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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
Assessee by : None Revenue by : Shri. Sankar Ganesh K, JCIT(DR)(ITAT), Bengaluru. Date of hearing : 15.02.2022 Date of Pronouncement : 22.02.2022 O R D E R Per N. V. Vasudevan, Vice President :
These are two appeals by the Revenue against two orders dated 18.05.2018 and 22.05.2018 of CIT(A)-1, Bengaluru, relating to Assessment Years2012-13 and 2013-14.
We shall first take up for consideration Assessment Year 2012-13. The grounds of appeal raised by the Revenue in this appeal reads as follows:
1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. On the facts and in the circumstances of the case, the Ld. CIT (A) erred in deleting the addition of Rs.2,70,67,374/- made by the assessing officer without appreciating the fact that these business expenses were claimed by the assessee even though no business was conducted by the assessee during the year.
3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 4. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.
The assessee is engaged in the implementation of a power project for and on behalf of M/s. BPL Power Projects (AP) Pvt. Ltd., (BPL Power). BPL Power is engaged in business of putting up a Thermal Power Station in Ramagundam. As per the contract between the assessee and BPL Power, the assessee has to finance all expenses including the day to day expenditure for project and could raise a bill with agreed margin, on financial closure of Ramagundam Thermal Project. During the Financial Year relevant to Assessment Year 2012-13, the assessee incurred various expenditures totalling Rs.61,56,073/- on power project and debited the same to project implementation charges account and charged it to Profit and Loss A/c. The assessee incurred financial charges for funds borrowed and also normal administrative expenses like depreciation, audit fee, accounting charges, etc., the details of which were as follows:
Project Implementation cost 61,56,073 Other Administrative expenses 71,12,562 Finance cost 1,06,15,553 Depreciation 3,55,855 Amortizations 28,29,700 Total 2,70,69,743 The assessee had other income of Rs.2,369/- and after setting off the loss against income from other sources the assessee declared loss of Rs.2,70,67,374/-.
For Assessment Year 2012-13, the assessee filed return of income declaring loss of Rs.1,33,42,202/-. In so far as the power project of BPL power is concerned, the business loss was a sum of Rs.2,70,67,374/-. The breakup of which has already been given in the earlier part of this order.
The AO examined the claim of the assessee for allowing loss of Rs.2,70,67,374/- which was nothing but the day-to-day expenditure, administrative expenses, finance charges for implementing the thermal power station project at Ramagundamon behalf of the BPL Power. According to the AO, since the assessee did not declare in the business income, the loss cannot be allowed as a deduction. Consequently, the AO computed the total income of the assessee as follows:
“5. In the instant case, the issue is that the assessee company has not declared any business income at all, and hence the expenses claimed by the assessee is not allowable.Therefore, the expenses claimed by the assessee amounting to Rs.2,70,67,374/-, in the absence of any business income, is disallowed in view of the provisions contained in Sec.3, Sec.28 and Sec.29 as explained supra.
After discussion with the assessee's authorized representative and after verifying the books of account, etc., the assessment is concluded as under:
Computation of Total Income (Rs.) (Rs.) Loss as per Computation statement (-)1,33,42,202 Expenses claimed by the assessee as per P & L a/c (-)2,70,67,374 Add : Expenses disallowed in the absence of income 2,70,67,374 as per the Provisions of Sec.3, Sec.28 and Sec.29 NIL Balance Loss
6. Aggrieved by the order of the AO, assessee filed appeal before the CIT(A). Before CIT(A), the assessee submitted that it is the principal investor and chief sponsor of Ramagundam project being set up by BPL Power. That it commenced work on the Ramagundam Power project in the year 1996-97. The objective of the assessee was to undertake all activity connected with development and construction phase of power projects. The Ramagundam Power project was allotted to the assessee by the Government of Andhra Pradesh. The Plan was a 2 X 260 Megawatt coal based power project for the purpose of generating and selling electrical energy to Andhra Pradesh State Electricity Board. The partners were Japan Power Corporation as a EPDC contractor. The assessee undertook the development of the said project on a turnkey basis. The scope of work of the assessee covered rendering services rendering to project activities like liasioning with various Government agencies for licenses and permissions, coordinating with various agency which carry out feasibility study and technical evaluation. Coordinating with engineering design consultants, procurement agencies and vendors as and when the project progress to construction stage. The scope of work also included sourcing quasi debt, credit support and monitoring deployment and proper utilisation of funds till financial closure and construction period up to achieving commercial operation of the first unit. The scope also includes, coordinating with and concluding agreements for Engineering Procurement and Construction Contract [EPC Contract], Operations and Maintenance Agreement, Coal supply agreement, Power Purchase agreement, Secondary fuel supply agreement, Fuel Transport Agreement, Insurance package, water agreement, and other project contracts. Invoices will be raised by the appellant based on closure of milestones and reviewed by BPL Power. The assessee was also required to coordinate with various financial agencies for financial closure for debt and equity. The assessee was also required to coordinate with potential equity participants and ensure closure of shareholder agreement etc.
As per the provisions of the agreement, the major milestones are Development and Preliminary expenses. Activities relating to other Non-EPC items, Activities relating to Establishment & Maintenance. Project development activities relating to specifications, legal, tax, insurance and other related matters. However, due to a long delay in project implementation, and change of the government from Andhra Pradesh to Telangana, the next most crucial mile stone was re-execute a power purchase agreement with the newly formed state. All expenses related to the project development was treated as work in progress and expenses related to the running and maintenance of the appellants office and meeting its statutory obligations was charged to its revenue accounts. The assessee followed completion method of accounting and as and when milestones were achieved, it would invoice the project company and recognize revenue. The assessee followed completion method of accounting and as and when milestones were achieved, it would invoice the project company and recognize revenue. The assessee contended that it was entitled to claim the expenditure incurred and offer income as an when the invoice is raised.
Without prejudice to the above claim, the assessee submitted that it was entitled to claim deduction of the above expenses as revenue expenditure.
Earning of income or profit is not a criterion for an expenditure. The expenditure has been incurred genuinely for the purpose of the business of the assessee. The assessee drew attention of CIT(A) to the order of the Income Tax Appellate Tribunal, Bangalore Bench in the case of the assessee for the assessment years 1997-98, 1998-99 and 1999-2000 wherein the Tribunal upheld order of CIT(A) allowing deduction of identical expenses under similar circumstances. The assessee submitted that it had not raised any invoice as the project was delayed due to various reasons and the set milestones were not achieved. It also brought to the notice of CIT(A) that negotiations are on to have a fresh agreement executed consequent to the change of State from Andhra Pradesh to Telangana.
The CIT(A) on consideration of the above submissions was of the view that it was undisputed that the assessee could not complete the project owing to various factors and the same method of accountancy has been followed by the assessee consistently. As the facts and circumstances of the current year being similar to that of the Assessment year for which the ITAT in its Order in in respect of the assessment year 1997-98 to 1999-00, held that expenses have to be allowed as deduction, the CIT(A) directed the AO to allow the said expenses disallowed in the impugned Order of the AO.
Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. We have heard the rival submissions. Learned DR reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal. It is clear from the order of the CIT(A) that the Tribunal in assessee’s own case on identical issue has already allowed identical loss which was disallowed by the Revenue authorities on identical grounds. It is not in dispute before us that the facts and circumstances in the present Assessment Year 2012-13 is also identical. The statement of income and net loss in respect of the Ramagundam project from Assessment Year 1997-98 till Assessment Year 2012-13 is as follows:
Net Profit/(Loss) Asst Year Invoice Amount (Rs 5,468,073) 1997 - 98 Rs 4.76 crores (Rs18,68,609) 1998 - 99 Rs 21.00 crores 1999 - 00 Rs 25.89 crores (Rs 13,85,749) Rs 94,57,652 2000 - 01 Rs 7.09 crores Rs 92,28,476 2001 - 02 Rs 28.00 crores Rs 1.35 crroes Rs 6,96,990 2002 - 03 (Rs 2,62,933) 2003 - 04 Rs 0.30 crores 2004 - 05 Rs 0.29 crores (Rs 10,59,77,983) 2005 - 06 Rs 1.00 crroes (Rs 5,68,169) 2006 - 07 Rs 0.50 crroes Rs17,48,854 2007 - 08 Nil (Rs 31,10,441) 2008 - 09 Nil (Rs 41,24,880) Nil (Rs 4,46,10,806) 2009 - 10 (Rs 3,70,14,271) 2010 - 11 Nil 2011 - 12 Nil (Rs 1,88,80,159) 2012 – 13 Nil (Rs 1,33,42,201)
In all the AYs identical claim for allowing loss in identical circumstances, has been allowed. We are of the view that following the rule of consistency, the claim of the assessee was rightly accepted by the CIT(A). We, therefore, uphold the order of the CIT(A) and dismiss the appeal of the Revenue.
As far as for Assessment Year 2013-14 is concerned, the grounds of appeal raised by the Revenue reads as follows:
The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. On the facts and circumstances of the case, the Ld. CIT (A) erred in allowing the assessee's appeal on the issue of disallowance made u/s 14A r. w. Rule 8D as the said matter has not reached finality since an SLP is pending, on the similar issue, before the Hon'ble Apex Court in the case of CIT Vs. Ballarpur Industries Ltd. 3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 4. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.
The impugned disallowance under section 14A of the Act made by the AO was deleted by the CIT(A) on the ground that the assessee did not earn any exempt income during the relevant previous year and therefore in the absence of any exempt income, no disallowance can be made under section 14A of the Act. In doing so, the CIT(A) followed the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi) wherein it was categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. The relevant observations of the judgment of the Hon’ble Delhi High Court are extracted hereunder:-
“15. Turning to the central question that arises for consideration, the court finds that the complete answer is provided by the decision of this court in CIT v. Hololcim India (P) Ltd. (decision dated 5th September 2014, in I.T. A. No. 486 of 2014). In that case, a similar question arose, viz., whether the Income-tax Appellate Tribunal was justified in deleting the disallowance under section 14A of the Act when no dividend income had been earned by the assessee in the relevant assessment year ? The court referred to the decision of this court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the Income-tax Appellate Tribunal in this very case, i.e., Cheminvest Ltd. v. CIT [2009] 317 !TR (AT) 86 (Delhi) [SB]. The court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Incl. (decision dated April 2, 2014, of the High Court of Punjab and Haryana in I. T. A. No. 970 of 2008)--since reported in [2015] 4 ITR-OL 246 (P&H)-- which in turn referred to two earlier decisions of the same court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H). The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj) ; [2015] 372 1TR 97 (Guj) and the third of the Allahabad High Court in CIT v. Shivam Motors (P) Ltd. (decision dated 5th May, 2014, in T.A. No. 88 of 1071Bang12016 2014). These three decisions reiterated the position that when an assessee had not earned any taxable income in the relevant assessment year in question "corresponding expenditure could not be worked out for disallowance."
Aggrieved by the aforesaid order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. The learned DR however placed reliance on the order of the AO and the circular of the CBDT Circular No.5/2014 dated 11-2.-2014 which clarified that section 14A would apply even when exempt income was not earned in a particular Assessment year and confirmed the action of the AO in making disallowance u/s.14A of the Act.
We are of the view that in the light of the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. (supra) the disallowance of expenditure u/s 14A of the Act deserves to be deleted. We may also add that the High Court of Delhi in the case of Prl.CIT Vs. IL & FS Energy Development Co.Ltd. (2017) 84 taxmann.com 186(Delhi) has held that CBDT Circular upon which extensive reliance is placed by revenue does not refer to rule 8D(1) at all but only refers to the word "includible" occurring in the title to rule 8D as well as the title to section 14A. The circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered. The Court held that the process of interpretation adopted by the CBDT will be a truncated reading of section 14A and rule 8D particularly when rule 8D(1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under section 5, the question of taxation of 'notional income' does not arise. For all of the aforementioned reasons, the the Court held that the CBDT Circular dated 11-5-2014 cannot override the expressed provisions of section 14A, read with rule 8D. We therefore confirm the order of CIT(A) and find no merits in this appeal by the revenue.
In the result, both the appeals are dismissed.