Expense cannot be disallowed for internal financial arrangements to fund expenditure

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

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