Unadjusted CENVAT Credit left on Closure of Manufacturing Unit which can't be used further shall be allowable as Business Expenditure u/s 37(1): ITAT [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the unadjusted CENVAT credit left on the closure of the manufacturing unit which cannot be used further shall be allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961.

The assessee is a company engaged in the business of buying and selling, trading, stocking, exporting-importing, auctioning, promoting, exhibiting, hiring, and dealing in art including painting, sculpture, antique, artistic value, or any other intrinsic value and to promote art and related services like gallery space, valuation, authentication, collection building and custodial services to the client. It e-filed its return declaring a loss of Rs. 7,63,56,892/-. The case was selected for scrutiny.

The Assessing Officer completed the assessment on a total loss of Rs. 3,99,66,777/- under Section 143(3) of the Income Tax Act resulting in disallowance of Rs. 1,15,27,945/- out of rental expenses claimed; disallowance of Rs. 8,01,799/- out of reimbursement/support services; disallowance of Rs. 1,81,03,975/- being service tax credit written off and disallowance of Rs. 60,16,402/- out of finance cost.

The Commissioner of Income Tax (Appeal) [CIT(A)] deleted the disallowances on account of the write-off of the CENVAT Credit.

In the case of Mohan Spg. Mills vs. ACIT: 27 taxmann.com 332, wherein it was held that unadjusted CENVAT credit left on the closure of manufacturing unit, which cannot be utilized further, is allowable as business expenditure under Section 37(1) of the Income Tax Act.

The Assessing Officer made the impugned disallowance holding that the assessee cannot suo-moto write off the credit available and the same is allowable only against future service tax liability.

The Departmental Representative submitted that requisite verification has neither been done by the Assessing Officer nor by the CIT(A). It is not an expenditure for this year. It is not allowable on grounds of the matching principle. It was further submitted that there is no difference between CENVET on capital goods and revenue items. Therefore, verification is called for.

The Authorized Representative submitted that the assessee has written off the unutilized CENVET Credit of Rs. 1,81,03,975/- and claimed it as a business expenditure. The assessee offered the explanation that the possibility of set off of available credit with service tax liability was remote due to the closure of the art gallery.

The Two-member bench comprising of Shamim Yahya (Accountant member) and Astha Chandra (Judicial member) held that the explanation of the assessee for write-off had not been accepted by the Assessing Officer without any cogent and valid reasons. The judicial consensus is that the write-off of CENVAT Credit is an allowable deduction under Section 37(1) of the Income Tax Act in the year it has been debited to the books of account. Thus, the appeal of the revenue was dismissed.

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