2011 (6) TMI 819 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance of disallowance of expenses of Dabhol Power Project.
2. Disallowance of Club Security Deposit and set-off of expenses against the settlement of income of Dabhol Power Project.
3. Levy of interest u/s 234B and 234C of the Income Tax Act.
4. Settlement of claims and the impact of the Government of India's Deed of Release.
5. Disallowance of expenses of Dabhol Project Office for the assessment year 2005-06.

Summary:

1. Sustenance of Disallowance of Expenses of Dabhol Power Project:
The assessee, a non-resident company, had its contract with Dabhol Power Company (DPC) terminated on 17.6.2001. The AO disallowed expenses of Rs. 1,52,87,952/- related to the Dabhol Project, stating that the business had ceased post-termination. The Commissioner of Income Tax (A) upheld this disallowance, noting that the assessee had no business in India except winding up the Dabhol Project. The Tribunal, however, found that the assessee had RBI permission to extend the project office and had entered into a new agreement in 2006 for the revival of the Dabhol Project. Citing various judicial precedents, the Tribunal concluded that temporary inactivity does not imply cessation of business and allowed the expenses, except for specific sales tax expenditures.

2. Disallowance of Club Security Deposit and Set-off of Expenses:
The assessee did not press these grounds during the hearing. Consequently, these grounds were rejected by the Tribunal.

3. Levy of Interest u/s 234B and 234C:
The assessee argued that as a non-resident, all payments made to it were subject to tax deduction at source u/s 195, and hence, it was not liable to pay advance tax. The Tribunal, following the decision in M/s NGC Network Asia LLC, held that no interest could be charged under sections 234B and 234C, as the duty to deduct tax was on the payer. The Tribunal deleted the interest charged.

4. Settlement of Claims and Impact of Government of India's Deed of Release:
The assessee raised a new issue regarding a Deed of Release executed by the Government of India, which limited the tax liability on the Dabhol Power Project to US$3 million. The Tribunal admitted this legal issue and, following its earlier decision in the assessee's own case, restored the matter to the AO for re-examination in light of the Deed of Release.

5. Disallowance of Expenses of Dabhol Project Office for Assessment Year 2005-06:
The facts of this issue were similar to those of the first issue. Following its findings, the Tribunal deleted the disallowance of expenses of Rs. 23,40,696/- made by the AO and sustained by the Commissioner of Income Tax (A).

Conclusion:
The appeals for the assessment years 2003-04 and 2005-06 were partly allowed for statistical purposes, with specific disallowances deleted and certain issues remanded back to the AO for re-examination.