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Income Tax Appellate Tribunal, CUTTACK BENCH CUTTACK
Before: SHRI C.M. GARG, JM & SHRI L.P. SAHU, AM
O R D E R Per L.P.Sahu, AM: These two appeals have been filed by the assessee against the separate order passed by the CIT(A)-1, Bhubaneswar, both dated 22.11.2017 for the assessment years 2011-2012 & 2013-2014. 2. First we shall decide the appeal of the assessee in for A.Y.2011-2012, wherein the assessee has raised the following grounds of appeal :-
1. That the order dated 22.11.2017 of the learned CIT(Appeals) in dismissing the appeal is against principles of natural justice, contrary to facts, arbitrary, erroneous and bad in law. RE-OPENING AND REASSESSMENT: 2. Re-opening u/s.147 and issue of notice u/s.148 of the Act: That on the facts and in the circumstances of the case, the learned CIT(Appeals): a. has erred both on facts and in law in dismissing the grounds regarding re-opening and reassessment proceedings. b. holding that all the conditions laid down under the law for re-opening of assessment are apparently satisfied in the case of the assessee and hence reassessment is valid in the eye of law is against the principles of natural justice erroneous, bad, both in the eye of law and on facts and legally untenable. c. holding that there is no change of opinion by the learned AO in order dated 30.11.2016 u/s.l43(3)/147 of the Act is erroneous, bad, both in the eye of law and on facts and legally untenable. d. ought to have held that the issue of notice u/s. 148 for re-opening the assessments is unjustified, erroneous, bad in law, without/lack of jurisdiction and legally untenable. e. ought to have held that the order dated 30.11.2016 U/S.147/143(3) of the Act passed by the learned 'AO' is arbitrary, unjustified, erroneous, bad in law and legally unsustainable. 3. That it is the settled law that the Assessing Officer in proceedings U/s 147 is obliged to first determine whether reopening is valid and only thereafter can proceed with the reassessments and the learned AO having failed to pass any order on validity of reopening and having proceeded with the reassessments, the learned CIT(Appeals) ought to have held that the consequent reassessment order dated 30.11.2016 is bad in law and legally untenable and liable to be quashed, on this ground alone. Without prejudice to Ground 2 & 3 above, assuming but not admitting that the reopening is valid: 4. Disallowance of Expenses Rs. 64,84,215/- a. That the order of the learned CIT(Appeals) in confinning the disallowance of expenses of Rs.64,84,215/- is against the principles of natural justice, on mis-appreciation of facts, unjustified, arbitrary, erroneous, bad, both in the eye of law and on facts and legally untenable. b. That the learned lower authorities holding that the business of the assessee has been discontinued is on misconstruing/mis-appreciation of the facts, on irrelevant considerations, presumptions, conjectures and surmises, without any material evidence on record and contrary to facts, arbitrary, unjustified, erroneous and bad, both in the eye of law and on facts and legally untenable. c. That on the facts and in the circumstances of the case, the learned CIT(Appeals) sustaining the disallowance of expenses of Rs.64,84,215/- by holding that the business of the assessee is discontinued long back is in utter disregard to the Orders of Hon'ble 3 IT AT, Cuttack Bench, in asseessee's own case in similar circumstances for the past years and is arbitrary, unjustified, wrong, erroneous and bad, both in the eye of law and on facts and legally untenable. d. That in similar circumstances, in the past assessment years, the 'disallowance of expenses and depreciation' having been decided in favour of the assessee, by the superior authority viz. the Jurisdictional ITAT Cuttack Bench, and the operation of the said ITAT orders not being stayed by the High Court, the learned AO as well as the CIT(Appeals) have committed judicial impropriety by not following the orders of his superior authorities in making the disallowance of expenses of Rs.64,84,215/- and said disallowance of expenses of Rs.64,84,215/- is uncalled for, arbitrary, erroneous, bad in law, illegal and deserves to be quashed on this ground alone. e. That on the facts and in the circumstances of the case, the aforesaid expenses of Rs.64,84,215/- is fully allowable u/s.37(l) of the Act the same ought not be disallowed. f. That on the facts and in the circumstances of the case, the aforesaid expenses of Rs.64,84,215/- ought to be fully allowed..
5. That the appellant craves leave to add, supplement, modify the grounds here-in-above at the hearing of the appeal.
Brief facts of the case are that the assessee filed return of income u/s.139(1) of the Act on 29.09.2011 declaring loss of Rs.64,84,215/-.
The assessment was originally completed on 24.03.2014 u/s. u/s.143(3) of the Act at a loss of Rs.64,84,215/-. Thereafter show cause noticed dated 01.02.2016 after recording the reasons as under :-
From the verification of assessment record, following facts are observed: a) Disallowance of expenditure; In the audited profit & loss account for the year ended 31st March, 2011, the assessee has claimed Rs.63,15,989/- as expenditure against Income, of Rs. 2,89,894/- from interest on deposits and exchange gain, From the notes to Accounts, It is observed that: I) Investment in CESCO Under a scheme of privatization of the distribution of electricity and retail supply in Orissa, the company acquired 51% of the equity in Central Electricity Supply of Orissa Limited (CESCO), which has been issued a licence by the Orissa Electricity Regulatory Commission (OERC) to undertake the business of distribution of electricity and retail supply in the Central Zone of Orissa. On 2nd April, 2005 Orissa Electricity Regulatory Commission (OERC) revoked the electricity distribution and retail supply license of CESCO effective from April 1, 2005 In terms of sec. 19 of the Electricity Act,
4 2003 read with the applicable provisions of the Orissa Electricity Reforms Act. As the assessee's business license has been revoked and it's business has been discontinued, the assessee is not eligible for deduction of expenditure, In this respect the following judicial pronouncement holds good:- "In order to avail deduction of expenditure, it Is necessary that the business, In respect of which expenses are Incurred, should be carried on by the assessee during the previous year. If the business has been closed or discontinued before the commencement of the previous year, no deduction in respect of such discontinued business is permissible while computing the taxable income of the previous year from other sources' L.M Chhabda &. Sons Vs. CIT(1967) 65 ITR 638 (SC). In response to notice, the assessee filed his return of income electronically on 19.07.2016 declaring same loss as filed in the original return of income u/s.139(1) of the Act. Subsequently, notice u/s.142(1) of the Act was issued to the assessee. In compliance to the above notice, the authorized representative appeared before the AO and filed written submissions. Thereafter the case was fixed 23.11.2016 for hearing. But till the completion of assessment, none appeared and did not reply to the subsequent notice. The ld. AO noticed from the financial statements for the year ended March, 2011 that the assessee had shown other income of Rs.2,89,894/- from interest on deposits and exchange gains.
Further it was found that the business of the assessee discontinued many years before the commencement of the previous year relevant to assessment year under consideration and has claimed expenditure of Rs.63,15,899/-. The assessee did not give any evidence in respect of expenses claimed. Accordingly, he framed the reassessment and next assessment years.
4. Against the assessment order, the assessee filed appeal challenging the reopening of the assessment as well as on merits. Ld. CIT(A) after considering the case of the assessee, dismissed the appeal of the assessee on both the counts after observing as under :-
2.1 I have considered the contention of the assessee and perused the materials on record. I have also gone through the reasons recorded by the AO before issue of notice u/s.148. I do not agree with the assessee that the reassessment proceeding has been initiated on change of opinion. Change of opinion presupposes an opinion already formed by the AO in the original assessment on certain issues and the reassessment proceeding is started on change of such opinion on such issues. Nothing of that sort appears to have happened in the case of the assessee. The AO in the original assessment has not taken any decision consciously to allow the expenses claimed against the interest income to be taxed as income from other sources. The assessee's business has been discontinued since long and there is no business activities reflected by earnings from business. The AO has not considered these aspects while completing the original assessment. Hence, there is no change of opinion when the AO initiates reassessment proceeding to disallow the expenses claimed on account of business. All the conditions laid down under law for reopening of assessment are apparently satisfied in the case of the assessee and hence the reassessment is held to be valid in the eye of law. Hence, the above grounds are dismissed.
3. In Ground No.3, the assessee challenges the disallowance of business expenses of Rs.64,84,215/- and contends that the same is fully allowable u/s.37(l) of the Act. The AO has disallowed the expenses in question by observing as under in the assessment order:
"DISALLOWANCE OF EXPENDITURE
On verification of the return of Income of the assessee & the audited profit & loss account for the year ended 31' March, 2011 the amount of Rs. 63,15,989/- as expenditure against income of Rs. 2,89,894/- from interest on deposits and exchange gain is not justified with adequate evidences. Further, in this instant case, it is found that the business of the assessee has been discontinued many years before the commencement of the previous year relevant to assessment year. So loss of Rs. 64,84,215/- claimed is not an allowable expenditure and it is also well proved, since the assessee has not given any explanation about the nature and source of the above expenditure of Rs. 63,15,989/- even after 6 giving number of opportunities of being heard. Thus, the same is hereby disallowed and added back to taxable income of the assessee." 3.1 In the course of appeal hearing, the assessee has filed a written submission stating that the business expenses could not have been disallowed by the AO being fully allowable u/s.37(l). By referring to certain orders of the Hon'ble ITAT, the assessee pleads that the AO is not justified to disallow the expenses. 3.2 I have given due consideration to the matter. The assessee's only earnings for the relevant previous year are interest on deposits and gains from foreign exchange. The business of the assessee has been discontinued long back and there is no business income for the last several years. Under these circumstances, the expenses claimed on account of discontinued business cannot be allowed. Hence, the AO appears to be fully justified to disallow the expenses of Rs.64,84,215/-. Hence, the disallowance is confirmed.
Ground No.4 is general in nature and requires no consideration.
In the result, the appeal is dismissed.
5. Against the aforesaid observations of the CIT(A), the assessee is in further appeal before the Income Tax Appellate Tribunal.
Ld. AR before us submitted that the AO was not justified to reopen the case. He had no any correct information nor any tangible material enabling him to reopen the case of the assessee as per the provisions of the Section 147/148 of the Income Tax Act, 1961. The AO is also not justified that there was no change of opinion. It was also contended by ld. AR that all relevant materials were placed in the original assessment u/s.143(3) of the Act. The AO could have examined the issue that the business of the assessee was not closed. Ld. AR drew our attention to the financial statements submitted by him and referred to the page Nos.1 to 61 of the paper book and page nos.1 to 26 filed in the paper book. Finally, ld. AR, to support his contentions, relied on the No.397/CTK/2017, order dated 24.07.2019.
On the other hand, ld. DR relied on the order of both the authorities below and submitted that there was an escapement of income. The assessee had carried forward loss of the closed business.
During the impugned assessment year, there was no any business carried on by the assessee only office and administrative expenses have been incurred, which cannot be construed as continuation of business of the assessee. Therefore, the reopening of the assessee made by the AO was justified and the AO has rightly denied the carried forward loss as per the provisions of Income Tax Act, 1961. Ld. DR also submitted that the case law relied on by the ld. AR of the assessee is not applicable in the present facts of the case.
After hearing both the sides and perusing the entire material available on record along with the orders of both the authorities below, we observe that the assessee has challenged the reopening of the assessment and we have also gone through the reasons recorded by the AO, which has been quoted in the reassessment order. As per the reassessment order, it is clear that the assessment u/s.143(3) of the Act was completed on 24.03.2014. The audit report on the basis of which the AO has recorded the reasons for reopening of the completed assessments were available with him. There was no any tangible already in the existence at the time of original assessment made by the AO. The AO reopened the case that the assessee had closed his business activity and the loss cannot be carried forward on the closed business.
But there was no opinion formed in this regard by the AO and he had also accepted the loss claimed by the assessee in the original assessments and the assessee had carried forward the said loss which has been allowed by the AO. Therefore, it can be said that reopening was based on any change of opinion. We are unable to accept the contention of the ld.DR. As held in various judicial pronouncements including the decision of the Hon’ble Supreme Court in the case of CIT Vs. Kelvinator of India Ltd., 320 ITR 561(SC), when the assessment is completed u/s.143(3) of the Act, there is a presumption that all the issues relevant to the assessment have been considered and concluded by the AO by applying his mind. It was further held that even if there is any mistake committed by the AO while competing the assessment u/s.143(3) of the Act, the same cannot be allowed to be taken as a basis for reopening of the assessment as it would amount of giving premium to an authority exercising qua judicial function to take the benefits of its own wrong. Therefore, as per our considered opinion and following the judicial pronouncements as cited above, we are of the view that the reopening in the case in hand is unjustified. Accordingly, we dismiss reassessment order passed by the AO in the case in hand. Since, we have quashed the reassessment order on legal issue, therefore, other grounds raised by the assessee on merits, are not being adjudicated upon. Thus, appeal of the assessee in for A.Y.2011-2012 is allowed.
Now, we shall take up the appeal of the assessee in for A.Y.2013-2014, wherein the assessee has raised the following grounds :-
That the order dated 22.11.2017 of the learned CIT(Appeals) in dismissing the appeal is against the principles of natural justice, contrary to facts, arbitrary, erroneous and bad in law.
Disallowance of Expenses Rs. Rs.4,20,680/- a. That the order of the learned CIT(Appeals) in confirming the disallowance of expenses of Rs.4,20,680/- is against the principles of natural justice, on mis-appreciation of facts, unjustified, arbitrary, erroneous, bad, both in the eye of law and on facts and legally untenable. b. That the learned CIT(Appeals) in his order dated 22.11.2017: (i) stating that written submission filed by,the assessee is quite confusing and does not appear to be much relevant to the issue under consideration; and (ii) stating that the issue is whether the impugned expenses which have not been incurred to earn interest income can be allowed to be set off against the interest income and holding that the same is in negative is arbitrary, wrong, unjustified, erroneous and bad, both in the eye of law and on facts and legally untenable. c. That in similar circumstances, in the past assessment years, the 'disallowance of expenses and depreciation' having been decided in favour of the assessee, by the superior authority viz. the Jurisdictional ITAT Cuttack Bench, and the operation of the said IT AT orders not being stayed by the High Court, the learned AO as well as the CIT(Appeals) have committed judicial impropriety by not following the orders of his superior authorities in making the disallowance of expenses of Rs.4,20,680/- and said disallowance of expenses of Rs.4,20,680/- is uncalled for, arbitrary, erroneous, bad in law, illegal and deserves to be quashed on this ground alone.
10 d. That on the facts and in the circumstances of the case, the learned CIT(Appeals) sustaining the disallowance of expenses of Rs.4,20,680/- by stating that the decisions of the Hon'be ITAT referred to by the assessee is not relevant, is in utter disregard to the Orders of Hon'ble ITAT, Cuttack Bench, in asseessee's own case in similar circumstances for the past years and is arbitrary, unjustified, wrong, erroneous and bad, both in the eye of law and on facts and legally untenable. e. That on the facts and in the circumstances of the case, the aforesaid expenses of Rs.4,20,680/- is fully allowable u/s.37(1) of the Act the same ought not be disallowed. f. That on the facts and in the circumstances of the case, the aforesaid expenses of Rs.4,20,680/- ought to be fully allowed..
3. That without prejudice to Ground No.2 above, on the facts and in the circumstances of the case, the learned Assessing Officer ought to have determined the loss for the year at Rs.41,89,214/- (including depreciation of Rs.21,214/-) and the AO having failed to do so and the learned CIT(Appeals)dismissing the Ground in this regard, is against the principles of natural justice, arbitrary, unjustified, wrong, erroneous and bad, both in the eye of law and on facts and legally untenable.
4. The appellant craves leave to add, supplement, modify the grounds here-in-above at the hearing of the appeal.
Brief facts of the case are that the assessee filed return of income on 25.09.2013 declaring total loss of Rs.41,84,214/-. The return was processed u/s.143(1) of the Act and later on it was selected for scrutiny u/s.143(3) of the Act and other statutory notices were also issued to the assessee. It was noticed by the AO that there was no any business activity has been carried on by the assessee during the impugned year, therefore, the expenses debited into the profit and loss account cannot be allowed as per Section 37(1) of the Act and he denied carry forward loss to the extent of Rs.46,20,680/-. appealed before the CIT(A) and the CIT(A) after considering the submissions of the assessee and the order of AO, dismissed the appeal of the assessee.
Against the order of the CIT(A), the assessee is in further appeal before the Income Tax Appellate Tribunal.
Ld. AR before us reiterated the submissions made before the lower authorities and submitted that the case is covered by the coordinate bench of the Tribunal in assessee’s own cases for the assessment years 2004-2005 and 2006-2007 in order dated 12.08.2011 and ITA No.318/CTK/2011 for the assessment year 2007-2008, copies of which are placed on record. It was also submitted by the ld. AR of the assessee that the business of the assessee was not closed, therefore, the assessee is entitled to carry forward the loss and expenses claimed in the profit and loss account u/s.37(1) of the Act, 1961.
On the other hand, ld. DR relied on the order of lower authorities and submitted that the business of the assessee has already been closed and no activity is undertaken during the assessment year under consideration, therefore, the expenses debited into the profit and loss account cannot be allowed u/s.37(1) of the Income Tax Act and there is no any revenue generation as well as closing stock and opening stock order of the CIT(A) should be restored.
After hearing both the sides and perusing the entire material available on record along with the orders of authorities below, first of all, we noticed that the AO has disputed the business carried on by the assessee, therefore, he has disallowed the expenses debited into the profit and loss account as per Section 37(1) of the Income Tax Act and the ld. CIT(A) has also upheld the same, whereas we noted that both the authorities mentioned in their respective orders that the assessee company engaged in the business of providing Power Distribution Management Service. It appears that the assessee is still carrying on his business as per the memorandum of association. Therefore, the assessee is entitled to debit the expenses in the profit and loss account for the impugned assessment year and he has rightly claimed as per Section 37(1) of the Act. The AR of the assessee relied on the decisions in his own case for the assessment years as mentioned supra. After going through the above judicial pronouncements relied on by the ld. AR we are of the considered opinion that the assessee is entitled to claim the expenses u/s.37(1) of the Act. Accordingly, we allow the grounds of appeal of the assessee. Thus, appeal of the assessee in for A.Y.2013-2014 is allowed.
Order pronounced in the open court on 28/01/2020.
Sd/- Sd/- (C.M.GARG) (L.P.SAHU) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER कटक Cuttack; ददनांक Dated 28/01/2020 Prakash Kumar Mishra, Sr.P.S. आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीलाथी / The Appellant- 1. AES Orissa Distribution Pvt Ltd HIG-4, BDA Colony, Jaydev Vihar Bhubaneswar-751013 प्रत्यथी / The Respondent- 2. DCIT, Circle-2(1), Bhubaneswar आयकि आयुक्त(अऩील) / The CIT(A), 3. आयकि आयुक्त / CIT 4. ववभागीय प्रनतननधध, आयकि अऩीलीय अधधकिण, कटक / DR, ITAT, 5. Cuttack गार्ा पाईल / Guard file. 6. सत्यावऩत प्रनत //True Copy// आदेशािुसार/ BY ORDER,
(Senior Private Secretary) ITAT Cuttack Bench, Cuttack