value of the inputs. These inputs were lying in the factory at the time of issue of first show cause notice dated 20-6-2000 but had become obsolete.

It was further submitted that since balance sheet of the present companies namely, M/s. Prasant Khosla Pneumatic Ltd. and M/s. Kiroloskar Oil Engines Ltd., being publicly available documents, allegation of such information being suppressed could not be sustained and therefore extended period under proviso (1) of section 11A was not invokable and therefore the penalty under section 11C and interest under section 11AB cannot be imposed on them. In this connection, reference is made to judgment in Hindalco Industries Ltd. v. C.C.E., Allahabad [2003 (161) E.L.T. 346] wherein it has been held that if demand has been raised on the basis of information appearing in the balance sheet of the companies being a publicly available documents, allegation of suppression of such information is not sustainable and extended period was not invokable under proviso (1) to section 11A of Central Excise Act, 1944. Further they referred to the judgment in matter of Bharat Heavy Electronics Ltd. v. C.C.E., Bangalore [2002 (50) RLT 208 (CEGAT-Bangalore)] wherein it was held that if the inputs are still lying in the factory even though they have been written off in the books of accounts the Modvat credit cannot be denied on the supposition that inputs would be used when there was no time limit for such utilization.

Respondent’s Contention: -Revenue submitted that the assessee has discontinued production of ‘MAN’ diesel engine long back and they should have cleared obsolete non-moving items to the Department which came to the notice of the departmental officer at the time of scrutiny of the balance sheet for the year 97-98 which indicated that the assessee had written down the value of the goods as they had become obsolete. Therefore they have suppressed this fact from the department, as they have not made any remark in the RT returns regarding the components being obsolete especially when their balance sheet was showing the fact regarding written down value of the goods under schedule 17. Therefore the appeal of appellants deserves to be rejected.

Reasoning of Judgment: -The Tribunal noted that in July 2000 the assessee had applied for remission of duty under Rule 196B read with Rule 173P of the Rules ibid and they waited for a considerable period for more than one year for the permission to come from the jurisdictional Commissioner. However after waiting for said period they disposed off their components which were received under chapter X procedure and paid duty under protest. Further these obsolete items were lying in the factory because Prasant Khosla Pneumatic Ltd., which was amalgamated with M/s. Kiroloskar Oil Engines Ltd. w.e.f. 1-4-98 had stopped manufacturing of MAN diesel engine during 1994. Further in the judgment of Hindalco Industries Ltd. v. C.C.E., referred by the assessee was also fully applicable as the demand has been raised on the basis of information appearing in balance sheet. It was held that since the balance sheet was a public document available to all, the allegation of suppression of such information is not sustainable. Therefore, the extended period of limitation cannot be invoked under proviso to Section 11A (1) of the Act. It was held that the inputs were still lying in the factory when the show cause notice for demanding duty was issued, though the components were written off in the books of account in such a situation credit cannot be denied on the presumption that input cannot be used when there was no time limit for consumption. The Tribunal followed the judgment given in Bharat Heavy Electricals Ltd case. There is no evidence of suppression of facts and therefore no penalty can be imposed under Section 11AC and no interest can be demanded under Section 11AB. Impugned order set aside.

Decision: - Appeal allowed.

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