2018 (11) TMI 253 - AT - Income Tax

Disallowance of expenditure as busniss discontinued of power distribution - Legal Scope on discontinuation of business - intention to continue the business - Held that - It is a settled legal proposition that the existence of intention to continue business and its demonstration by the assessee assumes significance in matters relating to decision on the cessation of business. The undisputed facts of (i) demonstration by way of passing of Resolution by AGM of assessee for continuation for fighting for renewal of license (ii) approaching the State Govt. MERC, APTEL, Supreme Court etc. for renewal of license, (iii) opposing the takeover bid of the MERC for MSEDCL with or without consideration; (iv) compliance to the legal orders of Supreme Court/APTEL without prejudice to the demand for renewal of license; (v) assessee never entertained the idea of sale of assets and infrastructure to MSEDCL, (vi) assessee did not entertain the idea of lease of assets too; (vii) assessee did not resort to liquidation or insolvency, (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. 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, 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 - We 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 ₹ 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. - - Decided in favour of assessee for statistical purposes. Set off of current year business loss against the scrap sales income and carry forward of loss - Held that - We find that the set off of carry forward of the unabsorbed loss issue needs to be decided as per the provisions of Sections 70 to 72 of the Act. Thus, we direct the AO to pass a speaking order on this aspect of the claim of the assessee. It is also the claim of the assessee before us that the brought forward losses from earlier assessment years were not properly allowed in the order of the AO due to their adverse decision on the intention to continue the business . AO is directed accordingly.

Summary

Issues Involved:
1. Discontinuation of Business and Intention to Continue Business.
2. Allowability of Business Expenses and Depreciation.
3. Taxability of Income and Set Off of Business Losses.

Detailed Analysis:

1. Discontinuation of Business and Intention to Continue Business:
Facts and Arguments:
- The assessee, a society engaged in the distribution of electricity, had its license expired on 31-01-2011, and the Maharashtra Electricity Regulatory Commission (MERC) issued a license to Maharashtra State Electricity Distribution Company Limited (MSEDCL).
- The Assessing Officer (AO) issued a show cause notice proposing to treat the business as closed, disallowing business expenses and carry forward of losses.
- The assessee argued that the handover to MSEDCL was temporary, pending appeals before the Appellate Tribunal for Electricity (APTEL) and the Supreme Court.
- The AO concluded that the business was substantially closed, relying on various case laws and the fact that employees were removed under the Voluntary Retirement Scheme (VRS).

Tribunal Decision:
- The Tribunal held that the intention to continue business is crucial, referring to the Supreme Court's judgment in Lahore Electric Supply Co. Ltd. and other relevant cases.
- The Tribunal found that the assessee demonstrated a clear intention to continue the business by engaging in extensive litigation for license renewal, maintaining infrastructure, and earning income from MSEDCL.
- The Tribunal concluded that the business was not discontinued, and the assessee's actions indicated an intention to resume operations.

2. Allowability of Business Expenses and Depreciation:
Facts and Arguments:
- The AO disallowed expenses and depreciation, treating the business as closed.
- The assessee claimed expenses related to employee VRS, salaries, gratuity, audit fees, and administrative expenses.
- The CIT(A) upheld the AO's decision, but the Tribunal found that the expenses were incurred for business purposes.

Tribunal Decision:
- The Tribunal noted that the genuineness of the expenses was not examined due to the adverse decision on business continuation.
- The Tribunal remanded the issue to the AO to verify the genuineness and allowability of the expenses, directing a detailed examination and passing a speaking order.
- The Tribunal emphasized that employee costs and VRS expenses are business expenditures and should be considered under specific provisions of the Income Tax Act.

3. Taxability of Income and Set Off of Business Losses:
Facts and Arguments:
- The AO taxed rental income and income from scrap sales under "income from other sources," denying the set off of business losses.
- The CIT(A) partly allowed the appeal, treating rental income as "income from house property" and other receipts as "income from other sources."
- The assessee argued for treating the entire income as business income and allowing the set off of losses.

Tribunal Decision:
- The Tribunal directed the AO to pass a speaking order on the set off of current year business losses against income from scrap sales and the carry forward of unabsorbed losses.
- The Tribunal instructed the AO to consider the favorable finding on business continuation and apply relevant provisions of Sections 70 to 72 of the Income Tax Act.
- The Tribunal allowed the appeal partly for statistical purposes, ensuring a detailed examination and proper application of tax laws.

Summary:
The Tribunal's decision focused on the intention to continue the business, the genuineness and allowability of business expenses, and the proper tax treatment of income and losses. The case was remanded to the AO for a detailed examination and passing of speaking orders on these issues, ensuring compliance with legal provisions and judicial precedents.