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:-
