Case Law Details

Case Name : Power Company of Karnataka Ltd. Vs ACIT (ITAT Mumbai)
Appeal Number : ITA No. 2574/Bang/2017
Date of Judgement/Order : 08/02/2021
Related Assessment Year : 2014-15
Courts : All ITAT (7804) ITAT Bangalore (495)

Power Company of Karnataka Ltd. Vs ACIT (ITAT Mumbai)

Conclusion: Since there were internal financial arrangements made by assessee with ESCOMs to fund the expenditure, therefore, this could not disentitle assessee to claim expenditure in accordance with the Act and the income of assessee had to be computed under the provisions of the Act without looking into how the expenditure was financed by assessee and it could not cause any prejudice to assessee as it was financed by the seed money or other mode of sources of fund.

Held: Assessee was a public sector company responsible for capacity addition by way of setting up of new power projects through bidding process. In order to bridge the short term demand and supply gap, PCKL had been procuring power on behalf of the ESCOMs from various sources including purchase of power through Energy Exchange, Banking (SWAP) as well bilateral transactions. PCKL also co-ordinated with other States and Central Government agencies on power related issues as well as through the forum of Southern Regional power Committee (SRPC). Assessee company had filed its return of income for the year under consideration declaring business loss, income from other sources and net income. However, AO disallowed the business loss of Rs.46,76,754 on the ground that there was no matching concept between the expenditure and the relatable income and disallowed the expenses relating to employees benefit, other expenses and depreciation and amortization expenses of which allowing Rs.10,00,000 being maintenance of corporate entity u/s.37 on the ground that the same were to be shared by all the five ESCOMS. It was held that there were internal financial arrangements made by assessee with ESCOMs to fund the expenditure. This could not disentitle assessee to claim expenditure in accordance with the Act. The income of assessee had to be computed under the provisions of the Act without looking into how the expenditure was financed by assessee and it could not cause any prejudice to assessee as it was financed by the seed money or other mode of sources of fund. There was a difference between the setting up of business and commencing the business as held by the Hon’ble Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC).  It was only when the unit had been put into such a shape that it could start functioning as a business or a manufacturing organisation that it could be said that the unit had been set up. The commercial sale of the product was not a criterion for deciding as to when a business was set up. Merely because there was no business receipt, it could not be said that assessee’s business had not been set up. Since the assessee’s business was already set up and ready to commence its business activities during the previous year relevant to the assessment year under consideration, assessee was entitled to the loss computed as claimed by assessee. The claim of assessee towards business expenditure incurred by assessee had to be allowed since the assessee had already set up its business and ready to commence.

FULL TEXT OF THE ITAT JUDGEMENT

Per Chandra Poojari, Accountant Member

This appeal is directed against the order of CIT(Appeals)-5, Bengaluru dated 19.09.2017 for the assessment year 2014-15.

2. At the time of hearing of the appeal, the ld. AR submitted that the assessee company had filed application under the Vivad Se Vishwas Scheme Act (VSVS), 2020 in Form 1 and Form 3 has been issued by the department. However, the assessee has withdrawn the Form 1 and seeks to continue the appeal. The relevant documents with regard to withdrawal under the VSVS are filed on record.

3. The assessee company has raised the following grounds of appeal:-

“1. The learned Respondent Assessing officer has erred law by disallowing the employee benefit expenses Rs. 84,77,015/-, other expenses Rs. 34,62,051/- and depreciation Rs. 3,69,362/-, on the ground that the same are to be reimbursed by ESCOMs, as the ESCOMS are to reimburse, only. the working expenditures, as per MOU between ESCOMs and the Assessing Company.

2. The learned Respondent Assessing officer has erred in law by allowing, only, Rs.10,00.000/- towards corporate expenses as the entire expenditure debited to the Profit and Loss account are, only, the corporate expenses.

3. The learned Respondent Assessing officer has failed to appreciate the fact that the assessing company debited all working expenditure incurred by them to the seed money received from the ESCOMs.

4. The learned Respondent has failed to appreciate the Memorandum of Understanding (MOU) between the ESCOMs and the Assessing Company, particularly the clauses 5, 7 and 8, where in, it is very clearly stated that the ESCOMs are to bear the working capital expenditure, only. as per the percentage indicated there in.

5. The learned Respondent Assessing officer has failed to appreciate that the Assessing Company has the corporate expenditure in the nature of, fees payable to Registrar of companies from time to time depending upon the decisions that may emerge from the meeting of the Board of Directors, annual fees, fee payable to Directors, remuneration to Managing Director and other corporate structure on going.

6. The learned Respondent Assessing officer has failed to appreciate the accounting policy drawn by the Assessing company which states that corporate expenditure. as explained above, shall be the expenditure of the company and same will be met out of the miscellaneous income by way of sale of bid documents and the interest income from the deposit of capital fund.

7. The Appellant submits that in the case of CIT Vs Integrated Technologies ltd. ITA.530/2011, HC (New Delhi): held that the administrative expenses were statutory in nature and not related to any business carried on by the Assessee and such expenses as were incurred for complying with the legal and statutory requirements under various laws were allowable as deduction.

8. The learned Respondent Assessing officer failed to appreciate the fact that the Accounting policy drawn by the Assessee Company PCKL, referred supra, becomes the ultimate solution. The Balance Sheet as at 31/03/2014 and the Profit and loss Account drawn for the year ended 31/03/2014 read with the Accounting Policy and the case laws referred above, subjected to Statutory Audit and Audit by C&AG, gives the true profit of the Company.

9. What is to be seen is how the Assessee is maintaining Accounts regularly and the Accounting treatment and presentation of financial statements, covered by Accounting policy. The financial statements drawn as per the regularly employed method Accounting and the Accounting policy has to be regarded and adopted. We rely on the following decisions:

1. CIT Vs Realest Builders & Services Ltd, 3071TR 202(SC) 120081216 CTR 345(SC)

2. CIT Vs IRM Ltd, 2015 Tax PUB (DT) 2853 (&ARN-HC): (2015) 065 (I) ITCL 0574

10. We further submit, although PCKL is a special purpose entity to assist ESCOMS, the Memorandum and Articles of association of the company, provides the scope for an activity of Generation and Distribution of power. The Company having been set up, any moment it can start to carry on the objects enumerated in the Memorandum of association. Any expenditure incurred by the Assessee after the setting up of the Company, are allowable deductions in spite the fact there being no income.

11. It is a settled position that for allow ability of expenses which are revenue in nature it is not the business should have actually commenced. What is important is that the ……………. e been set up which means the Assessee should be ready to commence expenses which are revenue in nature not being personal expenses and which are .7,-siness expenses incurred after the date of setting up of business have to be allowed. z:,:7enses incurred prior to setting up of the business would not be permissible deduction. is supported by the judgment of Hon’ble High Court of Bombay in the case of ..:stern India Vegetable Products Ltd. vs. CIT( 1954)26ITR, 151(Born).

12. On the other hand as contended by the Department, if the corporate expenditures are to be treated as the responsibility of ESCOMs, even the interest income has to be credited to ESCOMs. With the result PCKL will have no expenditure and no income.

13. The learned officer has erred in law by not setting off the losses against the miscellaneous income and the income from other source.

14. The learned Respondent has erred in law by levying interest u/s 234A, 234B and 234C of the IT Act of 1961.

15. For the grounds set fourth here in above and such other grounds and arguments that may be urged during the course of the appellate proceedings, this honourable Court may be pleased to set a side impugned order under appeal and allow the appeal by accepting the Return filled by the Assessee.”

4. The facts of the case are that the assessee Power Company of Karnataka Ltd. (PCKL) is a public sector company owned by the Government owned public sectors. PCKL is responsible for capacity addition by way of setting up of new power projects through bidding process, under Case-11 bidding guidelines issued by Ministry of Power, Govt. of India (GoI) and long term procurement of power under Case-1 bidding guidelines of Ministry of Power (MoP) & GoI. In order to bridge the short term demand and supply gap, PCKL has been procuring power on behalf of the ESCOMs from various sources including purchase of power through Energy Exchange, Banking (SWAP) as well bilateral transactions. PCKL also co-ordinates with other States and Central Government agencies on power related issues as well as through the forum of Southern Regional power Committee (SRPC). The Objectives of PCKL, a Special Purpose Vehicle (SPV) are as follows:-

  • In carrying out the trading/bilateral exchange of power with other States/traders on behalf of ESCOMs to meet the day-to-day requirements of power.
  • Co-coordinating with ESCOMs, Government and IPPs and resolving issues pertaining to power purchases.
  • To facilitate capacity addition for Long term, Medium Term and Short Term
  • To carry out tariff based competitive bidding process on behalf of ESCOMs.
  • Preliminary activities pertaining to setting up of power projects within the State through competitive bidding route.
  • Equity participation with other States for setting up of Generating Stations.
  • Capacity addition through Joint Venture.

5. The assessee purchases the power on behalf of the ESCOMS. For the purpose of purchase, ESCOMS pay the amount which is kept in the seed money and the payment will be made after the purchase of power for ESCOMS. As a SPV, all the project related cost are allocated to seed money and only the cost which are related administration activities like accounts department, administrative department, company annual filing charges, auditor expenses, depreciation which are not directly related to the project activities are debited to profit and loss account.

6. The assessee company had filed its return of income for the year under consideration declaring business loss of Rs.46,76,754, income from other source Rs.2,50,859 and net income of Rs.2,03,60,110. However, the Assessing Officer (AO) disallowed the business loss of Rs.46,76,754 on the grounds that there is no matching concept between the expenditure and the relatable income and disallowed the expenses relating to employees benefit Rs.84,77,015, other expenses Rs.34,62,051 and Depreciation and amortization expenses Rs.3,69,362 of which allowing Rs.10,00,000 being maintenance of corporate entity u/s.37 on the ground that the same are to be shared by all the five ESCOMS. Aggrieved on the above issues, the appellant filed appeal before the CIT(Appeals).

7. The main grounds raised by the assessee before the CIT(Appeals) was that the AO disallowed the employee benefit expenses of Rs.84,77,0151, other expenses of Rs.34,62,051 and depreciation of Rs.3,69,362 on the premise that the same are reimbursed by ESCOMS as the ESCOMS are to reimburse only the working expenditures as per MOU between ESCOMs and the assessee company. The AO was of the view that assessee is contesting that only corporate expenditure is incurred by it and rest of the expenditure is allocated to the ESCOMS. The assessee submitted that the MOU allows only for working capital expenditure, but not corporate expenditure. This stand was not accepted by the AO because clause 7 of the MoU stated as follows:-

“In the absence of any Revenue / Income streams for the company other than miscellaneous receipts by way of sale of bid documents etc., such time, all the five ESCOMs shall share expenditure of PCKL as per the percentage indicated below:

BESCOM: 50%; MESCOM: 15%; CESC: 15%; HESCOM : 10%; GESCOM:10%). “

8. According to the AO, the above clause which shows that all the expenditure of the assessee company has to be allocated to ESCOMs. The assessee company does not have any Revenue/Income streams for the company other than miscellaneous receipts by way of sale of bid documents in the current year and hence the entire expenditure should be borne by the ESCOMS. Further as per the submissions filed during scrutiny proceedings the assessee company is working for ESCOMs and the ESCOMs are reimbursing the expenses as per MoU and other than this work, the assessee is not indulged in any other activity. The assesse’s contention was that the corporate expenditure claimed to the extent of Rs.1.23 crores should be allowed to set off against the income of Rs.9,87,226 and Rs.2,50,36,859 of miscellaneous income and interest income respectively. Setting of said expenses against other operating revenue of Rs.9,87,226 was accepted since both income and expenses belong to the same ‘head of income’ i.e., business head. But setting of said expenses against interest income was not accepted because the assessee was trying to set off business expenses which belong to the ‘Business Head of Income’ with income under the head ‘Income from Other Sources’.

9. The CIT(Appeals) was of the view that this kind of set off is not allowed under the provisions of Income Tax Act, 1961 [the Act] and the matching principle. Analysing the revenues and expenses claimed with reference to matching principle, the CIT(A) observed that the main income of the assessee is interest income and against this the assessee has disallowed expenses to a tune of Rs.1,23,07,658, whereas its revenue from business is only 9,87,226 and this income is “other operating revenue”. Matching principle is a fundamental principle in accounting. This principle states that only expenses relatable to a head of income should be claimed in P&L Account as expense. Those expenses that do not relate to a ‘head of revenue’ should be either capitalized or not to be claimed or to be claimed under the ‘correct head of income. According to the CIT(A), in the instant case, the assessee has total revenue of Rs.2,60,24,085 (as per audit report) consisting of interest income and other operating revenues. The assessee has claimed expenses of Rs.1,23,07,658, when its business income is only Rs.9,87,226 (other operating income). The contest of the assessee is that expenses are to be incurred to maintain the corporate entity, an expense of Rs.10,00,000 (including depreciation claimed under IT Act) was allowed out of the expenses claimed of Rs.1,23,07,658 and the balance of Rs.1,13,07,658 was disallowed since it should have been allocated to ESCOMS proportionately.

10. The assessee submitted that the Memorandum of understanding (MoU) between the ESCOMS and the assessee company, particularly the clauses 5, 7 and 8, very clearly stated the ESCOMS are to bear the working capital expenditure only as per the parentage indicated therein. Further the AO has read the Clause 7 of MoU and the reply of the assessee in isolation. Had he read the said clause 7, along with the clauses 5, 6 and 8 together, it would have convinced him that the ESCOMs are to reimburse, only the working capital expenditure incurred by the assessee. Further, the assessee has debited all the working capital expenditure incurred by it to the seed money received from ESCOMs. As regards the corporate expenditure, the assessee submitted that being a corporate entity the corporate expenditure is in the nature of fees payable to Registrar of Companies from time to time depending upon the decisions that may emerge from the meeting of the Board of Directors, annual fees, fee payable to Directors, remuneration to Managing Director and other corporate structure staff, fee payable to statutory auditors, etc., to keep the corporate structure going on. The MoU mentioned above provides only for working capital expenditure and does not provide for corporate expenditure stated above. In view of the above, the assessee had to incur the above corporate expenditure on its own. Hence, this mandatory expenditure has been debited to Profit and loss Account for the year ended 31/03/2014. In support of its contention reliance was placed upon the decision of the Hon’ble Delhi High Court in the case of CIT Vs Integrated Technologies Ltd. ITA.530/2011, wherein it was held that as the administrative expenses were statutory in nature and not related to any business carried on by the Assessee and such expenses as were incurred for complying with the legal and statutory requirements under various laws were allowable as deduction. Further, the assessee company is a special purpose vehicle set up by the Government of Karnataka to supplement its efforts in capacity addition. The PCKL was incorporated by the Government of Karnataka under the Companies Act, 1956 to facilitate ESCOMs. In order to bridge short term demand and supply the appellant company has been procuring power on behalf of ESCOMs from various sources including purchase of power through Energy Exchanges, Banking (SWAP) as well as bilateral transactions. The appellant also co-ordinates with other States, Central Government, SRPC, CERC, KERC, SRLDC etc., on power related issues. In addition, it acts as facilitator to ESCOMs for the following activities:-

a. Land acquisition through Revenue Department / KIADB.

b. Allocation of water from the Water Resource Department.

c. Allocation of fuel linkages / coal blocks from Ministry of Power, Ministry of Coal, Govt. of India.

d. Arranging environment impact assessment, pre-feasibility reports and detailed projects reports through Consultants / Experts.

e. Power evacuation system pertaining to projects through Case-II competitive bidding route.

f. Negotiation with power trader, generators for short term procurement and preparation of PPA’s on behalf of ESCOMs.

g. Forecasting energy availability and demand.

h. Preparation / scrutiny of PPA’s on conventional power plants.

i. Pre and Post PPA’s issues relating IPP’s projects, Mall projects and Joint Venture.

j. Procuring power through exchanges.

k. Procuring power on Long / Medium / Short term and peak power.

l. Any other work assigned by GoK / GoI / KERC.

11. The assessee further submitted that the Memorandum and Articles of Association of the company provides the scope for other activities which can be carried out at any time. The Company having been set up, any moment it can start to carry on the objects enumerated in the Memorandum of Association. Any expenditure incurred by the Assessee, after the setting up of the Company, are allowable deductions in spite of the fact that there being no income. It was also submitted that it is a settled legal position that for allowability of expenses which are revenue in nature, it is not necessary that the business should have actually commenced. What is important is that the business should have been set up which means the Assessee should be ready to commence business. The expenses which are revenue in nature not being personal expenses and which are genuine business expenses incurred after the date of setting up of business have to be allowed. The expenses incurred prior to setting up of the business would not be permissible deduction. This view is supported by the judgment of Hon’ble High Court of Bombay in the case of Western India Vegetable Products Ltd. vs. CIT (1954)26lTR, 151(Bom).

12. The CIT(Appeals) called for the nature and details of the expenditure incurred which was furnished. The CIT(Appeals) observed that the finding of the Assessing Officer that the assessee’s main income is interest income earned through short term deposits. It has not shown any business income and has shown huge expenses consisting of mainly employees cost as well as administration and general expenses which it had set off against the interest income. The statutory auditors have pointed out that the company is not recognizing any revenues for its services rendered to ESCOM, at it is a Special Purpose Vehicle formed by the Karnataka State Govt. with all ESCOMS as its members. Under the Mercantile System of Accounting, this Matching is required to be done on accrual basis. Under this Matching concept, revenue and income earned during an Accounting Period, irrespective of actual cash inflow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Therefore, Method of Accounting followed by the assessee is relevant because accrual of income is to be seen in the light of Method of Accounting. This Matching concept is also covered by Section 36(1)(m) read with Section 43(2), which defines the word “Paid”. Both these sections form part of Chapter IV – Computation of Business Income. If the Matching concept is not applied then, the profits get distorted. In his order, the AO has recorded a finding of fact which categorically brings out the matching concept. Ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. Hence all expense incurred by the company is reimbursed by ESCOMS through seed money. Thereby, all expenses incurred by PCKL should be apportioned to the respective seed money of ESCOMS in proportion to contribution fixed by ESCOMS in government order. Thus, the action of the AO was sustained by the CIT(A). Against this, the assessee is in appeal before us.

13. The ld. AR submitted that the assessee has interest income and business income. The total income of assessee for the year is Rs.2,60,24,085 out of which business receipt is only Rs.9,87,226. The assessee claimed the expenditure of Rs.1,23,07,658 towards business income of Rs.9,87,226. The AO disallowed expenditure of Rs.1,13,07,658 and allowed the expenditure of Rs.10 lakhs on the reason that only expenses relating to earning of income should be allowed as a deduction. The expenditure of corporate office of assessee company constitutes as an expenditure met from the interest earned from deposits on surplus funds. In case the interest so earned is not sufficient to meet the expenditure of assessee company in any year, the same will be met from the seed money provided by ESCOMs. According to the ld. AR, the assessee has already commenced business and earning the income so as to allow business expenditure of assessee. The interest claimed by the assessee is relating to day to day operations of the business of assessee which are of routine nature and it has to be allowed, though there was no sufficient income earned by the assessee. According to him, the usage of seed money is a source to meet this expenditure as an internal arrangement of the assessee and income of the assessee has to be computed in accordance with the Act, notwithstanding the fact how this expenditure is met by the assessee. Further it was submitted that the assessee business was already set up and ready to commence. All the expenditure which are not personal in nature and are capital in nature has to be allowed as business expenditure while computing income of the assessee. Regarding set off of business loss with interest income, he submitted that section 71(1) of the Act allows the assessee to set off the business loss with any other head, other than capital gain including interest from other sources. He relied on the following judgments:-

(1) DCIT, Circle 4(1)(2) v. Zaveri and Company, ITA No.1193 & 1194/Ahd/2018 (2020-TIOL-1482-ITAT-AHM).

(2) Awasthi Traders v. DCIT, ITA No.119 & 441/Agr/2018 dated 08.07.2020.

(3) ACIT v. Motorola India Electronics Pvt. Ltd. (2014-TIOL-87-Karnataka High Court)

(4) CIT v. Prestige Estate Projects Pvt. Ltd. (2020-TIOL-982-Karnataka High Court).

14. On the other hand, the ld. DR relied on the order of CIT(Appeals) and submitted that the expenditure incurred by the assessee was either met out from interest earned by assessee or by the seed money provided by ESCOMs. Being so, it cannot be allowed as a business expenditure.

15. We have heard both the parties and perused the material on record. The first contention of the lower authorities is that the expenditure incurred is not corresponding to the income earned by the assessee. So applying the matching principle, the claim of deduction of expenditure of Rs.123,07,658 was denied by the AO and he has allowed deduction only to the tune of Rs.10 lakhs. However, the CIT(Appeals) has disallowed the entire amount. In our opinion, for allowing the expenditure assessee’s business should have been set up and ready to commence. In this case, there is no dispute the assessee’s business is already set up and ready to commence which emerges from the following facts:-

1. PCKL Power Company of Karnataka Limited (PCKL) is a special purpose vehicle set up by the Government of Karnataka to supplement the efforts of KPCL in capacity addition. PCKL was incorporated by the Government of Karnataka under the Companies Act 1956 to facilitate ESCOMs. In order to bridge short term demand and supply PCKL has been procuring power on behalf of ESCOMs from various sources including purchase of power through Energy Exchanges, Banking (SWAP) as well as bilateral transactions. PCKL also co-ordinates with other States, Central Government, SRPC, CERC, KERC, SRLDC etc., on power related issues. In addition, PCKL act as facilitator to ESCOMs for the following activities;

a. Land acquisition through Revenue Department / KIADB.

b. Allocation of water from the Water Resource Department.

c. Allocation of fuel linkages / coal blocks from MoP, Ministry of Coal, GoI.

d. Arranging environment impact assessment, pre-feasibility reports and detailed projects reports through Consultants / Experts.

e. Power evacuation system pertaining to projects through Case-II competitive bidding route.

f. Negotiation with power trader, generators for short term procurement and preparation of PPA’s on behalf of ESCOMs.

g. Forecasting energy availability and demand.

h. Preparation / scrutiny of PPA’s on conventional power plants.

i. Pre and Post PPA’s issues relating IPP’s projects, MoU projects and Joint Venture.

j. Procuring power through exchanges.

k. Procuring power on Long / Medium / Short term and peak power.

l. Any other work assigned by GoK / GoI / KERC.

2. The Government of Karnataka vide Order dated 7th April 2007 has accorded approval for formation of Special Purpose Vehicle to carry out the bidding process for establishment of power plants through competitive biddings.

3. The expenditure to be incurred by PCKL to carry out the work of inviting tariff bidding and farming of business rules as done by Ministry of Power, Government of India, for procurement of power and to carry out erstwhile work of SPPCC, will be met out of Seed Money collected from all the five ESCOMs.

4. With regard to working capital requirement, it was decided in the meeting of the Board of Directors held on 4th December 2007, subject 1/26, to meet the day to day expenditure of PCKL out of seed money received from ESCOMs. The seed money of Rs. 99 lakhs needs to be replenished whenever shortfall arises, for which Managing Director, PCKL will address ESCOMs for additional funds.

5. In the absence of any Revenue / Income streams for the Company other than miscellaneous receipts by way of sale of bid documents etc., such time, all the five ESCOMs shall share the expenditure of PCKL as per the percentage indicated below.

BESCOM: 50%; MESCOM: 15%; CESC: 15%; HESCOM: 10%; GESCOM:10%.

6. The expenditure so incurred as stated in Para (5) shall be shared by all the five ESCOMs in accordance with the Para (7) and accordingly PKCL shall intimate its expenditure monthly/quarterly to all the five ESCOMs in order to exhibit the same in their books of accounts against the seed money provided to PCKL. The credits if any to given towards interest earned on the deposits of surplus fund will be afforded/adjusted against the expenditure at the end of the financial year.

16. Being so, the claim of the expenditure by the assessee cannot be denied. Secondly the lower authorities observed that the assessee met the expenditure out of interest income earned or in case interest is not sufficient to meet the expenditure, it should be met by the seed money provided by the ESCOMs. These are internal financial arrangements made by the assessee with ESCOMs to fund the expenditure. This cannot disentitle the assessee to claim expenditure in accordance with the Act. The income of the assessee has to be computed under the provisions of the Act without looking into how the expenditure was financed by the assessee and it cannot cause any prejudice to the assessee as it was financed by the seed money or other mode of sources of fund.

17. There is a difference between the setting up of business and commencing the business as held by the Hon’ble Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC). On the question as to whether a business can be said to have been set up and when it can be regarded as ready to commence business, it was held by the Court that business unit cannot be said to have been “set up” unless it is ready to discharge a function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. The commercial sale of the product is not a criterion for deciding as to when a business is set up. The setting up of plant and machinery and commencement of production are material facts for deciding as to whether the business has commenced. In the present case, the assessee had set up the business after taking the following steps:-

a. Land acquisition through Revenue Department / KIADB.

b. Allocation of water from the Water Resource Department.

c. Allocation of fuel linkages / coal blocks from Ministry of Power, Ministry of Coal, Govt. of India.

d. Arranging environment impact assessment, pre-feasibility reports and detailed projects reports through Consultants / Experts.

e. Power evacuation system pertaining to projects through Case-II competitive bidding route.

f. Negotiation with power trader, generators for short term procurement and preparation of PPA’s on behalf of ESCOMs.

g. Forecasting energy availability and demand.

h. Preparation / scrutiny of PPA’s on conventional power plants.

i. Pre and Post PPA’s issues relating IPP’s projects, Mall projects and Joint Venture.

j. Procuring power through exchanges.

k. Procuring power on Long / Medium / Short term and peak power.

l. Any other work assigned by GoK / GoI / KERC.

18. Only because there was no business receipt, it cannot be said that assessee’s business has not been set up. Since the assessee’s business is already set up and ready to commence its business activities during the previous year relevant to the assessment year under consideration, in our opinion, the assessee is entitled to the loss computed as claimed by the assessee.

19. Accordingly, we hold that the claim of assessee towards business expenditure incurred by the assessee has to be allowed since the assessee has already set up its business and ready to commence.

20. The second issue in this appeal is with regard to allowability of set off of business loss against the interest income. The contention of the assessee is that interest income has to be assessed business income only. We do not find merit in the argument of the ld. AR. The interest income earned by the assessee is from the fixed deposits which is sourced from the share capital. This interest income is to be assessed as income from other sources. However, as per section 71(1) of the Act, assessee is entitled to set off business loss with income from other sources. Being so, we direct the AO to allow the set off of business loss against income from other sources in terms of section 71 (1) of the Act.

21. In the result, the appeal by the assessee is partly allowed.

Pronounced in the open court on this 8th day of February, 2021.

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