TaxTMI 
TaxTMI 
TaxTMI 
2018 (11) TMI 253
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....o 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 time to time. Eventually, the said license granted to the assessee exp....
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....9] 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 business of distribution of electricity and it is only to earn rental income fr....
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....e 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 against the assessee as per the discussion given in Para No.5.2 of the order of CIT(A). T....
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....nes, 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. 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,....
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....e 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'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 as....
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....d 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 revoked. ii. MERC has no power to direct the transfer of assets unless its existing license is suspended/revoked. iii. It cannot direct the appellant to vest all its assets in MSEDCL. iv. Since no proper opportunity was given directed MERC to rec....
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....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" of assessee for continuation of business in the following paragraphs. 10. Intention to carry on the business of service provider qua the Electricity Distribution - Case of the assessee : Before us, on this issue, Ld. Counsel for the assessee filed a written submission explaining the facts and the issues and submitted various ar....
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....rder 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 were on the issue of payment of interim compensation/user charges. As on today MSEDCL challenged all the order passed by Hon'ble APTE, Delhi. J. The Assessee submit that the orders of the MERC and APTE on the payment of interim compensation/user charges reached the Hon'ble Apex Court and as per the order of the Apex Court dated 11/05/2016 it is clarified that Assessee should file undertaking in case it is not entitled to....
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....n 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 salary paid to employees and other expenses. Hon'ble High Court confirmed the order of the Tribunal holding that it cannot be said that there was a permanent closure of Assessee's business as validity of the Act was pending in Supreme Court and said company was maintaining establishment was indication of its intention to resume business. N. It is submitted that in the AGM by the members of Assessee's Society it was resolved to fight for grant of licence. Copy of AGM Resolution No. 17(5) dated....
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.... 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. Assessee also distinguished series of judgments relied upon by the AO vide the discussion in Para "K" vide Para 10 above. In Para "L & M" above, Ld. Counsel highlighted the test relating to "intention" of the assessee vide the Apex Court's judgment in the case of Universal Plast Ltd. (supra). 10.3 Further, Ld. Counsel rely on another judgment of Hon'ble Supreme Court in the case of Vellore Electric Corpn. Ltd. v. CIT 227 ITR 557 and submitted, like the assessee's case, the company was taken over Govt. of Tamilna....
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.... 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 to future assessment years for set off against income of subsequent assessment years. Tribunal Decision 14. Thus so far, we have culled out the facts necessary or relevant for adjudication of three issues, i.e. (i) the continuation of business or intention for continuing business; (ii) the set off of current year expenses against the income of the year; and (iii) brought or carry forward of losses to subsequent assessment years. Further, we have also recorded the various arguments of Ld. Counsel as well as Ld. DR exhaustively. We h....
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....ted 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 owns the business assets such as land, office building, distribution network, database, of the customers, goodwill with electricity consumers etc. and he has no intention to sell the same. Hence, this is merely the case of non-renewal of license. Elaborating the business assets of the assessee, Ld. Counsel submitted that the assessee built up huge infrastructure over the past 50 years in those villages as notified by the Government. The assets of the company are never for sale. The assessee has been incessantly knocking the doors of Hon'bl....
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.... 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 before the other institutions. 14.3 Assessee earns income by way of Fee : Highlighting the fact that assessee earns fee/income of Rs. 1 crore per month from MSEDCL of the State Government consequent to the Hon'ble Supreme Court's judgment read with order of the APTEL in the assessee's own case (supra), assessee claims that he did not close or discontinue the business as held by the AO erroneously. This decision of CIT(A) was confirmed unfairly without appreciating the facts. The fact is that assessee earns income from MSEDCL on take over o....
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....tion 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 Case of Vellore Electric Corporation Ltd. (supra), the Hon'ble Madras High Court held that there was no discontinuation of assessee's business while it was challenging the acquisition of its undertaking by State Government and the matter was pending in the court; all the expenses incurred by assessee in running the establishment during that period are allowable as deduction. e. In the case of L. Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114, the Hon'ble Madras High Court held that if a person carries on two or more distinct businesses, the profits or losses of all of ....
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....der 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, Ld. Counsel submitted that the moment, the assessee gets the order on renewal of license, the assessee shall recruit the employees as required for the business. We find merit in the same. Therefore, we dismiss this aspect of objection from Revenue side. We order accordingly. 14.7 Further, on the other objection of the AO on the orders of MERC/APTEL about their closure order, we find the same are unsustainable in view of subsequent developments till 2016 on the decision of MERC and APTEL. Therefore, we dismiss the same too. Summary : Therefore, to sum up, it is a settled legal proposition that the existence of "intenti....
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....tute 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 huge expenditure amounting to Rs. 41.90 crores. More than 1522 employees availed VRS of the assessee which demanded incurring of the above expenditure. In the return of income, assessee did not claim the same as an allowable expenses considering the specific income tax provisions meant for claim of VRS expenses. These are the expenses incurred on employees, in view of commercial expediency and the prudent business decision. 16. Arguments of Ld. Counsel for the assessee : Ld. Counsel submitted that the genuineness and correctness of the expenditure on this account was never verified by the authorities below due to their decision on the....
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....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 Revenue and the paper book filed by the assessee. Further, we have also perused the decisions relied on by both the sides. The fact on VRS of 1522 employees of the company was also analysed. In this regard, the case of the assessee is that there is no point in bearing the employee cost when the request for renewal of license is not yet decided by the MERC, who ordered for handover of the power distribution network to MSEDCL. Assessee also demonstrated the business nature of each and every account debited to profit and loss account. Further, justifying the expenditure, assessee claims that the business of the assessee is subjected to up & downs due ....