Inactivity for a limited period does not mean that business ceased to exist. Accordingly, expenditure is allowable even though no business income is earned during such period

Bechtel International Inc., USA, V/s The Assistant Director of Income Tax,

ITA No.2188/Mum/2010 (Assessment Year: 2005-06)

Bechtel International Inc., USA, V/s The Assistant Director of Income Tax,

O R D E R

PER D.K.AGARWAL (JM)

These two appeal preferred by the assessee are directed against the separate orders dated 12.2.2007 and 13.1.2010 passed by the learned Commissioner of Income Tax (A) for the assessment years 2003-04 and 2005-06 respectively. Since facts are identical and issue involved is common, both these appeals were heard together and are being disposed of by this common order for the sake of conveyance.

ITA No. 4120/Mum/2007 (AY: 2003-04)

2. Briefly stated facts of the case are that the assessee ­company M/s Bechtel International Inc.,(in short BINT) is a non-resident Company, incorporated in United States of America. The assessee has entered into contracts for two projects in India viz. Dabhol Power Company (DPC) for setting a power plant in Maharashtra and also to execute the contract with Haldia Petrochemical Ltd.(HPL) in connection with setting up of a petrochemical plant in West Bengal. The return     of income was filed  declaring total income of Rs.13,02,55,470/-. However, the assessment was completed at an income of Rs.15,35,19,800/- vide order dated 21.2.2006 passed under section 143(3) of the Income Tax Act, 1961 (the Act). On appeal, the learned Commissioner of Income Tax (A) partly allowed the appeal.

5. The brief facts of the issue are that during the course of assessment proceedings, the AO interalia observed that the contract with   DPC was terminated with  effect from 17.6.2001 for the default in payment by  DPC. The Petrochemical Project at Haldia had been completed in past. During the year the project office was actively pursuing its claim made against the DPC at the same time exploring the possibility of reviving the project. Also during the year the project office was engaged in regulatory compliance under Income Tax Act, Sales Tax Act, Wealth Tax Act etc. The AO further observed that the Head Office has confirmed its intention to continue the project office in India and has agreed to render financial and other assistance from time to time. The AO further observed that in the computation of income, the assessee has shown income from Dabhol Project and income from Haldia Project. In the profit and loss account of Dhabhol Project the assessee has shown other income at Rs. 59,90,915/- and write back of excess accrual on  recognized  loss  on contract  is  shown  atRs.1 1,60,75,000/- and write back of provision for contingencies  has    been  shown at Rs.82,86,880/-. Accordingly, profit before tax has been shown at Rs.10,17,95,112/-. In Schedule VIII of Schedules forming part of the profit and loss account details of other income is given which is a under :

In Schedule VII of Schedules forming part of the profit and loss account value of the work done is shown at NIL. This shows that no business activity has been done during the year. The Assessee has earned only income from other sources. The AO further observed that against other income the assessee has debited various expenses. The Assessee was requested to give reasons as to why the expenses should be allowed as a deduction when there is no business activity carried out by the assessee. In reply, it was interalia submitted by the assessee that there is only suspension of an activity and business was never closed down by BINT. Thus, termination of the contract with DPC results into only temporary cessation of the activity. It was further submitted that there are several legal precedents, which reiterate that temporary cession of the activity due to adverse conditions cannot be considered as cessation of the business and hence the expenses incurred in the year in which no business activity is carried due to some adverse conditions, although business is not closed down, should be allowed as a deduction in that year and also allowed to be carried forward as business loss to the next year and in support, the assessee also placed reliance on various decisions. The AO after considering the assessee’s submissions observed that it is a fact that the Petro Chemical Project in West Bengal has been completed and the contract with DPC has been terminated effective 1 7 June 2001. Also there is no business income in both the project during the year. It is only other income shown by the assessee in both the projects. Therefore, any expenditure is not allowable against these unearned income shown by the assessee under the head “other income” in both the project and the case laws relied upon by the assessee- company are entirely different than the facts of the assessee’s case. The AO after relying on certain decisions appearing at page 5 of the assessment order held that the expenditure claimed by the assessee against the income from both the projects shown by the assessee is not allowable as there was no business activity carried on by the assessee during the year. Besides the above, the AO further observed that in the absence of any details furnished by the assessee, deduction under section 44C   of the Income Tax Act, 1961 (the Act) is also not allowable. The AO further observed that the assessee has claimed a deduction of Rs.2,11,581/- being demand raised by the Sales Tax Authorities for the Financial Year 1990-91. As no proof was filed whether the payment is compensatory or penal in nature, the AO disallowed the same.

6. On appeal, the learned Commissioner of Income Tax (A) has observed that the BINT has a project office in India to carry out two projects, namely, Haldia Petrochemical Project in West Bengal which project was completed in March 2000, the other project was that of DPC in Maharashtra. The learned Commissioner of Income Tax (A) further observed that the project of DPC was not completed, but was prematurely terminated w.e.f. 17.6.2001. After 17.6.2001, the assessee did not have any business in India, except the winding up of the project prematurely terminated at Dabhol and closing any operation relating to Haldia project. The permission by RBI for starting a project office in India was given by RBI’s order dated 29.6.1994. Extension was granted by RBI from time to time. The AR has filed copy of RBI’s letter dated 21.11.2002 to show that the RBI has  granted approval for extension of project office till 30.9.2003. RBI has subsequently extended  the period till 30.9.2005 vide their letter dated 10.1.2005. The assessee had sought extension vide letter dated 28.9.2005 till 30.9.2006. According to the learned Commissioner of Income Tax (A) the closer examination of the facts reveals that the assessee being a non-resident, is entitled to carry out only those activities which are permitted by RBI or the Central Government. In other words, when a permission is given for particular project and that project has come to an end either after successful completion or on account   of premature termination, the business comes to an end. A non-resident cannot continue to have an office and be engaged in business with the hope that sometime in future some project may come and till then business could be said to be in temporarily lull.   The assessee had permission for two projects, namely, Haldia Project and DPC. Haldia Project was completed in March 2000. Dabhol Project was prematurely terminated in June, 2001. The assessee had no contract or work in India except the winding up of the Dabhol Project. After termination of the agreement, the assessee started the winding up proceedings and started demobilizing man, material and equipment from Dabhol site and started sending them to the places outside India where they could be used. Besides demobilizing its equipment, material and manpower, assessee was also engaged in pursuing its dispute with DPC for the amounts receivable from DPC towards the contract. The learned Commissioner of Income Tax (A) after relying the ratio of certain decisions appearing at pages 8 to 10 of his order has held that the assessee had no business during Financial Year 2002-03 and was not entitled to deduction of any business expenditure. Claim of expenses of Rs.1 ,52,87,952/- made in the return of income is therefore not in order. The AO has rightly disallowed. Income of the Dabhol Project shall be taken at Rs. 59,90,915/- as shown in the books. The learned Commissioner of Income Tax (A) on the issue of dis allowance of payment of Rs.2,11,581/- to the Sales Tax Authorities after examining the nature of payment held that in the event of business expenditure being allowable to the assessee, the dis allowance to the extent of two payments of Rs.1,13,840/- and Rs.5,000/- is confirmed and deleted the dis allowance of payment of Rs.92,741/-.

7. At the time of hearing, the learned counsel for the assessee while reiterating the same submissions as submitted before the AO and the learned Commissioner of Income Tax (A) further submits that it is a fact that DPC project was not completed but was prematurely terminated with effect from 17.6.2001. Thereafter, the permission by RBI for starting a project office in India was given by RBI’s order dated 29.6.1994. Extension was given by RBI from time to time till 30.9.2003. RBI has subsequently extended the period till 30.9.2005 vide their letter dated 10.1.2005. The extension was further sought vide letter dated 28.9.2005 till 30.9.2006. He further submits that the assessee- company has entered into an agreement with Bharat Heavy Electricals Limited on 27.3.2006 for providing through its Dabhol Restarting Project Office, Engineering, Design, Review and Programme Management Services in relation to the revival of the aforesaid Power Project. He further submits that the  AO after considering the same has assessed the income from Dabhol Project as business income for the assessment years 2006-07 and 2007-08 and in support he also placed on record the copy of the said assessment orders. He further submits that even in the assessment year 2001-02, the AO after considering the fact that on 17.6.2001 the project office of the assessee terminated its contract with DPC has assessed income from Haldia Project and Dabhol Project as business income vide assessment order dated 29.3.2004 passed under section 143(3) of the Act. In the light of the above, he submits that mere fact that the contract with DPC was terminated with effect from 17.6.2001 for some period does not imply that it has ceased to exists when the assessee has proved that the assessee has got RBI permission for extension of the project office and has also proved that the assessee has started its business in the Financial Year 2005-06 on wards and the same has been accepted by the AO itself. The learned counsel for the assessee for the proposition that temporally suspension of business does not mean that the assessee has discontinued business placed reliance on the following decisions:

In the light of the above, he submits since the assessee has filed complete details of expenses, break up of which is appearing at pages No.13,18 and 35 of the assessee’s paper book, the learned Commissioner of Income Tax (A) was not justified in sustaining the dis allowance of expenses of Rs. 1,52,87,952/- made by the AO and therefore the dis allowance made by the AO be deleted.

8. On the other hand, the learned D.R. while relying on the order of the AO and the learned Commissioner of Income Tax (A) submits that since the complete facts of revival of DPC project was not before the AO, therefore, in the interest of justice the issue may be set aside to the file of the AO.

16. Applying the ratio of the above decisions to the facts of the present case and in absence of any contrary decision cited by the learned D.R. and keeping in view the documentary evidence filed by the assessee to show that the assessee got extension of project office from the  RBI till 3.09.2006 and in  March 2006 it entered into an  agreement with Bharat Heavy Electricals Limited in relation to the revival  of the DPC Project and also keeping in view that in the subsequent assessment years 2006-07 and 2007-08 the AO has also accepted the same, we are of the view that the assesseehas proved that the assessee has revived its business. Mere inactivity for a limited period does not mean that the assessee’s business ceased to exists or that it did not carry on business at all.  Accordingly except the dis allowance of sales tax expenditure of Rs.1,13,840/- and Rs.5,000/- sustained by the learned Commissioner of Income Tax (A), we delete the balance dis allowance of expenses made by the AO. The ground taken by the assessee is therefore, partly allowed.

17. Ground No. 2 is against sustenance of dis allowance of Club Security Deposit of Rs. 2,55,340/- and Ground No. 3 is against allow ability of set off of the expenses against the settlement of income of Dabhol Power Project.

18. At the time of hearing, the learned counsel for the assessee submits that he does not want to press aforesaid grounds No.2 and 3 which was not objected to by the learned DR .

19. That being so and in the absence of any other supporting materials placed on record by the learned counsel for the assessee, the grounds taken by the assessee are therefore, rejected being not pressed.

20. Ground No.4 is against the levy of interest under sections 234B and 234C of the Act.

21. At the time of hearing, the learned counsel for the assessee submits that the assessee company being a non­resident, all payments made to it are subject to tax deduction at source under section 195 of the Act, therefore, the assessee is not liable to pay advance tax and hence the AO was not justified in charging interest under sections 234B and 234C and for this proposition the reliance was placed on the following decisions :

He also placed on record the copy of the above decisions.

24. In M/s NGC Network Asia LLC, (supra) it has been held that when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be imposed on the payee assessee under section 234B of the Act.

Respectfully following the decision of the Hon’ble Jurisdictional High Court in M/s NGC Network Asia LLC, (supra), and consistent view we are of the view that there is no default on the part of the assessee and hence no interest can be charged under sections 234B and 234C of the Act and the same is deleted. The ground taken by the assessee is therefore allowed.

“Settlement of claims

5.1 The appellant submit that no demand can be raised upon them by virtue of the duly executed and legally binding Deed of Release signed on July 12,2005 by the Government of the Republic of India (hereinafter referred to as “GOI”) (Ministry of  Finance).  In accordance with the GOI Deed of release, no claims/demands for taxes or tax assessments, relating to the Dabhol Power Project, in excess of US$3million, including amounts already paid, can any longer be made upon the appellant, as described fully in the terms of said GOI Deed of Release.

5.2  The GOI has agreed that in the GOI Deed of Release to secure the cooperation of  its Affiliates, including but not limited to all Indian Central, State, Local or other governmentat subdivisions, organs, instrumentalities, or agents, to accomplish the items and objective mentioned in 5.1

5.3 The AO has therefore erred in raising a demand of Rs.1,35,88,083 under section 143(3) of the Act on the appellant relating to the Dabhol Power Project, contrary to the GOI Deed of  Release as described above.

5.4 The appellant therefore prays that the AO be directed suitably in this matter to reverse completely and to withdraw said order and demand for additional taxes as described in 5.3”

26. At the time of hearing, the learned counsel for the assessee while admitting that the above issue was not raised before the AO and the learned Commissioner of Income Tax (A) submits that the Tribunal in assessee’s own case in M/s.Bechtel International Inc., USA, V/s The Deputy Director of Income Tax, International Taxation-3(2) in I.T.A. No.2126/Mum/05 (AY-2001-02) order dated 21.1.2009 after admitting the similar issue has set aside the matter to the file of the AO. Therefore, in view of the said order of the Tribunal, the issue is a legal issue and therefore the same be admitted and the issue may be restored back to the file of the AO.

“4. The learned counsel for the assessee stated before us that subsequent to the decision of the CIT(A), there has been a development, which is required to be taken into consideration for disposal of the appeal. It has been pointed out that there was a Settlement Agreement between the various parties and subsequent to the settlement, the Government of India has executed a Deed of Release dated 12^th July, 2005, by virtue of which the Government of India has agreed that tax liability on the settlement payments [as defined in settlement agreement] the transactions contemplated and claim being compromised thereby would in the event it exceeds 3 million US $ be paid by Maharashtra Power Development Corporation Ltd. and no claim shall be made against Bechtel parties for any such  additional amounts. Copies of the Settlement Deed and Government of India’s Deed of Release have been placed on record. It has been contended that the assessee has paid more than 3 million US $ by way of tax and therefore, no further tax is payable by the assessee in respect of the transactions.

5. The parties before us agreed that the issues raised in the grounds of appeal deserve to be restored to the file of the Assessing Officer for the purpose of examining the claim of the assessee that in the light of the Deed of Release by the Government of India and the Settlement Agreement, the additions made by the Assessing Officer are rendered inconsequential, in so far as no tax would be payable by the assessee in excess of 3 million US $. We accordingly restore the grounds of appeal raised before us to the file of the Assessing Officer for the purpose of examining the claim of the assessee and taking a decision in accordance with law. The decision of the CIT(A) as well as that of the Assessing Officer on the issues raised before us are set aside as above.”

In the absence of any distinguishing features brought on record by the Revenue, we respectfully following the order of the Tribunal in the assessee’s own case (supra) admit the legal issue raised by the assessee at this stage and send back the matter to the file of the AO to decide the same afresh in the light of the directions given by the Tribunal (supra) and according to law after providing reasonable opportunity of being heard to the assessee. Grounds taken by the assessee are therefore partly allowed for statistical purpose.

ITA No. 2188/Mum/2010 (AY:2005-06)

32. Ground No.2 is against the sustenance of dis allowance of Sales Tax Expenses of Dabhol Project Office, Ground No.3 is against the sustenance of dis allowance of Haldia Project Office and Ground No.4 is against the set off of carried forward unabsorbed depreciation and business loss.33. At the time of hearing, the learned counsel for the assessee submits that he does not want to press aforesaid grounds No.2,3 and 4 which was not objected to by the learned DR .

34. That being so and in the absence of any other supporting materials placed on record by the learned counsel for the assessee, the grounds No.2,3 and 4 taken by the assessee are therefore, rejected being not pressed.

35. In the result, the assessee’s appeal for the assessment year 2003-04 is partly allowed for statistical purposes and the appeal for the assessment year 2005-06 is partly allowed.

Order pronounced in the open court on 8th June, 2011.

Sd                                                                         Sd

(R.K.PANDA) (D.K.AGARWAL)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated 8th June, 2011

MUMBAI BENCHES, ‘G’, MUMBAI

BEFORE S/SHRI D.K.AGARWAL (JM) AND R.K.PANDA (A.M)

ITA No. 4120/Mum/2007
(Assessment Year: 2003-04)

ITA No. 2188/Mum/2010
(Assessment Year: 2005-06)

Appellant by : S/Shri Sunil M.Lala and Pankaj Bagri

Respondent by : Shri.Pavan Ved

CORRINGENDUM

PER D.K.AGARWAL (JM)