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TMI Blog2021 (2) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... , other expenses Rs. 34,62,051/- and depreciation Rs. 3,69,362/-, on the ground that the same are to be reimbursed by ESCOMs, as the ESCOMS are to reimburse, only. the working expenditures, as per MOU between ESCOMs and the Assessing Company. 2. The learned Respondent Assessing officer has erred in law by allowing, only, Rs. 10,00.000/- towards corporate expenses as the entire expenditure debited to the Profit and Loss account are, only, the corporate expenses. 3. The learned Respondent Assessing officer has failed to appreciate the fact that the assessing company debited all working expenditure incurred by them to the seed money received from the ESCOMs. 4. The learned Respondent has failed to appreciate the Memorandum of Understanding (MOU) between the ESCOMs and the Assessing Company, particularly the clauses 5, 7 and 8, where in, it is very clearly stated that the ESCOMs are to bear the working capital expenditure, only. as per the percentage indicated there in. 5. The learned Respondent Assessing officer has failed to appreciate that the Assessing Company has the corporate expenditure in the nature of, fees payable to Registrar of companies from time to time depending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that for allow ability of expenses which are revenue in nature it is not the business should have actually commenced. What is important is that the .........e been set up which means the Assessee should be ready to commence expenses which are revenue in nature not being personal expenses and which are .7,-siness expenses incurred after the date of setting up of business have to be allowed. z:,:7enses incurred prior to setting up of the business would not be permissible deduction. is supported by the judgment of Hon'ble High Court of Bombay in the case of ..:stern India Vegetable Products Ltd. vs. CIT( 1954)26ITR, 151(Born). 12. On the other hand as contended by the Department, if the corporate expenditures are to be treated as the responsibility of ESCOMs, even the interest income has to be credited to ESCOMs. With the result PCKL will have no expenditure and no income. 13. The learned officer has erred in law by not setting off the losses against the miscellaneous income and the income from other source. 14. The learned Respondent has erred in law by levying interest u/s 234A, 234B and 234C of the IT Act of 1961. 15. For the grounds set fourth here in above an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The assessee company had filed its return of income for the year under consideration declaring business loss of Rs. 46,76,754, income from other source Rs. 2,50,859 and net income of Rs. 2,03,60,110. However, the Assessing Officer (AO) disallowed the business loss of Rs. 46,76,754 on the grounds that there is no matching concept between the expenditure and the relatable income and disallowed the expenses relating to employees benefit Rs. 84,77,015, other expenses Rs. 34,62,051 and Depreciation and amortization expenses Rs. 3,69,362 of which allowing Rs. 10,00,000 being maintenance of corporate entity u/s.37 on the ground that the same are to be shared by all the five ESCOMS. Aggrieved on the above issues, the appellant filed appeal before the CIT(Appeals). 7. The main grounds raised by the assessee before the CIT(Appeals) was that the AO disallowed the employee benefit expenses of Rs. 84,77,0151, other expenses of Rs. 34,62,051 and depreciation of Rs. 3,69,362 on the premise that the same are reimbursed by ESCOMS as the ESCOMS are to reimburse only the working expenditures as per MOU between ESCOMs and the assessee company. The AO was of the view that assessee is contesting tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing principle is a fundamental principle in accounting. This principle states that only expenses relatable to a head of income should be claimed in P&L Account as expense. Those expenses that do not relate to a 'head of revenue' should be either capitalized or not to be claimed or to be claimed under the 'correct head of income. According to the CIT(A), in the instant case, the assessee has total revenue of Rs. 2,60,24,085 (as per audit report) consisting of interest income and other operating revenues. The assessee has claimed expenses of Rs. 1,23,07,658, when its business income is only Rs. 9,87,226 (other operating income). The contest of the assessee is that expenses are to be incurred to maintain the corporate entity, an expense of Rs. 10,00,000 (including depreciation claimed under IT Act) was allowed out of the expenses claimed of Rs. 1,23,07,658 and the balance of Rs. 1,13,07,658 was disallowed since it should have been allocated to ESCOMS proportionately. 10. The assessee submitted that the Memorandum of understanding (MoU) between the ESCOMS and the assessee company, particularly the clauses 5, 7 and 8, very clearly stated the ESCOMS are to bear the working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the following activities:- a. Land acquisition through Revenue Department / KIADB. b. Allocation of water from the Water Resource Department. c. Allocation of fuel linkages / coal blocks from Ministry of Power, Ministry of Coal, Govt. of India. d. Arranging environment impact assessment, pre-feasibility reports and detailed projects reports through Consultants / Experts. e. Power evacuation system pertaining to projects through Case-II competitive bidding route. f. Negotiation with power trader, generators for short term procurement and preparation of PPA's on behalf of ESCOMs. g. Forecasting energy availability and demand. h. Preparation / scrutiny of PPA's on conventional power plants. i. Pre and Post PPA's issues relating IPP's projects, Mall projects and Joint Venture. j. Procuring power through exchanges. k. Procuring power on Long / Medium / Short term and peak power. l. Any other work assigned by GoK / GoI / KERC. 11. The assessee further submitted that the Memorandum and Articles of Association of the company provides the scope for other activities which can be carried out at any time. The Company having been set up, any moment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Therefore, Method of Accounting followed by the assessee is relevant because accrual of income is to be seen in the light of Method of Accounting. This Matching concept is also covered by Section 36(1)(m) read with Section 43(2), which defines the word "Paid". Both these sections form part of Chapter IV - Computation of Business Income. If the Matching concept is not applied then, the profits get distorted. In his order, the AO has recorded a finding of fact which categorically brings out the matching concept. Ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it is incurred. Hence all expense incurred by the company is reimbursed by ESCOMS through seed money. Thereby, all expenses incurred by PCKL should be apportioned to the respective seed money of ESCOMS in proportion to contribution fixed by ESCOMS in government order. Thus, the action of the AO was sustained by the CIT(A). Against this, the assessee is in appeal before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by the assessee was either met out from interest earned by assessee or by the seed money provided by ESCOMs. Being so, it cannot be allowed as a business expenditure. 15. We have heard both the parties and perused the material on record. The first contention of the lower authorities is that the expenditure incurred is not corresponding to the income earned by the assessee. So applying the matching principle, the claim of deduction of expenditure of Rs. 123,07,658 was denied by the AO and he has allowed deduction only to the tune of Rs. 10 lakhs. However, the CIT(Appeals) has disallowed the entire amount. In our opinion, for allowing the expenditure assessee's business should have been set up and ready to commence. In this case, there is no dispute the assessee's business is already set up and ready to commence which emerges from the following facts:- 1. PCKL Power Company of Karnataka Limited (PCKL) is a special purpose vehicle set up by the Government of Karnataka to supplement the efforts of KPCL in capacity addition. PCKL was incorporated by the Government of Karnataka under the Companies Act 1956 to facilitate ESCOMs. In order to bridge short term demand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare the expenditure of PCKL as per the percentage indicated below. BESCOM: 50%; MESCOM: 15%; CESC: 15%; HESCOM: 10%; GESCOM:10%. 6. The expenditure so incurred as stated in Para (5) shall be shared by all the five ESCOMs in accordance with the Para (7) and accordingly PKCL shall intimate its expenditure monthly/quarterly to all the five ESCOMs in order to exhibit the same in their books of accounts against the seed money provided to PCKL. The credits if any to given towards interest earned on the deposits of surplus fund will be afforded/adjusted against the expenditure at the end of the financial year. 16. Being so, the claim of the expenditure by the assessee cannot be denied. Secondly the lower authorities observed that the assessee met the expenditure out of interest income earned or in case interest is not sufficient to meet the expenditure, it should be met by the seed money provided by the ESCOMs. These are internal financial arrangements made by the assessee with ESCOMs to fund the expenditure. This cannot disentitle the assessee to claim expenditure in accordance with the Act. The income of the assessee has to be computed under the provisions of the Act without look ..... X X X X Extracts X X X X X X X X Extracts X X X X
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