M/s. Mula Pravara Electric Co-op. Society Ltd. Vs DCIT (ITAT Pune)
Conclusion –
As intention of assessee to continue the business was clear, business expenditure including, depreciation as claimed by the assessee could not be disallowed due to temporary restrictions.
Facts –
Assessee is engaged in the business of distribution of electricity since 20 years, however, on expiry of licence on 31.01.2011, the licence was issued to MSEDCL and the assessee was ordered to handover the infrastructure and database of clientele of the assessee to MSEDCL.
Notice was issued by AO proposing to treat the assessee a closed business and resultantly disallowing the business expenditure and also claiming ineligible to carry forward of business losses.
Assessee submitted that handling over of business to MSEDCL is temporary phenomenon and appeal is pending before Appellate Tribunal for Electricity. Assessee submitted that it is merely a case of non-renewal of license and the same is distinct from cancellation of license. The “cancellation of license” is different from “non-renewal of license”. Assessee has been earning income by exploiting the business assets of the assessee since the year 2011, the year of nonrenewal of license.
Held –
It is a settled legal proposition that the existence of “intention” to continue business and its demonstration by the assessee assumes significance in matters relating to decision on the cessation of business.
It is an undisputed facts of (i) demonstration of assessee for continuation for fighting for renewal of license (ii) Approaching the State Govt. MERC, APTEL, Supreme Court etc. for renewal of license, (iii) opposing the takeover bid of the MERC for MSEDCL with or without consideration; (iv) compliance to the legal orders of Supreme Court/APTEL without prejudice to the demand for renewal of license; (v) assessee never entertained the idea of sale of assets and infrastructure to MSEDCL, (vi) assessee did not entertain the idea of lease of assets too; (vii) assessee did not resort to liquidation or insolvency, (viii) assessee receives compensation of Rs.1 crore plus every month from MSEDCL and reports to income tax office every year; (ix) no authority/executive/judiciary ever rejected the demand for renewal of license till date. Therefore, all these undisputed facts, in our view, support the existence of “intention” to do business of power distribution.
Therefore, the business of the assessee cannot be held to be a discontinued one. All the administrative expenses have to be allowable as business expenditure.
FULL TEXT OF THE ITAT JUDGEMENT
This is the appeal filed by Assessee against the order of CIT (Appeals)-2, Pune, dated 30.06.20 16 for the A.Y.2012-13.
2. Grounds raised by the Assessee are extracted here as under:
“1. On the facts and the circumstances of the case, the Ld. CIT(A) has erred in sustaining the assessment order passed by the AO holding that the appellant has discontinued it’s business and in the process CIT(A) has further erred in confirming the disallowance of business expenses including depreciation totaling to Rs.41,89,87,895/- debited to the P&L Account.
2. On the facts and in the circumstances of the case and in continuation with ground No.1 CIT(A) has erred in not giving the benefit of carry forward of current year business loss of Rs.41,82, 75,484/-.
The above grounds of appeal may kindly be allowed to be amended, altered and/or modified in the interest of natural justice.”
3. Briefly stated relevant facts of the case are that the assessee is a society engaged in the business of Distribution of Electricity-a service provider. Assessee filed the return of income declaring loss of Rs. 16.23 crores (rounded off). Subsequently, the return was revised by revising the loss at Rs.43.04 crores (rounded off). During the scrutiny proceedings, AO noticed that the assessee reflected the rental income of Rs. 1,59,831, scrap sales of Rs.5,29,950/- and miscellaneous receipts of Rs.22,630/- totalling to Rs.7,12,41 1/-. Against this income, assessee claimed various expenses including VRS expenditure of Rs.4 1.90 crores (rounded off). As such, no income on account of the core activity of “distribution of electricity” is reported by the assessee in the year under consideration.
3.1 Regarding the electricity distribution business, assessee was engaged in the business for the past 20 years under the license issued by Government of Maharashtra under the provisions of Indian Electricity Act, 1910. The license was renewed from time to time. Eventually, the said license granted to the assessee expired on 31-01-2011. The Maharashtra Electricity Regulatory Commission (MERC) issued license to the Maharashtra State Electricity Distribution Company Limited (MSEDCL) for distribution of electricity to the specified areas. Thus, the assessee was ordered to hand over the infrastructure and database of clientele etc. of the assessee to MSEDCL.
3.2 On these facts, AO issued a show cause notice to the assessee proposing to treat the assessee as closed business and resultantly, the assessee shall not be eligible to claim the business expenditure as allowable as well as not eligible for carry forward of business losses. AO observed that the removal of employees of the assessee under Voluntary Retirement Scheme (VRS) supports the AO’s decision. In response, assessee submitted that the said development of handing over the business to MSEDCL by MERC is a temporary phenomenon. In this regard, assessee submitted that the facts relating to the pendency of the appeal by the assessee before the Appellate Tribunal for Electricity which set aside the order of the MERC No. 39/2011, dated 17-12-2011. In this order, the Appellate Tribunal for Electricity (APTEL) directed the MERC to consider the issuing of license to the assessee and dispose the issue on merits. There is an indication of renewing/granting license to the assessee as well as to MSEDCL to operate in some areas. The assessee challenged the same before the Appellate Tribunal for Electricity (APTEL) vide No.222 and 223/2014. In this regard, the APTEL passed an order dated 13-03-2015 requiring the MSEDCL to pay Rs.50 crores till the final quantum of dues is decided. Thus the assessee tried to demonstrate the existence of business operations of the assessee and argued that the expenditure of Rs.4 1.90 crores (rounded off) is incurred for business purposes. Assessee pleaded for allowing the claim of expenditure and also for carry forward of the current year losses.
3.3 In the assessment, AO considered the above submissions of the assessee and concluded that there is no possibility of revival of the business. AO held that the business of the assessee is substantially a closed one and the assessee is only to receive the compensation or rent from the MSEDCL for handing over of the entire infrastructure of the assessee. Further, AO discussed certain case laws, i.e. New Seven Sugar and Gur Refinery Co. Ltd. Vs. CIT 74 ITR 7 (SC), Madras Silk and Rayon Mills Pvt. Ltd. Vs. ITO & Another 262 ITR 122 (Mad.), Universal Plast Limited Vs. CIT 237 ITR 454 (SC), Guntur Merchants Cotton Press Company Ltd. Vs. CIT 154 ITR 861 etc. and held that, how a particular receipt of income is taxed under the “income from business” or from “income from other sources” is specific to the facts of that case. Further, he also discussed intention of the assessee to resume the business after obtaining the license from the Govt. AO opined that the intention to carry on the business is the determining factor.
3.4 Further, referring to the judgment of the Appellate Tribunal for Electricity dated 13-03-2015, the assessee mentioned that the APTEL directed the State Commission to evaluate the assets of the assessee and to pay Rs. 1 crore per month towards the lease rent of the infrastructure owned and handed over by the assessee. The fact of about granting 10% interest per annum to compensate the outstanding amount due to assessee was also directed by the State Tribunal. Based on these, AO concluded that assessee is not going to resume the business of distribution of electricity and it is only to earn rental income from the laying of the infrastructure of MSEDCL. Referring to the Supreme Court judgment in the case of Universal Plast Limited Vs. CIT 237 ITR 454 (SC) and Vikram Cotton Mills Ltd. 169 ITR 597 (SC), the AO highlighted the “intention of the assessee” to start or to stop the business and in Para No.16 of the assessment order, the AO concluded by stating if there is no intention to resume the business the transaction of earning rent will not be for business purposes. Applying the same to the case of the assessee, the AO relied heavily on the order of the Appellate Tribunal for Electricity (APTEL) and treated the income earned by the assessee under the head income from other sources. Contents of Para No.19 are relevant in this regard and therefore, we proceed to extract the same here as under :
“19. In view of above, the entire income claimed under the head of rent income, income from sale of store scrap material and other misc. receipts, ie. Rs.7,12,411/- as per Para-111 “Misc. Revenue” to the profit & Loss Account for the year ending as on 31-03-2012 treated income under the head of “Income from other sources.”
3.5 Resultantly, considering the decision of AO on the cessation of business of the assessee, the AO did not allow the claim of business expenditure and allow the carry forward and set off of earlier years brought forward losses against the income reported by the assessee in this year. Eventually, the AO taxed the said sum of Rs.7,12,410/- as “income from other sources”.
4. Aggrieved with the same, the assessee filed an appeal before the First Appellate Tribunal and raised various issues relating to the discontinuation of business treating the income as income from other sources denying the carry forward of losses etc.
5. Before the CIT(A) : Assessee filed various written submissions during the proceedings before the CIT(A). Assessee relied on various judgments/orders passed by MERC, APTEL, Hon’ble Supreme Court to demonstrate the intention to continue the business. Further, assessee relied on various judgments in its favour and contended that his case is not the case of discontinuation of business and it is merely a temporary Assessee would resume the business soon after the license is renewed. Therefore, assessee requested for reversing the order of the AO. He also submitted the facts relating to the pending judicial proceedings before the Hon’ble Supreme Court and also relied in the interim order of the Hon’ble Supreme Court dated 11-05-2016. Infact, the Hon’ble Supreme Court upheld the order of the APTEL dated 06-05-2016 and on the compensation issue, the Hon’ble Supreme Court gave a direction to State Commission to release Rs.64 crores from MSEDCL to the assessee and also directed for considering the infrastructural assets of the company as security against the same. The Hon’ble Supreme Court also directed the assessee to furnish the undertaking that, incase, the assessee is entitled to said amount as per the final order it will refund the said amount with interest. Based on these, assessee submitted that the assessee stand a chance of winning on the core issues and for this, assessee rely on the courts observation about the assets and the possibility of winning is not ruled out. The decisions relied upon by the assessee are enlisted in pages 9 to 11 of the order of CIT(A). In para No.5 of his order, the CIT(A) extracted the contents of Para Nos. 4 to 17 of the AO’s order and gave his conclusion against the assessee as per the discussion given in Para No.5.2 of the order of CIT(A). The contents of the same as extracted here as under :
“5.2.1 I have examined the facts of the case on this issue. It is seen that the appellant society was having distribution license till 31st January 2011. Thereafter the regulatory authority, ie. MERC called for expression of interest from prospective applicants and after considering the applications filed, the distribution license was finally issued in favour of Maharashtra State Electricity Distribution Company Ltd. (MSEDCL). The relevant operative part of the order of MERC dated 27-01-2011 reads as under :
“xiv. Accordingly the MPECS is required to vest the undertaking of distribution to the new licensee.
xv. Over the period of 40 years, MPECS has expanded the distribution network, it inherited from erstwhile MSECS. Now, as fresh Distribution License to MPECS is rejected by the Commission, there is no use of distribution network for MPECS. Therefore, in the interest of the consumers in MPECS area, the Commission directs MPECS, to hand over their complete distribution network and allied equipments and asset to MSEDCL, MPECS will however be entitled to claim value for the assets handed over. MPECS may file a separate petition before the Commission for deciding transfer value of their asset, with all relevant documentary evidence.
xvi. Also, MPECS is directed to handover all the consumer and billing database in hard as well as soft format to MSEDCL. The Commission also directs MPECS to hand over the scrutiny deposits paid by the consumers to MSEDCL, along with records, and not to create any third party interest on the security deposit held by them.
xvii. Keeping in view the larger interest of all consumers in this Area, consisting of 183 villages in five talukas, the Commission directs the Directors, the Management and Officers of the MPECS to provide all help and assistance to the Management and Officers of MSEDCL, to ensure a smooth transition from the existing “Service Provider” (MPECS) to a “New Service Provider” (MSEDCL) with effect from Ist February, 2011.”
5.2.1 On a perusal of the aforesaid order issued by MERC, it is very clear that after detailed examination of various proposals received, MERC issued the license to MSEDCL and the appellant was directed to hand over the entire infrastructure of electricity distribution, power system including electrical system, substations, overhead lines, service lines, offices and associate facilities like land, buildings, materials, stores and plants in the areas of it’s operation w.e.f. 01-02-2011. Not only that, the appellant was also directed to handover the consumer and billing database including security deposits paid by the customers to MSEDCL.
5.2.2 In view of the above facts, it was rightly held by the Assessing Officer that for all purposes business of electricity distribution of the appellant society was discontinued and closed w.e.f. 01-02-2011. No such activity could be started even up to the current year and there was no possibility of restarting the business. All the decisions on the appellants appeal till date are against the appellant. This point is further cemented by the fact that almost all employees of the appellant society were granted VRS. I am therefore in agreement with the view of the Assessing Officer that the business activity of the appellant has discontinued and therefore claim of allowing any business expenses or depreciation does not arise at all.
5.2.3 The reliance placed by the appellant on various decisions are distinguishable on facts. In the case relied upon on I.C.D.S. Ltd. Vs. CIT, the fact was entirely different as in that case the assessee was engaged in the business of hire purchase and leasing and High Court held that the assessee was entitled to claim depreciation on the leased vehicles. No such fact is there in the present case.
5.2.4 The appellant has also placed reliance on the case of CIT Vs. Vellore Electric Corporation. In this case, the appellant had claimed establishment, salary and other expenses which was disallowed by the Assessing Officer and in view of the appeal filed by the assessee it was held by the Hon’ble Court that these expenses were allowable. However facts are little different in the present case as because in the present case the appellant was directed to handover all assets including database and security deposits of the customers to new licensee, ie. MSEDCL. Not only that in the present case, the appellant society itself has given VRS to almost all of its employees. Such facts were not present in the cited case.
5.2.5 The appellant has also placed reliance on the case of K.N.P. Securities, ITAT, Mumbai The facts are again distinguishable and in the cited case SEBI had cancelled the registration of the assessee for being involved in shares scam. However in the present case no such fact is there and in fact the entire business asset and all related establishments and databases were transferred to new licensee. No such fact is there in the cited case.
5.2.6. I accordingly uphold the action of the Assessing Officer in holding that the business of electricity distribution of the appellant society has been closed and therefore it is not entitled for any claim of business expenses and depreciation. Ground of appeal No.1 is accordingly dismissed.”
From the above, it is evident that the CIT(A) relied heavily on the order of the APTEL and MERC for considering the assessee as a discontinued entity. CIT(A) also relied on certain decisions for deciding the issue against the assessee. Handing over of the assets of the society, retrenchment of the employees of the society, handing over of databases etc., are other supporting reasons.
6. Further, on the issue of taxability of rental income of Rs. 1,59,831/-, the CIT(A) held that the same is taxable as “income from house property” and not under the head “income from other sources” as held by the AO. Accordingly, the CIT(A) allowed this issue in favour of the assessee. Other receipts such as scrap scales/misc. receipts are treated as “income from other sources:. In the result, the CIT(A) partly allowed the appeal of the assessee.
7. Aggrieved with the same, the assessee filed the appeal before us with the grounds extracted above.
BEFORE THE TRIBUNAL
8. At the outset, Ld. Counsel for the assessee narrated the aforementioned facts of the case/issue and filed the paper books giving the various orders of the MERC, APTEL, interim orders of the Hon’ble Supreme Court, the proceeding of the committees of State Govt. etc. He also filed the compendium of Judgments to establish the law on the issue of intention of the assessee, continuation of business, related issues of allowability of expenses and set off of carry forward of losses etc. After all these things, Ld. Counsel listed the issues for adjudication and the same are (A) Whether the business stands discontinued – the intention of the assessee vide the judgment of Hon’ble Supreme Court in the assessee’s own case; (B) Whether the Expenses debited to Profit and Loss Account constitute business expenditure eligible for claim of deduction u/s.37 of the Act; and (C)Whether the assessee is eligible to carry forward of the losses after set off against the current years business income as claimed by the assessee.
We shall deal with each of these 3 issues separately in the succeeding paragraphs of the order.
(A) Whether the business of assessee stands discontinued – the intention of the assessee vide the judgment of Hon’ble Supreme Court in the assessee’s own case
9. During the proceedings before us, Ld. Counsel for the assessee filed a thick paper book as well as chart of major developments pertaining to the business of the assessee. The said chart contains the chronology of events and brief narration of the issues. For the sake of completeness, the said chart is extracted here as follows :
CHART SHOWING VARIOUS EFFORTS UNDERTAKEN FOR RENEWAL OF LICENSE/BUSINESS – INTENTION
