TaxTMI 
TaxTMI 
2018 (11) TMI 253
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....84/-. The above grounds of appeal may kindly be allowed to be amended, altered and/or modified in the interest of natural justice." 3. Briefly stated relevant facts of the case are that the assessee is a society engaged in the business of Distribution of Electricity-a service provider. Assessee filed the return of income declaring loss of Rs. 16.23 crores (rounded off). Subsequently, the return was revised by revising the loss at Rs. 43.04 crores (rounded off). During the scrutiny proceedings, AO noticed that the assessee reflected the rental income of Rs. 1,59,831, scrap sales of Rs. 5,29,950/- and miscellaneous receipts of Rs. 22,630/- totalling to Rs. 7,12,411/-. Against this income, assessee claimed various expenses including VRS expenditure of Rs. 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 ....
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....ertain case laws, i.e. New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC), Madras Silk & Rayon Mills (P.) Ltd. v. ITO [2003] 262 ITR 122 (Mad.), Universal Plast Ltd. v. CIT [1999] 237 ITR 454 (SC), Guntur Merchants Cotton Press 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 Rs. 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 bus....
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....of the AO. He also submitted the facts relating to the pending judicial proceedings before the Hon'ble Supreme Court and also relied in the interim order of the Hon'ble Supreme Court dated 11-05-2016. Infact, the Hon'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 Rs. 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 ....
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....hand over the entire infrastructure of electricity distribution, power system including electrical system, substations, overhead lines, service lines, offices and associate facilities like land, buildings, materials, stores and plants in the areas of 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. ....
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....s taxable as "income from house property" and not under the head "income from other sources" as held by the AO. Accordingly, the CIT(A) allowed this issue in favour of the assessee. Other receipts such as scrap scales/misc. receipts are treated as "income from other 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'....
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....ublishing 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 2011 set aside the order of MERC with the direction to reconsider the application for renewal of license and considering the feasibility of granting license to both MSEDCL and appellant to provide the electricity in the said area. The Tribunal in this order clearly held that : i. License already to appellant is neither suspended nor....
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.... 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 is engaged in this business activity since 1971. Referring to the above chart of chronology of events, Ld. Counsel for the assessee labored extensively to demonstrate that the assessee has always been for continuation of the business. Assessee had to struggle at the time of first renewal in 2000 till the license was renewed on 02-05-2005, doing the business for another period of 20 years. Eventually, the license was renewed. Presently, for renewal, only the assessee has been litigating before MERC, APTEL and Hon'ble Supreme Court against the decision of not renewing of license, not awarding of compensation in lieu of use of the assets of the company by the MSEDCL etc. Assessee spent huge amount of time and money in this endeavour and it is all for the purposes of the continuation of business. Having considered the factual matrix and the various steps taken up by the assessee for continuation of business/renewal of license, we shall now proceed to examine the "intention....
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....n'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 disbursement of deposit shall be subject to final outcome of the dispute (Page No._ paper book S.C. order) H. MERC disposed of the interim application of the Assessee vide order dated 02/05/2016 on the issue of payment of the interim user charges/compensation. I. MERC also disposed of the application of the Assessee being Case No.87 of 2010 by declining to grant license and directed the Assessee to file fresh application vide order dated 18-06-2014. Assessee challenged the order of the MERC, Mumbai in Hon'ble APTE, New Delhi which is registered as Appeal No.223 of 2014 which is presently pending hearing and final adjudication on the issue of grant of license to the Assessee society. The assessee society is fighting its case for renewal and grant of license under Electricity Act, 2003. The matter has not reached the finality. The orders of Hon'ble APTE, Delhi challenged by MSEDCL before the Hon'ble Supreme Court we....
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.... 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 cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets. L. The Assessee also placed reliance on the decision of the Hon'ble Apex Court in the case of Universal Plast Ltd. (Supra). In fact the taste laid down in said decision support the contention of the Assessee that intention of the Assessee is not to go out of business but Assessee is fighting legal battle for restoration of it's licence to resume its business. M. In the case of CIT v. Vellore Electric Corporation Ltd. - 243 ITR 529 (MAD). Said Assessee was private electric company. Its undertaking vested with the State Government due to enactment of the Tamil Nadu Electricity Supply Undertaking (Acquisition) Act, 1973. Said Assessee challenged validity of that Act in the Supreme Court. The Assessee claimed expenditure on sa....
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..... 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, also did not comply with said order of the MERC in matters of payment for use of the assets/infrastructure of the assessee. In the interim order, the assessee was to receive Rs. 1 crore per month as per the order of the APTEL. Against the said order, MSEDCL approached the Apex Court and its attempt for non-payment of fee to assessee did not fructify. Hon'ble Apex Court confirmed the direction of APTEL and detailed the available safeguard for the MSEDCL for recovery of the fee paid to the assessee in case the assessee requests for license is eventually allowed. As per the assessee, such a direction or the observation of the Hon'ble Supreme Court is taken as hope to assessee in matters of the core issue of renewal of license. 10.2 As on date, the MERC is still ceased up with the issue of granting or renewal of license to the assessee vide the Appeal No.223 of 2014. A....
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....te 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, assessee is only to receive the rent or compensation subject to the conditions specified in the judgment of Hon'ble Supreme Court. Further, Ld. DR for the Revenue relied heavily on the orders of the AO and the CIT(A). 13. Responding to the elaborate arguments of Ld. Counsel on the intention aspect, Ld. DR submitted that the assessee failed to prove the intention of the assessee in matters of continuation of the business. He also reiterated the fact that even after 7 years of litigation there is nothing concrete materialized in favour of the assessee so far as granting of license is concerned. Therefore, Ld. DR submitted for confirming the orders if the CIT(A)/AO is without any modification on all the three issues, i.e. (i) continuation of business intention; (ii) set off of expenses against the business income; (iii) brought or/and carry forward of business or brought forward losses ....
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....ukas. 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 been earning income by exploiting the business assets of the assessee since the year 2011, the year of non-renewal of license. Assessee has been showing the same in the returns filed regularly since the A.Y. 2012-13 onwards. The fact that assessee reported earning of such income either on account of compensation or on account of "sale of scrap" and others and it demonstrate the spirit of continuation of business. Further, the fact that assessee has been sincerely knocking the doors of every institution, i.e. Hon'ble Supreme Court, MERC or APTEL etc demonstrates that the assessee's bonafide desire for continuation of the business should be beyond any doubt. As per Ld. Counsel, the assessee never surrendered the right to conduct the business of power distribution in any form before any authority/judicial body. No authority has every ordered for closure of the business. Assessee still o....
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.... 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 filing an 'affidavit' for the refund of amount of compensation by the assessee to the MSEDCL as and when the decision of MERC/APTEL/Hon'ble Supreme Court on the core issue of renewal of license goes in various of the assessee. Assessee also relies on the order of the APTEL in this regard. Assessee indicates the chance of renewal of license. In these circumstances, AO's finding that the business is substantially closed or closed and no possibility of renewal of license, are not held on sound footing. The very fact that the APTEL has referred the matter back to the MERC for reconsideration and the MERC's direction to file a fresh application by the assessee for grant of renewal of license also indicates the possibility of renewal of license. It is a matter for the future and the finality of the judicial bodies. We have nothing to comment on this as the matter is sub-judice bef....
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....y 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 exploitation, the lease rent derived from letting out the assets is assessable as business income and not as income from other sources. b. In the case of CIT v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom.) the Hon'ble Supreme Court held that company under liquidation having leased its plant and machinery, it could not be said that business of company ceased in the face of clear findings of Tribunal and income from leasing could be set off against past losses. c. In the case of Shri Lakshmi Silk Mills Ltd. (supra), the Hon'ble Supreme Court that where a manufacturer, being unable to use his plant gainfully, lets it out temporarily for making profits for that business, the plant so let out does not cease to be a commercial asset of the manufacturer and the income earned by letting it out is chargeable as business income under sec.10 of 1922 Act. d. In the ....
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....ity 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 resume business must be inferred. Hence, the company had ceased to carry on business, and the Tribunal's conclusion to the contrary was incorrect." These ratios of various decisions/judgments support the case of the assessee and the claims need to be allowed in favour of the assessee. We order accordingly. 14.6 Removal of 1522 employees - Not a litmus Test : Coming to the AO's reservation on the decision of the assessee is giving VRS to 1522 employees, we find it a prudent commercial decision and the same cannot be interpreted against the assessee as lack of intention. In our view, saying bye to these employees cannot be equated with the decision of no sale of capital assets like land/building/distribution network, database etc. Recruitment of employees is not a significant and decisive event to decide the termination of business. In this regard,....
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....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 to be allowable as business expenditure. Therefore, we find it difficult to conclude that the assessee does not have any intention to continue the business of power distribution. Accordingly, the Ground No.1 raised by the assessee is allowed. (B) Whether the Expenses debited to Profit and Loss Account constitute business expenditure eligible for claim of deduction u/s.37 of the Act 15. On scrutinizing of the profit and loss account of the assessee, the main expenditure incurred by the assessee relates to claim of Rs. 41.90 crores. Ground No.2 relates to denial of benefit of carry forward of the current year business losses and set off of the assessee and determination of proper head of income for taxing the returned income of Rs. 7,21,411/-are the issues connected to the Ground No.2. During the assessment proceedings, AO noted that the assessee claimed hug....
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....urther, Ld. Counsel submitted that the claim of assessee for taxing Rs. 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 incurred on personnel (VRS + Gratuity of establishment etc.) constitutes business expenditure and the same needs to be allowed u/s.37 of the Act. 17. Arguments of Ld. DR for the Revenue : On the other hand, Ld. DR for the Revenue submitted that allowability of these expenses becomes relevant only if the issue relating to continuation of business is decided against the Revenue. He also submitted that assessee did not have the recognition required for granting of VRS. Therefore, it is a case of removal of employees in view of closure of business. Further, Ld. DR argued that the claim of VRS expenditure is capital nature as it is a one-time expenditure. However, when the assessee referred to the Approval dated 24-05-2012 of the Labour Commissioner, Maharashtra Govt., and demonstrated the business nature of it. 18. Decision of the Tribunal on Ground No. 2 : We heard both the sides on this issue, perused the orders of the Revenu....
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....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 file of AO for fresh adjudication both on the genuineness as well as on the allowability of the expenses amounting to Rs. 40.90 crores. We direct the AO to pass a speaking order on the claim in all individual accounts debited to profit and loss account. AO shall note that employee cost constitutes an business expenditure and there are specific provisions in the Act for allowing the VRS expenditure. AO is directed to admit any evidence for adjudication of this issue. AO shall grant reasonable opportunity of being heard to the assessee in the said remand proceedings as per the set principles of natural justice. Accordingly, this part of the ground No.2 is allowed for statistical purposes. 19. Set off of current year business loss against the scrap sales income and carry forward of loss Before us, on the issue of giving set off of business loss against the receipts earned on sale of scrap as well as on the issue of grant of benefit of carry forwar....