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2024 (8) TMI 1242 - AT - Income TaxDisallowance of expenditure as assessee has not carried any business activities during the current assessment year - HELD THAT - Assessee is having a huge plant for the purposes of generating, transmitting, distribution and supply of electricity since 1995 with an agreement for supply of electricity with HPCL, at present HPPC for 15 year power purchase agreement, however, the same was suspended by HPCC w.e.f. 10th May, 2005 in compliance with the order of HERC. We observed that the assessee has not received any payment of fixed tariff from HPPC and has filed a suit in Supreme Court which is pending as on date. It is a fact on record that assessee has not declared any income due to non realisation of fixed tariff and AO has objected to the same and opined that the assessee should have declared deemed income in order to claim of the expenditure. We are in agreement with the findings of the CIT(A) until the relevant fixed tariff are realisable the same cannot be declared as income in the hands of the assessee and further the assessee has to keep up the plant in running condition it has to incur certain expenditures. As and when withdrawal of the suspension of power purchase agreement the assessee may continue to generate power, therefore, the temporarily suspension of the business is with a proper reason declared on record, therefore, in our view assessee is eligible to claim the Revenue expenditure as well as the relevant depreciation of the fixed assets during the current year, therefore, we are inclined to agree with the findings of the CIT(A) and, accordingly, appeal filed by the Revenue is dismissed.
Issues Involved:
1. Whether the business of the assessee was discontinued or temporarily suspended. 2. Whether the assessee is eligible to claim business expenditure and depreciation during the period of suspension. 3. Applicability of the matching principle in accounting for expenses and revenue. Issue-wise Detailed Analysis: 1. Whether the business of the assessee was discontinued or temporarily suspended: The primary issue was whether the business activities of the assessee were discontinued or merely temporarily suspended. The assessee argued that the business was temporarily suspended due to a dispute with Haryana Power Generation Corporation Limited (HPGCL) under a 15-year Power Purchase Agreement (PPA) which was suspended by HPGCL w.e.f. 10.05.2005. The assessee maintained that the suspension did not amount to discontinuance or closure of business, citing judicial precedents such as Lakshmi Narayan Board Mills Pvt. Ltd. v. CIT and L.VE. Vairavan Chettiar v. CIT, which support the notion that a business can be considered ongoing even if temporarily inactive. The Tribunal agreed with the assessee's contention, noting that the business was temporarily suspended due to ongoing litigation and that the infrastructure was maintained to resume operations once the dispute was resolved. 2. Whether the assessee is eligible to claim business expenditure and depreciation during the period of suspension: The Assessing Officer (AO) had disallowed the expenses and depreciation claimed by the assessee, arguing that since no revenue was declared, no expenses could be allowed. The AO relied on the matching principle, which requires expenses to be recognized in the same period as the related revenues. However, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] allowed the claim, noting that the company had incurred expenses to maintain the plant and was engaged in the business of power generation since 1995. The Tribunal upheld the Ld. CIT(A)'s decision, stating that the expenses incurred were necessary for maintaining the plant in anticipation of resuming business operations. The Tribunal also referenced judicial precedents such as CIT v. Vishwanath Bhaskar Sathe and Whittle Anderson Ltd. V. CIT, which support the allowance of depreciation even when machinery is idle but kept ready for use. 3. Applicability of the matching principle in accounting for expenses and revenue: The AO had argued that the matching principle required the assessee to declare deemed revenue to claim the related expenses. However, the Tribunal found that the fixed tariff (deemed generation) had not accrued to the company due to the suspension of the PPA and ongoing litigation. The Tribunal agreed with the Ld. CIT(A) that until the fixed tariff was realizable, it could not be declared as income. The Tribunal concluded that the assessee was eligible to claim the expenses and depreciation as the business was only temporarily suspended and the plant was maintained in anticipation of resuming operations. Conclusion: The Tribunal dismissed the Revenue's appeal, agreeing with the Ld. CIT(A) that the business was temporarily suspended and not discontinued. The assessee was entitled to claim the expenses and depreciation incurred during the period of suspension, as these were necessary for maintaining the plant and keeping it ready for future operations. The matching principle did not preclude the allowance of these expenses, as the fixed tariff had not accrued due to the suspension of the PPA and ongoing litigation. The appeal filed by the Revenue was dismissed, and the order was pronounced on 23rd August, 2024.
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