TMI Blog2018 (11) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ₹ 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. Further, various committees recommended for grant of renewal of license to the assessee along with MSEDCL along with subsidy if any. Therefore, all these undisputed facts, in our view, support the existence of “intention” to do business of power distribution. The business of the assessee cannot be held to be a discontinued one. All the administrative expenses have to be allowable as business expenditure. - Decided in favour of assessee. Expenses debited to Profit and Loss Account constitute business expenditure eligible for claim of deduction u/s.37 - Held that:- We heard both the sides and examined all the accounts debited to profit and loss account of the year/assessee and found, prima-facie, that they are allowable expenditure and the salary expenses, bonus expenses, audit fee etc. relate to business expenditure allowable u/s.37 of the Act. However, there is no categorical finding by AO/CIT(A) with respect to the allowability of these expenditures accounts. In the absence of the same, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-a service provider. Assessee filed the return of income declaring loss of ₹ 16.23 crores (rounded off). Subsequently, the return was revised by revising the loss at ₹ 43.04 crores (rounded off). During the scrutiny proceedings, AO noticed that the assessee reflected the rental income of ₹ 1,59,831, scrap sales of ₹ 5,29,950/- and miscellaneous receipts of ₹ 22,630/- totalling to ₹ 7,12,411/-. Against this income, assessee claimed various expenses including VRS expenditure of ₹ 41.90 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 distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess Co. Ltd. v. CIT [1985] 154 ITR 861 (AP) 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 ₹ 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 Ltd. (supra) and CIT v. Vikram Cotton Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. v. CIT, the fact was entirely different as in that case the assessee was engaged in the business of hire purchase and le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28-07-2010 Maharashtra Electricity Regulatory Commission (MERC) invited Expression of Interest for granting the license for the period after the expiry of license on 31-01-2011 by publishing notice to that effect in newspaper.Appellant and other filed applications in response to invitation by MERC of Expression of Interest. Applicant filed application on 28-07-2010 for renewal. Of these 6 applicants there remained only 2 applicants namely appellant and Maharashtra State Electricity Distribution Ltd. (MSEDCL) See Page Nos.19 to 35 of paper book 7. 27-01-2011 MERC on examining the applications filed by MSEDCL and appellant granted license to MSEDCL and refused the renewal of license to appellant vide its order in Case No.85 and 87 dated 27-01-2011 See Page Nos.42 to 53 of paper book. In para 24 of this order MERC has given the reasons for not granting the renewal of license to the appellant 8. 16-12-2011 The Appellate Tribunal for Electricity (APTEL) on an appeal filed by the appellant by its Case No.39 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecommend the reality of the demand of the appellant by its letter dated 01-03-2016 See Page Nos.172 173 of paper book. This committee has not yet given the report 15. 11-05-2016 Order of Supreme Court directing appellant to give undertaking to refund the user charges paid by MSEDCL with interest on sorting out issue of granting the license if it goes against the appellant See Page Nos.626 to 628 of paper book 16. 13-05-2016 Undertaking given by appellant as per the order of Supreme Court See Page Nos.605 to 606 of paper book 17. 04-01-2018 Business Plan obtained from World Institute of Sustainable Energy (WESE) Pune See Page Nos.599 to 603 of paper book Summary of Chart : From the above chronology of events, Ld. Counsel for the assessee submitted that the assessee is licensed to be a service provider qua the distribution of electricity to 183 villages spread over in Five Mandals of the State of Maharashtra. Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth (Case no.24 of 2012 Order dated 15th October, 2012). D. MERC did not finalise the compensation/charges payable by MSEDCL for the use of assets and infrastructure of the Assessee and disposed of Case No.24 of 2012. E. MSEDCL refused to pay ad interim user charges/compensation as directed by MERC on adhoc basis. F. Assessee challenged order passed by MERC dated 15th October, 2012 on the issue of payment of ad interim compensation/user charges by filing appeal in the APTE, New Delhi. The APTE directed MSEDCL vide order dated 13th March, 2015 to pay ₹ 1 crore per month as per interim order dated 15/10/2012 in Case No.24 of 2012 by MERC. APTEL also directed MERC to do valuation of the assets of the assessee through independent agency and determine user charges/compensation. G. MSEDCL challenged the order of the APTE dated 13th March, 2015 in the Hon'ble Supreme Court, i.e. Civil Appeal No.6079 of 2015. Hon'ble Supreme Court dismissed appeal of the MSEDCL vide order dated 17/09/2015 and directed MSEDCL to deposit user charges in the MERC, Mumbai. The Hon'ble Supreme Court also directed MERC to make investment in bank Fixed Deposits and disburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t guidelines. 1. no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head 'Profits and Gains of business or profession'; 2. it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out; 3. where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same: 4. if only or a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Hence, it is submitted that claim of expenses, brought forward losses and the depreciation cannot be denied to the Assessee and the same may be allowed under the head Profit and gains, business or profession i.e. as business loss. Thus, as per the Ld. Counsel for the assessee, the case of the AO is that, with the removal of 1522 employees through the VRS and also when the MERC ordered for non-renewal of license, the business of the assessee should be considered discontinued. In this regard, the intention of assessee is not a relevant factor. Consequently, the claim of expenditure is not an allowable one and the loss computed for this year under consideration is not allowable to be set off against the business income earned by the assessee in the year under consideration and also not allowable for the carry forward benefits u/s.70 to 71 of the Act. 10.1 In reply, Ld. Counsel commented the above conclusion of the AO is factually erroneous. The fact is that the order of MERC stands set-aside by the APTEL in appeal proceedings. APTEL directed for fresh consideration of the assessee's claim. The MSEDCL, who is now given the job of power distribution to the said villages, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 ITR 529 (Mad.); and (5) CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). 12. Per Contra, to continue the elaborate case of the Revenue, the demand for renewal of license is a futile exercise as the Govt. of Maharashtra already allowed/employed licensed MSEDCL for providing distribution of power to specified villages by the State Govt. of Maharashtra. Further, it is undisputed fact that the assessee granted VRS of 1552 employees and claims expenses of ₹ 36.03 crores on this account. Assessee has not rendered any service of providing business activities during the year. Further, Ld. DR submitted that the assessee did not report any business income out of power distribution during the year. No sales, no receipt of service charges out of core activities of electricity distribution etc. was reported. Infact, assessee has no license to do such business till date despite the long legal proceedings initiated by the assessee before the MERC/APTEL, Hon'ble Supreme Court etc. Therefore, assessee stands no possibility of revival of its business. AO concluded that it is a case of cessation of business once and for all and hence, it stands closed. As per Ld. DR, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of power distribution does not arise. Further, earning of rental income or compensation income from MSEDCL in accordance with the directions of the Hon'ble Supreme Court, APTEL etc., is the only source of income and the same cannot be held as business income of the assessee. Revenue also rely on various decisions as discussed in the preceding paragraphs of this order. When the business is substantially closed, making claims of deduction of expenditure on account of VRS and others, is not sustainable. Consequently, the claim of set off of the expenditure against the income earned by the assessee during the year and the carry forward of the balance of expenditure/losses to the future years is not sustainable. Per Contra, the case of the assessee, in brief, is that the business is never closed despite the non-renewal of the license for power distribution in those 183 villages of 5 Talukas. No authority/legal bodies have ever cancelled the license for doing the business by the assessee. It is merely a case of non-renewal of license and the same is distinct from non cancellation of license. The cancellation of license is different from non-renewal of license . Assessee has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewal of license indicates the assessee's earnest desire to continue the business and he is hopeful that, one day, the order of renewal of license by the State Government for Power Distribution will be issued in one form or other, i.e. standalone basis or in continuation of MSEDCL. The same is left to the discretion of the Government. In this regard, relying on judgment of Hon'ble Supreme Court (supra) and the order of the APTEL (supra), assessee asserted the possibility of resuming business in those villages on a standalone basis or in association with the MSEDCL as joint service providers. Therefore, we have to hold that assessee never gave up the demand for renewal of license implying the intention to not to exit the business of power distribution. 14.2 Possibility of Renewal of License (ROL) : Mentioning about the possibility of renewal of license, the case of the assessee is that the possibility of granting license to assessee as well as MSEDCL in the same locations was already communicated by judicial bodies as discussed in the preceding paragraphs of this order. In this regard, assessee relying on the Hon'ble Supreme Court's judgment which ordered for filin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the case of the assessee is that the ongoing litigation for the grant of license ever since 2011 till 2018 should demonstrate the assessee's strong intention to continue the business in this line. Assessee also takes a cue from the development from the renewal after 2000, and mentioned that the process of renewal of license by the MERC was never a smooth affair. The assessee had to wait for nearly a decade during the first renewal of license vide Notification dated 02-05-2000 (Sl.No.2 of the chronology of events chart). In our view, it cannot be concluded that the assessee does not have the intention to continue the business. We order accordingly. 14.5 Legal Scope on discontinuation of business - Assessee's intention: After considering the case of the assessee and the Revenue on the issue of intention Vs. discontinuation of business, we have perused the said decisions relied on by both the parties. a. In the case of Vikram Cotton Mills Ltd. (supra) the Hon'ble Supreme Court held that where an assessee leases its assets and the intention of the assessee is not to discontinue the business but to lease out the assets for a temporary period as a part of their ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It was sufficient for the purpose of this case to state that even an intention to resume business had not been established. Therefore, the business was closed and the company had not established an intention to resume it. That would be enough to show that no business was carried on and it would be irrelevant to enquire whether the business was permanently closed. The facts that the company had to pay the Government half share of the profits between 27-11-1942, and 5-9-1946 and that it had to return to the consumers the deposits made by them would not indicate that it was carrying on a business. It would be laying down strange law to hold that where a business had in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. Business as contemplated by section 10 is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities was not an activity which could ever produce such a result. It could not be said, therefore, that because liabilities of a closed business were outstanding, it had to be held that either the business was continuing or that an intention to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvency, (viii) assessee receives compensation of ₹ 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. Further, various committees recommended for grant of renewal of license to the assessee along with MSEDCL along with subsidy if any. Therefore, all these undisputed facts, in our view, support the existence of intention to do business of power distribution. Unlike in the case of Lahore Electric Supply Co. Ltd. (supra) where mere clearing of outstanding liabilities is only defense from 'Revenue' in support of intention for continuation of business activity, the case on hand and its facts distinguishes the facts of other case. Further, we find the judgment in the case of Vellore Electric Corpn. Ltd. (supra) is very close to the facts of the present one under consideration so long as the takeover decision of the Court is concerned. But the basis of actions of the present assessee keeps the assessee on a different pedestal. Therefore, the business of the assessee cannot be held to be a discontinued one. All the administrative expenses have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that since these details are not examined by the authorities and therefore, the same needs to be allowed. Further, Ld. Counsel for the assessee submitted for remanding the issues. Further, Ld. Counsel also submitted that the assessee earned total income of ₹ 7,12,411/-, i.e. ₹ 1,59,831/- and ₹ 5,29,950/- out of rental income and income on sale of scrap respectively. Assessee considered the entire income as business and set off the same against the expenditure before claiming the benefit of carry forward of loss for set off in future assessment years. AO taxed ₹ 1,59,831/- (rental income) and ₹ 5,29,950/- (income from sale of scrap) under the head income from other sources. However, the CIT(A) confirmed the AO's action regarding ₹ 1,59,831/-. However, CIT(A) upheld the AO's view on the discontinuation of business and consequent claim of set off of carry forward of losses. Further, Ld. Counsel submitted that the claim of assessee for taxing ₹ 5,29,950/- under the head business income is sustainable and relied on the judgment in the case of Vellore Electric Corpn. Ltd. (supra). Further, he also submitted that the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure of ₹ 40.90 crores against the total income of the year at ₹ 7,12,411/-. Genuineness of expenditure was never the issue before the AO/CIT(A) for the reason that they concluded against the assessee on the issue of discontinuation/cessation of business of electricity distribution. This issue of discontinuation of business was independently raised in Ground No.1 and the same stands adjudicated by us in favour of the assessee. Consequently, the genuineness, the allowability etc. becomes relevant now. Therefore, on this issue, we heard both the sides and examined all the accounts debited to profit and loss account of the year/assessee and found, prima-facie, that they are allowable expenditure and the salary expenses, bonus expenses, audit fee etc. relate to business expenditure allowable u/s.37 of the Act. However, there is no categorical finding by AO/CIT(A) with respect to the allowability of these expenditures accounts. In the absence of the same, we cannot decide this issue at this point of time as there is no adverse finding or otherwise exists on the allowability of disallowability of the expenses. Hence, we find it relevant to remand this issue to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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