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Cenvat Credit

neeraj (Deputy Manager Finance) (24 Points)

11 April 2011

If a company has taken Capital goods, it is eligible for 50% cenvat credit in 1st year and balance 50% in second year subject to availiablity of asset in 2nd year. Suppose in the second year due to some internal accounting problem we couldnt reverse that credit on such capital goods then how we can take credit of that cenvat. We have done everything legally but due to internal accounting problem we are unable to reverse it through that capital; goods.

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3 Replies

Tharun Raj (CMA) (1016 Points)
Replied 11 April 2011

Sir, When you are using the word reversal it appies only when the credit is not available on account of various grounds i.e.

1. Capital goods removed as such

2. Capital goods wrritten off or provision has been made to write off

3. Capital goods removed after use

4. capital goods removed as scrap.

If it is the case, the cenvat credit has to be reversed. If there is no balance in the CENVAT credit (Capital goods) A/C, then such amount should be reversed from CENVAT credit (Inputs) A/C. If that is also not available then you have to pay the amount through PLA/GAR-7 challan. Such amount should be debited to asset account and the asset balance will increase, where we can claim depreciation as per AS-6.

Suppose if you are speaking about utilisation of credit during the second year then the provision shall be as follows:

At the time of purchase you will be transferring the amount (i.e 50% which can be utilised) to CENVAT credit deferred A/C. Now you have to canel this account by debiting the CENVAT credit receivable A/c, so that it can be adjusted for payment of Excise duty/ Service tax liablity.

I didnt understand about the internal accounting problem in your company. Can you please elaborate this so that i can help you to some extent

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U S Sharma (glidor@gmail.com) (21063 Points)
Replied 11 April 2011

4. Conditions for allowing CENVAT credit. -

(1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service:

Provided that in respect of final products, namely, articles of jewellery falling under heading 7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who get such final products manufactured on his behalf, on job work basis, subject to the condition that the inputs are used in the manufacture of such final product by the job worker.

(Above proviso has been inserted vide Notification No. 13/2005-CE(N.T.), dated 01/03/2005)

(2) (a) The CENVAT credit in respect of capital goods received in a factory or in the premises of the provider of output service at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year:

Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if such capital goods are cleared as such in the same financial year.

Provided further that the CENVAT credit of the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, [OMITTED- as amended by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931, the force of law ], in respect of capital goods shall be allowed immediately on receipt of the capital goods in the factory of a manufacturer.

(In above proviso the portion beginning with the words and figure "as amended by clause 72" and ending with the words "the force of law," has been omitted vide Notification No. 22/2005-CE(N.T.), dated 13/05/2005)

(Above 2nd proviso has been inserted vide Notification No. 13/2005-CE(N.T.), dated 01/03/2005)

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There is limitation on 50% in 1st year but no such restriction that balance 50% would be taken compulsary in 2nd year, u can take it right now.

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Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 12 April 2011

Query is not clear.

Assuming that the accounting system does not allow for the entry thru a journal entry the same can be passed. Credit is available in 2nd or subsequent tears as long as the CG is posessed.