TMI Blog2021 (2) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No.2574/Bang/2017 - - - Dated:- 8-2-2021 - Shri Chandra Poojari, Accountant Member And Shri George George K., Judicial Member For the Appellant : Shri A. Ravish Rao, CA For the Respondent : Shri Kannan Narayanan, Jt.CIT(DR)(ITAT), Bengaluru ORDER 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 However, the assessee has withdrawn the Form 1 and seeks to continue the appeal.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 VS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nates 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1.23 crores should be allowed to set off against the income of ₹ 9,87,226 and ₹ 2,50,36,859 of miscellaneous income and interest income respectively. Setting of said expenses against other operating revenue of ₹ 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate 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 appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetitive 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. 1. 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, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 projec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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