M/S. MULA PRAVARA ELECTRIC CO-OP. SOCIETY LTD.,,AHMEDNAGAR vs. DEPUTY SSISTANT COMMISSIONER OF INCOME-TAX,,

PER D. KARUNAKARA RAO, AM :

This is the appeal filed by Assessee against the order of CIT (Appeals)-2, Pune, dated 30.06.2016 for the A.Y.2012-13.

“1. On the facts and the circumstances of the case, the Ld. CIT(A) has erred in sustaining the assessment order passed by the AO holding that the appellant has discontinued it’s business and in the process CIT(A) has further erred in confirming the disallowance of business expenses including depreciation totaling to Rs.41,89,87,895/- debited to the P&L Account. 2. On the facts and in the circumstances of the case and in continuation with ground No.1 CIT(A) has erred in not giving the benefit of carry forward of current year business loss of Rs.41,82,75,484/-. The above grounds of appeal may kindly be allowed to be amended, altered and/or modified in the interest of natural justice.”

2 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

society engaged in the business of Distribution of Electricity-a service

provider. Assessee filed the return of income declaring loss of Rs.16.23

crores (rounded off). Subsequently, the return was revised by revising the

loss at Rs.43.04 crores (rounded off). During the scrutiny proceedings,

AO noticed that the assessee reflected the rental income of Rs.1,59,831,

scrap sales of Rs.5,29,950/- and miscellaneous receipts of Rs.22,630/-

totalling to Rs.7,12,411/-. Against this income, assessee claimed various

expenses including VRS expenditure of Rs.41.90 crores (rounded off). As

such, no income on account of the core activity of “distribution of

electricity” is reported by the assessee in the year under consideration.

3.1 Regarding the electricity distribution business, assessee was

engaged in the business for the past 20 years under the license issued by

Government of Maharashtra under the provisions of Indian Electricity

Act, 1910. The license was renewed from time to time. Eventually, the

said license granted to the assessee expired on 31-01-2011. The

Maharashtra Electricity Regulatory Commission (MERC) issued license to

the Maharashtra State Electricity Distribution Company Limited

(MSEDCL) for distribution of electricity to the specified areas. Thus, the

assessee was ordered to hand over the infrastructure and database of

clientele etc. of the assessee to MSEDCL.

3.2 On these facts, AO issued a show cause notice to the assessee

proposing to treat the assessee as closed business and resultantly, the

assessee shall not be eligible to claim the business expenditure as

allowable as well as not eligible for carry forward of business losses. AO

observed that the removal of employees of the assessee under Voluntary

Retirement Scheme (VRS) supports the AO’s decision. In response,

3 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

assessee submitted that the said development of handing over the

business to MSEDCL by MERC is a temporary phenomenon. In this

regard, assessee submitted that the facts relating to the pendency of the

appeal by the assessee before the Appellate Tribunal for Electricity which

set aside the order of the MERC No. 39/2011, dated 17-12-2011. In this

order, the Appellate Tribunal for Electricity (APTEL) directed the MERC to

consider the issuing of license to the assessee and dispose the issue on

merits. There is an indication of renewing/granting license to the

assessee as well as to MSEDCL to operate in some areas. The assessee

challenged the same before the Appellate Tribunal for Electricity (APTEL)

vide No.222 and 223/2014. In this regard, the APTEL passed an order

dated 13-03-2015 requiring the MSEDCL to pay Rs.50 crores till the final

quantum of dues is decided. Thus the assessee tried to demonstrate the

existence of business operations of the assessee and argued that the

expenditure of Rs.41.90 crores (rounded off) is incurred for business

purposes. Assessee pleaded for allowing the claim of expenditure and

also for carry forward of the current year losses.

3.3 In the assessment, AO considered the above submissions of the

assessee and concluded that there is no possibility of revival of the

business. AO held that the business of the assessee is substantially a

closed one and the assessee is only to receive the compensation or rent

from the MSEDCL for handing over of the entire infrastructure of the

assessee. Further, AO discussed certain case laws, i.e. New Seven Sugar

and Gur Refinery Co. Ltd. Vs. CIT 74 ITR 7 (SC), Madras Silk and Rayon

Mills Pvt. Ltd. Vs. ITO & Another 262 ITR 122 (Mad.), Universal Plast

Limited Vs. CIT 237 ITR 454 (SC), Guntur Merchants Cotton Press

Company Ltd. Vs. CIT 154 ITR 861 etc. and held that, how a particular

4 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

receipt of income is taxed under the “income from business” or from

“income from other sources” is specific to the facts of that case. Further,

he also discussed intention of the assessee to resume the business after

obtaining the license from the Govt. AO opined that the intention to carry

on the business is the determining factor.

3.4 Further, referring to the judgment of the Appellate Tribunal for

Electricity dated 13-03-2015, the assessee mentioned that the APTEL

directed the State Commission to evaluate the assets of the assessee and

to pay Rs. 1 crore per month towards the lease rent of the infrastructure

owned and handed over by the assessee. The fact of about granting 10%

interest per annum to compensate the outstanding amount due to

assessee was also directed by the State Tribunal. Based on these, AO

concluded that assessee is not going to resume the business of

distribution of electricity and it is only to earn rental income from the

laying of the infrastructure of MSEDCL. Referring to the Supreme Court

judgment in the case of Universal Plast Limited Vs. CIT 237 ITR 454 (SC)

and Vikram Cotton Mills Ltd. 169 ITR 597 (SC), the AO highlighted the

“intention of the assessee” to start or to stop the business and in Para

No.16 of the assessment order, the AO concluded by stating if there is no

intention to resume the business the transaction of earning rent will not

be for business purposes. Applying the same to the case of the assessee,

the AO relied heavily on the order of the Appellate Tribunal for Electricity

(APTEL) and treated the income earned by the assessee under the head

income from other sources. Contents of Para No.19 are relevant in this

regard and therefore, we proceed to extract the same here as under :

“19. In view of above, the entire income claimed under the head of rent income, income from sale of store scrap material and other misc. receipts, i.e. Rs.7,12,411/- as per Para-111 “Misc. Revenue” to the profit & Loss

5 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

Account for the year ending as on 31-03-2012 treated income under the head of “Income from other sources.”

3.5 Resultantly, considering the decision of AO on the cessation of

business of the assessee, the AO did not allow the claim of business

expenditure and allow the carry forward and set off of earlier years

brought forward losses against the income reported by the assessee in

this year. Eventually, the AO taxed the said sum of Rs.7,12,410/- as

“income from other sources”.

First Appellate Tribunal and raised various issues relating to the

discontinuation of business treating the income as income from other

sources denying the carry forward of losses etc.

during the proceedings before the CIT(A). Assessee relied on various

judgments/orders passed by MERC, APTEL, Hon’ble Supreme Court to

demonstrate the intention to continue the business. Further, assessee

relied on various judgments in its favour and contended that his case is

not the case of discontinuation of business and it is merely a temporary

phenomenon. Assessee would resume the business soon after the license

is renewed. Therefore, assessee requested for reversing the order of the

AO. He also submitted the facts relating to the pending judicial

proceedings before the Hon’ble Supreme Court and also relied in the

interim order of the Hon’ble Supreme Court dated 11-05-2016. Infact, the

Hon’ble Supreme Court upheld the order of the APTEL dated 06-05-2016

and on the compensation issue, the Hon’ble Supreme Court gave a

direction to State Commission to release Rs.64 crores from MSEDCL to

the assessee and also directed for considering the infrastructural assets of

6 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

the company as security against the same. The Hon’ble Supreme Court

also directed the assessee to furnish the undertaking that, incase, the

assessee is entitled to said amount as per the final order it will refund the

said amount with interest. Based on these, assessee submitted that the

assessee stand a chance of winning on the core issues and for this,

assessee rely on the courts observation about the assets and the

possibility of winning is not ruled out. The decisions relied upon by the

assessee are enlisted in pages 9 to 11 of the order of CIT(A). In para No.5

of his order, the CIT(A) extracted the contents of Para Nos. 4 to 17 of the

AO’s order and gave his conclusion against the assessee as per the

discussion given in Para No.5.2 of the order of CIT(A). The contents of the

same as extracted here as under :

“5.2.1 I have examined the facts of the case on this issue. It is seen that the appellant society was having distribution license till 31st January 2011. Thereafter the regulatory authority, i.e. MERC called for expression of interest from prospective applicants and after considering the applications filed, the distribution license was finally issued in favour of Maharashtra State Electricity Distribution Company Ltd. (MSEDCL). The relevant operative part of the order of MERC dated 27-01-2011 reads as under :

“xiv. Accordingly the MPECS is required to vest the undertaking of distribution to the new licensee.

xv. Over the period of 40 years, MPECS has expanded the distribution network, it inherited from erstwhile MSECS. Now, as fresh Distribution License to MPECS is rejected by the Commission, there is no use of distribution network for MPECS. Therefore, in the interest of the consumers in MPECS area, the Commission directs MPECS, to hand over their complete distribution network and allied equipments and asset to MSEDCL, MPECS will however be entitled to claim value for the assets handed over. MPECS may file a separate petition before the Commission for deciding transfer value of their asset, with all relevant documentary evidence.

xvi. Also, MPECS is directed to handover all the consumer and billing database in hard as well as soft format to MSEDCL. The Commission also directs MPECS to hand over the scrutiny deposits paid by the consumers to MSEDCL, along with records, and not to create any third party interest on the security deposit held by them.

xvii. Keeping in view the larger interest of all consumers in this Area, consisting of 183 villages in five talukas, the Commission directs the Directors, the Management and Officers of the MPECS to provide all help and assistance to the Management and Officers of

7 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

MSEDCL, to ensure a smooth transition from the existing “Service Provider” (MPECS) to a “New Service Provider” (MSEDCL) with effect from Ist February, 2011.”

5.2.1 On a perusal of the aforesaid order issued by MERC, it is very clear that after detailed examination of various proposals received, MERC issued the license to MSEDCL and the appellant was directed to hand over the entire infrastructure of electricity distribution, power system including electrical system, substations, overhead lines, service lines, offices and associate facilities like land, buildings, materials, stores and plants in the areas of it’s operation w.e.f. 01-02-2011. Not only that, the appellant was also directed to handover the consumer and billing database including security deposits paid by the customers to MSEDCL.

5.2.2 In view of the above facts, it was rightly held by the Assessing Officer that for all purposes business of electricity distribution of the appellant society was discontinued and closed w.e.f. 01-02-2011. No such activity could be started even up to the current year and there was no possibility of restarting the business. All the decisions on the appellants appeal till date are against the appellant. This point is further cemented by the fact that almost all employees of the appellant society were granted VRS. I am therefore in agreement with the view of the Assessing Officer that the business activity of the appellant has discontinued and therefore claim of allowing any business expenses or depreciation does not arise at all.

5.2.3 The reliance placed by the appellant on various decisions are distinguishable on facts. In the case relied upon on I.C.D.S. Ltd. Vs. CIT, the fact was entirely different as in that case the assessee was engaged in the business of hire purchase and leasing and High Court held that the assessee was entitled to claim depreciation on the leased vehicles. No such fact is there in the present case.

5.2.4 The appellant has also placed reliance on the case of CIT Vs. Vellore Electric Corporation. In this case, the appellant had claimed establishment, salary and other expenses which was disallowed by the Assessing Officer and in view of the appeal filed by the assessee it was held by the Hon’ble Court that these expenses were allowable. However facts are little different in the present case as because in the present case the appellant was directed to handover all assets including database and security deposits of the customers to new licensee, i.e. MSEDCL. Not only that in the present case, the appellant society itself has given VRS to almost all of its employees. Such facts were not present in the cited case.

5.2.5 The appellant has also placed reliance on the case of K.N.P. Securities, ITAT, Mumbai. The facts are again distinguishable and in the cited case SEBI had cancelled the registration of the assessee for being involved in shares scam. However in the present case no such fact is there and in fact the entire business asset and all related establishments and databases were transferred to new licensee. No such fact is there in the cited case.

5.2.6. I accordingly uphold the action of the Assessing Officer in holding that the business of electricity distribution of the appellant society has been closed and therefore it is not entitled for any claim of business expenses and depreciation. Ground of appeal No.1 is accordingly dismissed.”

8 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

From the above, it is evident that the CIT(A) relied heavily on the

order of the APTEL and MERC for considering the assessee as a

discontinued entity. CIT(A) also relied on certain decisions for deciding

the issue against the assessee. Handing over of the assets of the society,

retrenchment of the employees of the society, handing over of databases

etc., are other supporting reasons.

the CIT(A) held that the same is taxable as “income from house property”

and not under the head “income from other sources” as held by the AO.

Accordingly, the CIT(A) allowed this issue in favour of the assessee. Other

receipts such as scrap scales/misc. receipts are treated as “income from

other sources:. In the result, the CIT(A) partly allowed the appeal of the

assessee.

with the grounds extracted above.

BEFORE THE TRIBUNAL

aforementioned facts of the case/issue and filed the paper books giving

the various orders of the MERC, APTEL, interim orders of the Hon’ble

Supreme Court, the proceeding of the committees of State Govt. etc. He

also filed the compendium of Judgments to establish the law on the issue

of intention of the assessee, continuation of business, related issues of

allowability of expenses and set off of carry forward of losses etc. After all

these things, Ld. Counsel listed the issues for adjudication and the same

are (A) Whether the business stands discontinued – the intention of the

assessee vide the judgment of Hon’ble Supreme Court in the assessee’s

9 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

own case; (B) Whether the Expenses debited to Profit and Loss Account

constitute business expenditure eligible for claim of deduction u/s.37 of

the Act; and (C)Whether the assessee is eligible to carry forward of the

losses after set off against the current years business income as claimed

by the assessee.

We shall deal with each of these 3 issues separately in the

succeeding paragraphs of the order.

(A) Whether the business of assessee stands discontinued – the intention of the assessee vide the judgment of Hon’ble Supreme Court in the assessee’s own case

a thick paper book as well as chart of major developments pertaining to

the business of the assessee. The said chart contains the chronology of

events and brief narration of the issues. For the sake of completeness,

the said chart is extracted here as follows :

CHART SHOWING VARIOUS EFFORTS UNDERTAKEN FOR RENEWAL OF LICENSE/BUSINESS - INTENTION

Sr.No. Date Event Remark 1 28-01-1971 License for carrying on the business of See page 7 to 15 of electricity granted by Government of paper book Maharashtra. Electricity to be provided in the area of 167 villages of 4 talukas namely Rahuri, Shrirampur, Newasa and Sangamner. The validity of the license is of 20 years, i.e. expiring on 31-01-1991 2 02-05-2000 Renewal of license by Notification dated See page No.17 & 02-05-2000 upto 31-01-2011 18 of paper book 3 27-01-2004 MERC by its letter dated 27-01-04 required Secretary (Energy) Industries, Energy and Labour Department to submit its views on the findings and recommendations relating to the viability of the appellant 4 24-08-2004 GOM by its GR dated 24-08-2004 directed See Page No.168 & MERC to allow the appellant to continue 169 of paper book its operation as distribution license and for that purpose providing revenue subsidy of Rs.72 crores and capital subsidy Rs.4 crore per annum

10 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

5 13-07-2010 Administrative Staff College of India See Page No.579 to furnished the report recommending for 587 of this synopsis getting its license renewed 6 28-07-2010 Maharashtra Electricity Regulatory See Page No.19 to Commission (MERC) invited “Expression 35 of paper book of Interest” for granting the license for the period after the expiry of license on 31-01- 2011 by publishing notice to that effect in newspaper. Appellant and other filed applications in response to invitation by MERC of Expression of Interest. Applicant filed application on 28-07-2010 for renewal. Of these 6 applicants there remained only 2 applicants namely appellant and Maharashtra State Electricity Distribution Ltd. (MSEDCL) 7 27-01-2011 MERC on examining the applications filed See Page No.42 to by MSEDCL and appellant granted 53 of paper book. license to MSEDCL and refused the In para 24 of this renewal of license to appellant vide its order MERC has order in Case No.85 and 87 dated 27-01- given the reasons 2011 for not granting the renewal of license to the appellant 8 16-12-2011 The Appellate Tribunal for Electricity See Page No.61 to (APTEL) on an appeal filed by the 124 of paper book. appellant by its Case No.39 of 2011 set Particularly 117 to aside the order of MERC with the 124 of paper book direction to reconsider the application for renewal of license and considering the feasibility of granting license to both MSEDCL and appellant to provide the electricity in the said area. The Tribunal in this order clearly held that :

i. License already to appellant is neither suspended nor revoked. ii. MERC has no power to direct the transfer of assets unless its existing license is suspended/revoked. iii. It cannot direct the appellant to vest all its assets in MSEDCL. iv. Since no proper opportunity was given directed MERC to reconsider the application of the appellant 9 15-10-2012 MERC in interim order dated 15-10-2012 See Page No. of directed MSEDCL to pay the user charges paper book of Rs. 1 crore per month for using the infrastructure etc of the appellant as temporary arrangement 10 28-02-2014 Supreme Court order the appellant to hold See Page No.182 & the election 183 of paper book 11 18-06-2014 MERC gave effect to the above order of See Page No.125 to APTEL by its order dated 18-06-2014. In 161 of paper book this order MERC has neither refused renewal of license nor revocated or suspended. It however directed the appellant to file fresh application

11 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

12 31-07-2014 Appellant filed appeal No.222 and 223 See Page No.163 & against the MERC order dated 18-06- 164 of paper book 2014 reiterating that it only should be and page No.296 to granted the license and to hold that 578 of the synopsis. MSEDCL is not distribution license Particularly Page No.431

13 30-09-2015/ Resolutions passed by the appellant in See Page No.588 to 16-08-2016/ order to pursue the Government to grant 590 of synopsis 25-09-2016 the renewal of license 14 01-03-2016 GOM vide its order dated 01-03-2016 as See Page No.172 & per its resolution dated 07-11-12 173 of paper book. appointed the committee to recommend This committee has the reality of the demand of the appellant not yet given the by its letter dated 01-03-2016 report 15 11-05-2016 Order of Supreme Court directing See Page No.626 to appellant to give undertaking to refund 628 of paper book the user charges paid by MSEDCL with interest on sorting out issue of granting the license if it goes against the appellant 16 13-05-2016 Undertaking given by appellant as per the See Page No.605 to order of Supreme Court 606 of paper book 17 04-01-2018 Business Plan obtained from World See Page No.599 to Institute of Sustainable Energy (WESE) 603 of paper book Pune

Summary of Chart : From the above chronology of events, Ld. Counsel for

the assessee submitted that the assessee is licensed to be a service

provider qua the distribution of electricity to 183 villages spread over in

Five Mandals of the State of Maharashtra. Assessee is engaged in this

business activity since 1971. Referring to the above chart of chronology

of events, Ld. Counsel for the assessee labored extensively to demonstrate

that the assessee has always been for continuation of the business.

Assessee had to struggle at the time of first renewal in 2000 till the

license was renewed on 02-05-2005, doing the business for another

period of 20 years. Eventually, the license was renewed. Presently, for

renewal, only the assessee has been litigating before MERC, APTEL and

Hon’ble Supreme Court against the decision of not renewing of license,

not awarding of compensation in lieu of use of the assets of the company

by the MSEDCL etc. Assessee spent huge amount of time and money in

this endeavour and it is all for the purposes of the continuation of

12 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

business. Having considered the factual matrix and the various steps

taken up by the assessee for continuation of business/renewal of license,

we shall now proceed to examine the “intention” of assessee for

continuation of business in the following paragraphs.

Electricity Distribution – Case of the assessee : Before us, on this

issue, Ld. Counsel for the assessee filed a written submission explaining

the facts and the issues and submitted various arguments enlisted from A

to O of the written submissions. The same are extracted as under :

“A The AO. as well as the Ld. CIT(A) placed their heavy reliance. i. Order of MERC in Case No.85 & 87 of 2010 dated 27/01/2011 ii. The Assessee society has given VRS 1522 employees.

B. The reliance placed on Order dated 27/01/2011 of MERC by the both the Authorities is misplaced as said order is nonest as the same has been set aside by the Appellate Tribunal for electricity, Delhi (APTE) allowing the Appeal filed by the Assessee being Appeal No.13 of 2011 order dated 16/12/2011 (Page No._ Paperbook).

- Hon'ble APTE, Delhi held that impugned order of MERC dated 27/01/2011 is set aside. - MERC's direction for handing over assets to the MSEDCL is not in accordance with law. Matter was set aside to MERC for fresh adjudication and also to - consider granting of licence to the Assessee with MSEDCL. (Page No._ Paperbook).

C. In respect of determination of interim compensation/user charges directed MSEDCL to pay Rs.1 Crore per month (Case no.24 of 2012 Order dated 15th October, 2012).

D. MERC did not finalise the compensation/charges payable by MSEDCL for the use of assets and infrastructure of the Assessee and disposed of Case No.24 of 2012.

E. MSEDCL refused to pay ad interim user charges/compensation as directed by MERC on adhoc basis.

F. Assessee challenged order passed by MERC dated 15th October, 2012 on the issue of payment of ad interim compensation/user charges by filing appeal in the APTE, New Delhi. The APTE directed MSEDCL vide order dated 13th March, 2015 to pay Rs.1 crore per month as per interim

13 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

order dated 15/10/2012 in Case No.24 of 2012 by MERC. APTEL also directed MERC to do valuation of the assets of the assessee through independent agency and determine user charges/compensation.

G. MSEDCL challenged the order of the APTE dated 13th March, 2015 in the Hon’ble Supreme Court, i.e. Civil Appeal No.6079 of 2015. Hon’ble Supreme Court dismissed appeal of the MSEDCL vide order dated 17/09/2015 and directed MSEDCL to deposit user charges in the MERC, Mumbai. The Hon’ble Supreme Court also directed MERC to make investment in bank Fixed Deposits and disbursement of deposit shall be subject to final outcome of the dispute (Page No._ paper book S.C. order)

H. MERC disposed of the interim application of the Assessee vide order dated 02/05/2016 on the issue of payment of the interim user charges/compensation.

I. MERC also disposed of the application of the Assessee being Case No.87 of 2010 by declining to grant license and directed the Assessee to file fresh application vide order dated 18-06-2014. Assessee challenged the order of the MERC, Mumbai in Hon’ble APTE, New Delhi which is registered as Appeal No.223 of 2014 which is presently pending hearing and final adjudication on the issue of grant of license to the Assessee society. The assessee society is fighting its case for renewal and grant of license under Electricity Act, 2003. The matter has not reached the finality. The orders of Hon'ble APTE, Delhi challenged by MSEDCL before the Hon'ble Supreme Court were on the issue of payment of interim compensation/user charges. As on today MSEDCL challenged all the order passed by Hon'ble APTE, Delhi.

J. The Assessee submit that the orders of the MERC and APTE on the payment of interim compensation/ user charges reached the Hon'ble Apex Court and as per the order of the Apex Court dated 11/05/2016 it is clarified that Assessee should file undertaking in case it is not entitled to the amount of interim compensation/user charge, the shall be refunded to MSEDCL.

K. The reliance placed by the Assessing Officer as well as Ld. CIT(A) on the following decision is totally misplaced, as the facts are totally different.

a. In case of Savan Sugar and Gur Refinery Company Ltd. (Supra) - In this case the said Assessee lease out its building, machinery and plant for initial period of five years with option to renew the list. Assessee had option to terminate lease after first two years. On interpretation of the terms of the lease deed it was held that intention of said Assessee was to go out of business.

b. In case of Madras Silk & Rayon Mills (P) Ltd. (Supra) - Company was running into losses and sold most of his machineries without carrying on any manufacturing activity and lease out its premises. In backdrops of those facts it was held that lease rent cannot be treated as a business income.

c. In case of Universal Plast Ltd. (Supra) - The Apex Court laid down following important guidelines.

14 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

would fall under the head 'Profits and Gains of business or profession';

L. The Assessee also placed reliance on the decision of the Hon'ble Apex Court in the case of Universal Plast Ltd. (Supra). In fact the taste laid down in said decision support the contention of the Assessee that intention of the Assessee is not to go out of business but Assessee is fighting legal battle for restoration of it's licence to resume its business.

M. In the case of CIT Vs. Vellore Electric Corporation Ltd. - 243 ITR 529 (MAD). Said Assessee was private electric company. Its undertaking vested with the State Government due to enactment of the Tamil Nadu Electricity Supply Undertaking (Acquisition) Act, 1973. Said Assessee challenged validity of that Act in the Supreme Court. The Assessee claimed expenditure on salary paid to employees and other expenses. Hon'ble High Court confirmed the order of the Tribunal holding that it cannot be said that there was a permanent closure of Assessee's business as validity of the Act was pending in Supreme Court and said company was maintaining establishment was indication of its intention to resume business.

N. It is submitted that in the AGM by the members of Assessee's Society it was resolved to fight for grant of licence. Copy of AGM Resolution No. 17(5) dated 30/09/2015 and Resolution No.17(5) dated 25/05/2016 are filed in the Paperbook. The Assessee also approached to the World Institution for Sustainable Energy and Sought the Business Plan (copy submitted). The Assessee is also pursuing the issue of restoration of licence with the Govt. of Maharashtra. It is submitted that the fact and evidences support the case of the Assessee that it has intention to restart business once license is restore.

O. The issue of VRS given to the employees cannot be taken as a ground by the Assessing Officer as well as Ld. CIT(A) to come to erroneous conclusion that Assessee has closed down it's business permanently. The Industrial Dispute Act, 1947 gives right to the employer to retrench his employees/workmen Sec.25(F) of the I.D. Act, 1947, if employees are surplus and employer unable to give work to his employees. Till today minimum required employees/staff are with the Assessee looking after day to day matters and also pursuing Court cases. Hence, it is submitted that claim of expenses, brought forward losses and the depreciation cannot be denied to the Assessee and the

15 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

same may be allowed under the head Profit and gains, business or profession i.e. as business loss.”

Thus, as per the Ld. Counsel for the assessee, the case of the AO is

that, with the removal of 1522 employees through the VRS and also when

the MERC ordered for non-renewal of license, the business of the assessee

should be considered discontinued. In this regard, the intention of

assessee is not a relevant factor. Consequently, the claim of expenditure

is not an allowable one and the loss computed for this year under

consideration is not allowable to be set off against the business income

earned by the assessee in the year under consideration and also not

allowable for the carry forward benefits u/s.70 to 71 of the Act.

10.1 In reply, Ld. Counsel commented the above conclusion of the AO is

factually erroneous. The fact is that the order of MERC stands set-aside

by the APTEL in appeal proceedings. APTEL directed for fresh

consideration of the assessee’s claim. The MSEDCL, who is now given the

job of power distribution to the said villages, also did not comply with said

order of the MERC in matters of payment for use of the

assets/infrastructure of the assessee. In the interim order, the assessee

was to receive Rs.1 crore per month as per the order of the APTEL.

Against the said order, MSEDCL approached the Apex Court and its

attempt for non-payment of fee to assessee did not fructify. Hon’ble Apex

Court confirmed the direction of APTEL and detailed the available

safeguard for the MSEDCL for recovery of the fee paid to the assessee in

case the assessee requests for license is eventually allowed. As per the

assessee, such a direction or the observation of the Hon’ble Supreme

Court is taken as hope to assessee in matters of the core issue of renewal

of license.

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10.2 As on date, the MERC is still ceased up with the issue of granting or

renewal of license to the assessee vide the Appeal No.223 of 2014.

Assessee also distinguished series of judgments relied upon by the AO

vide the discussion in Para “K” vide Para 10 above. In Para “L & M”

above, Ld. Counsel highlighted the test relating to “intention” of the

assessee vide the Apex Court’s judgment in the case of Universal Plast

(supra).

10.3 Further, Ld. Counsel rely on another judgment of Hon’ble Supreme

Court in the case of M/s. Vellore Electric Corporation Ltd. (supra) and

submitted, like the assessee’s case, the company was taken over Govt.of

Tamilnadu, employees were removed and expenses was incurred on

salaries etc.. In the context of disallowing of the claim of business

expenditure u/s.37 of the Act, Hon’ble Supreme Court highlighted the

“intention” of the assessee to stay in the business and decided the issue

in favour of the assessee.

10.4 Further, Ld. Counsel rely on the resolution No. 17(5) & 17(5) dated

25-05-2016 and 30-09-2015 of AGM of assessee for continuation of legal

fight for renewal of license.

the following judgments/decisions in favour of his claims of existence of

deep intention for continuation of its business, allowability business

expenses, set off and carry forward of losses. They are (1) Supreme Court

judgments in the case of Universal Plast Limited Vs. CIT 237 ITR 454

(SC); (2) Vikram Cotton Mills Ltd. 169 ITR 597 (SC); (3) CIT v. Lahore

Electric Supply Company Limited. 60 ITR 1; (4) CIT Vs. Vellore Electric

17 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

Corporation Ltd. 243 ITR 529; and (5) CIT Vs. Shri Lakshmi Silk Mills

Limited 20 ITR 451

demand for renewal of license is a futile exercise as the Govt. of

Maharashtra already allowed/employed licensed MSEDCL for providing

distribution of power to specified villages by the State Govt. of

Maharashtra. Further, it is undisputed fact that the assessee granted

VRS of 1552 employees and claims expenses of Rs.36.03 crores on this

account. Assessee has not rendered any service of providing business

activities during the year. Further, Ld. DR submitted that the assessee

did not report any business income out of power distribution during the

year. No sales, no receipt of service charges out of core activities of

electricity distribution etc. was reported. Infact, assessee has no license

to do such business till date despite the long legal proceedings initiated by

the assessee before the MERC/APTEL, Hon’ble Supreme Court etc.

Therefore, assessee stands no possibility of revival of its business. AO

concluded that it is a case of cessation of business once and for all and

hence, it stands closed. As per Ld. DR, assessee is only to receive the rent

or compensation subject to the conditions specified in the judgment of

Hon’ble Supreme Court. Further, Ld. DR for the Revenue relied heavily

on the orders of the AO and the CIT(A).

intention aspect, Ld. DR submitted that the assessee failed to prove the

intention of the assessee in matters of continuation of the business. He

also reiterated the fact that even after 7 years of litigation there is nothing

concrete materialized in favour of the assessee so far as granting of

license is concerned. Therefore, Ld. DR submitted for confirming the

18 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

orders if the CIT(A)/AO is without any modification on all the three issues,

i.e. (i) continuation of business intention; (ii) set off of expenses against

the business income; (iii) brought or/and carry forward of business or

brought forward losses to future assessment years for set off against

income of subsequent assessment years.

TRIBUNAL DECISION

adjudication of three issues, i.e. (i) the continuation of business or

intention for continuing business; (ii) the set off of current year expenses

against the income of the year; and (iii) brought or carry forward of losses

to subsequent assessment years. Further, we have also recorded the

various arguments of Ld. Counsel as well as Ld. DR exhaustively. We

have extracted the written submissions of the assessee wherever

necessary and recorded various decisions/judgments cited by the Ld.

Counsels. On completion of the same, we shall now proceed to adjudicate

each of the triple issues in the succeeding paragraphs of the order.

A. Discontinuation of Business – Intention vide Ground No.1 :

Hon’ble Supreme Court held in the case of M/s. Lahore Electric Supply

Company Ltd. (supra) that the “intention” of the assessee decides the

issue of continuation or otherwise of the business of the assessee. On

hearing both the sides on the issue of “intention to continue the business”

or discontinue the same, briefly, we find the case of the AO is that the

business stands closed in view of the non-renewal of the license by MERC

to distribute the electricity to the said areas. Further, with the removal of

1522 employees, there is no possibility of grant of renewal of license.

Therefore, conducting of any business of power distribution does not

19 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

arise. Further, earning of rental income or compensation income from

MSEDCL in accordance with the directions of the Hon’ble Supreme Court,

APTEL etc., is the only source of income and the same cannot be held as

business income of the assessee. Revenue also rely on various decisions

as discussed in the preceding paragraphs of this order. When the

business is substantially closed, making claims of deduction of

expenditure on account of VRS and others, is not sustainable.

Consequently, the claim of set off of the expenditure against the income

earned by the assessee during the year and the carry forward of the

balance of expenditure/losses to the future years is not sustainable.

Per Contra, the case of the assessee, in brief, is that the business

is never closed despite the non-renewal of the license for power

distribution in those 183 villages of 5 Talukas. No authority/legal bodies

have ever cancelled the license for doing the business by the assessee. It

is merely a case of non-renewal of license and the same is distinct from

non cancellation of license. The “cancellation of license” is different from

“non-renewal of license”. Assessee has been earning income by exploiting

the business assets of the assessee since the year 2011, the year of non-

renewal of license. Assessee has been showing the same in the returns

filed regularly since the A.Y. 2012-13 onwards. The fact that assessee

reported earning of such income either on account of compensation or on

account of “sale of scrap” and others and it demonstrate the spirit of

continuation of business. Further, the fact that assessee has been

sincerely knocking the doors of every institution, i.e. Hon’ble Supreme

Court, MERC or APTEL etc demonstrates that the assessee’s bonafide

desire for continuation of the business should be beyond any doubt. As

per Ld. Counsel, the assessee never surrendered the right to conduct the

20 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

business of power distribution in any form before any authority/judicial

body. No authority has every ordered for closure of the business.

Assessee still owns the business assets such as land, office building,

distribution network, database, of the customers, goodwill with electricity

consumers etc. and he has no intention to sell the same. Hence, this is

merely the case of non-renewal of license. Elaborating the business

assets of the assessee, Ld. Counsel submitted that the assessee built up

huge infrastructure over the past 50 years in those villages as notified by

the Government.

The assets of the company are never for sale. The assessee has

been incessantly knocking the doors of Hon’ble Supreme Court, Tribunal,

MERC etc. for grant of renewal of license. The business assets are being

used by MSEDCL against the payment of fee and this arrangement is

approved by the Hon’ble Supreme Court. Assessee removed 1522

employees pending the order on renewal of license. These are some of the

issues, which need to be analysed when it comes to the assessee’s

intention to continue the business. The same are elaborately discussed

and adjudicated in the following paragraphs.

14.1 Infrastructure – Not for sale : Coming to the infrastructure of the

assessee, the case of the assessee is that assessee owns crores worth of

infrastructure by way of land, building, transmission network, power

connections, customer database etc. He relies on the books of account in

this regard. The assessee never sold the said infrastructure for any

consideration in any form. This decision/resolutions of the assessee-

society for fighting for renewal of license indicates the assessee’s earnest

desire to continue the business and he is hopeful that, one day, the order

of renewal of license by the State Government for Power Distribution will

21 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

be issued in one form or other, i.e. stand-alone basis or in continuation of

MSEDCL. The same is left to the discretion of the Government. In this

regard, relying on judgment of Hon’ble Supreme Court (supra) and the

order of the APTEL (supra), assessee asserted the possibility of resuming

business in those villages on a standalone basis or in association with the

MSEDCL as joint service providers. Therefore, we have to hold that

assessee never gave up the demand for renewal of license implying the

intention to not to exit the business of power distribution.

14.2 Possibility of Renewal of License (ROL) : Mentioning about the

possibility of renewal of license, the case of the assessee is that the

possibility of granting license to assessee as well as MSEDCL in the same

locations was already communicated by judicial bodies as discussed in

the preceding paragraphs of this order. In this regard, assessee relying on

the Hon’ble Supreme Court’s judgment which ordered for filing an

‘affidavit’ for the refund of amount of compensation by the assessee to the

MSEDCL as and when the decision of MERC/APTEL/Hon’ble Supreme

Court on the core issue of renewal of license goes in various of the

assessee. Assessee also relies on the order of the APTEL in this regard.

Assessee indicates the chance of renewal of license. In these

circumstances, AO’s finding that the business is substantially closed or

closed and no possibility of renewal of license, are not held on sound

footing. The very fact that the APTEL has referred the matter back to the

MERC for reconsideration and the MERC’s direction to file a fresh

application by the assessee for grant of renewal of license also indicates

the possibility of renewal of license. It is a matter for the future and the

finality of the judicial bodies. We have nothing to comment on this as the

matter is sub-judice before the other institutions.

22 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

14.3 Assessee earns income by way of Fee : Highlighting the fact that

assessee earns fee/income of Rs.1 crore per month from MSEDCL of the

State Government consequent to the Hon’ble Supreme Court’s judgment

read with order of the APTEL in the assessee’s own case (supra), assessee

claims that he did not close or discontinue the business as held by the AO

erroneously. This decision of CIT(A) was confirmed unfairly without

appreciating the facts. The fact is that assessee earns income from

MSEDCL on take over of the assets/database etc. consequent to the order

of the APTEL and then confirmed by the judgment of Hon’ble Supreme

Court and the same constitutes business income and it evidences the fact

of continuation of business. In this regard, assessee submits that assets

of assessee are not for sale or lease to MSEDCL and assessee would never

have to hand over the assets/infrastructure but for the judgment of the

Hon’ble Supreme Court or APTEL or MERC. Thus, the assessee is

determined to fight out for renewal of license till the end and intend is to

resume the business. Reporting of business income in the return of

income of the year is undisputed. Therefore, in our opinion, the assessee

cannot be said to have no intention to continue the business. Thus, we

agree with the same and order accordingly.

14.4 Intention – Litigation : Further, detailing the extent of litigation

undertaken by the assessee for renewal of license, the case of the

assessee is that the ongoing litigation for the grant of license ever since

2011 till 2018 should demonstrate the assessee’s strong intention to

continue the business in this line. Assessee also takes a cue from the

development from the renewal after 2000, and mentioned that the process

of renewal of license by the MERC was never a smooth affair. The

assessee had to wait for nearly a decade during the first renewal of license

23 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

vide Notification dated 02-05-2000 (Sl.No.2 of the chronology of events

chart). In our view, it cannot be concluded that the assessee does not

have the intention to continue the business. We order accordingly.

14.5 Legal Scope on discontinuation of business – Assessee’s

intention: After considering the case of the assessee and the Revenue on

the issue of intention Vs. discontinuation of business, we have perused

the said decisions relied on by both the parties.

a. In the case of CIT Vs. Vikram Cotton Mills Ltd. the Hon’ble Supreme

Court held that where an assessee leases its assets and the intention of

the assessee is not to discontinue the business but to lease out the assets

for a temporary period as a part of their exploitation, the lease rent

derived from letting out the assets is assessable as business income

and not as income from other sources.

b. In the case of CIT Vs. National Mills Co. Ltd. the Hon’ble Supreme

Court held that company under liquidation having leased its plant and

machinery, it could not be said that business of company ceased in

the face of clear findings of Tribunal and income from leasing could be set

off against past losses.

c. In the case of CIT Vs. Shri Lakshmi Silk Mills Ltd., the Hon’ble

Supreme Court that where a manufacturer, being unable to use his plant

gainfully, lets it out temporarily for making profits for that business, the

plant so let out does not cease to be a commercial asset of the

manufacturer and the income earned by letting it out is chargeable as

business income under sec.10 of 1922 Act.

d. In the Case of CIT Vs. Vellore Electric Corporation Ltd., the Hon’ble

Madras High Court held that there was no discontinuation of assessee’s

24 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

business while it was challenging the acquisition of its undertaking by

State Government and the matter was pending in the court; all the

expenses incurred by assessee in running the establishment during that

period are allowable as deduction.

e. In the case of L.Ve. Vairavan Chettiar Vs. CIT, the Hon’ble Madras

High Court held that if a person carries on two or more distinct

businesses, the profits or losses of all of them ought to be added together

and the aggregate sum would represent his profits or gains in the

business.

f. In the case of CIT Vs. Lahore Electric Supply Co. Ltd., the Hon’ble

Supreme Court observed as under (HELD PORTION) :

“None of the above grounds led to the conclusion that the company intended to canyon business. The mere fact that the company had not gone into liquidation would not establish that it had the intention to do business. There was further no question of the company's going into liquidation in the accounting years, for, during that time it had not received from the Government the entire amount due to it as compensation for the said acquisition. At the relevant time the company was not possessed of any commercial undertaking. It was unnecessary to go into the question whether an expression of an intention to resume business in vacuo would amount to carrying on business. It was sufficient for the purpose of this case to state that even an intention to resume business had not been established. Therefore, the business was closed and the company had not established an intention to resume it. That would be enough to show that no business was carried on and it would be irrelevant to enquire whether the business was permanently closed. The facts that the company had to pay the Government half share of the profits between 27-11-1942, and 5-9-1946 and that it had to return to the consumers the deposits made by them would not indicate that it was carrying on a business. It would be laying down strange law to hold that where a business had in fact ceased to be run, it must be deemed as continuing because the outstanding liabilities of that business had not been liquidated. Business as contemplated by section 10 is an activity capable of producing a profit which can be taxed. Payment of outstanding liabilities was not an activity which could ever produce such a result. It could not be said, therefore, that because liabilities of a closed business were outstanding, it had to be held that either the business was continuing or that an intention to resume business must be inferred. Hence, the

25 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

company had ceased to carry on business, and the Tribunal's conclusion to the contrary was incorrect.”

These ratios of various decisions/judgments support the case of the

assessee and the claims need to be allowed in favour of the assessee. We

order accordingly.

14.6 Removal of 1522 employees – Not a litmus Test : Coming to the

AO’s reservation on the decision of the assessee is giving VRS to 1522

employees, we find it a prudent commercial decision and the same cannot

be interpreted against the assessee as lack of intention. In our view,

saying bye to these employees cannot be equated with the decision of no

sale of capital assets like land/building/distribution network, database

etc. Recruitment of employees is not a significant and decisive event to

decide the termination of business. In this regard, Ld. Counsel submitted

that the moment, the assessee gets the order on renewal of license, the

assessee shall recruit the employees as required for the business. We find

merit in the same. Therefore, we dismiss this aspect of objection from

Revenue side. We order accordingly.

14.7 Further, on the other objection of the AO on the orders of

MERC/APTEL about their closure order, we find the same are

unsustainable in view of subsequent developments till 2016 on the

decision of MERC and APTEL. Therefore, we dismiss the same too.

Summary : Therefore, to sum up, 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 judgment in the case of Lahore Electric Supply

Co. Ltd. (supra) is relied. In this regard, we considered the undisputed

26 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

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 Rs.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. Unlike in

the case of Lahore Supply Co. Ltd.(supra) where mere clearing of

outstanding liabilities is only defense from ‘Revenue’ in support of

intention for continuation of business activity, the case on hand and its

facts distinguishes the facts of other case. Further, we find the judgment

in the case of Vellore Electric Corporation Ltd. (supra) is very close to the

facts of the present one under consideration so long as the takeover

decision of the Court is concerned. But the basis of actions of the present

assessee keeps the assessee on a different pedestal. Therefore, the

business of the assessee cannot be held to be a discontinued one. All the

administrative expenses have to be allowable as business expenditure.

27 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

Therefore, we find it difficult to conclude that the assessee does not have

any intention to continue the business of power distribution. Accordingly,

the Ground No.1 raised by the assessee is allowed.

(B) Whether the Expenses debited to Profit and Loss Account constitute business expenditure eligible for claim of deduction u/s.37 of the Act

main expenditure incurred by the assessee relates to claim of Rs.41.90

crores. Ground No.2 relates to denial of benefit of carry forward of the

current year business losses and set off of the assessee and determination

of proper head of income for taxing the returned income of Rs.7,21,411/-

are the issues connected to the Ground No.2. During the assessment

proceedings, AO noted that the assessee claimed huge expenditure

amounting to Rs.41.90 crores. More than 1522 employees availed VRS of

the assessee which demanded incurring of the above expenditure. In the

return of income, assessee did not claim the same as an allowable

expenses considering the specific income tax provisions meant for claim of

VRS expenses. These are the expenses incurred on employees, in view of

commercial expediency and the prudent business decision.

submitted that the genuineness and correctness of the expenditure on

this account was never verified by the authorities below due to their

decision on the aspects of cessation of business. The claim of the

assessee was passively denied conjoint with the adverse decision on

continuation of business. In this regard, Ld. Counsel for the assessee

filed the paper book giving the details of the expenditure (pages 4 to 9 of

the paper book) and explained the business exigency in incurring of the

expenses. Referring to page 1 of the paper book, Ld. Counsel for the

28 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

assessee furnishing of the breakup of the expenditure for

Rs.36,71,81,348/-. The salary of employees with the figure of

Rs.36,03,23,569/- is a major expenditure. Rs.15 lakhs was paid as

Gratuity to the employees. Other major expenditure includes Audit Fees

at Rs.13,69,000/- and Administrative Expenses at Rs.16,51,547/-. Ld.

Counsel submitted that these expenses constitutes establishment,

administrative/personal cost. He submitted that since these details are

not examined by the authorities and therefore, the same needs to be

allowed. Further, Ld. Counsel for the assessee submitted for remanding

the issues.

Further, Ld. Counsel also submitted that the assessee earned total

income of Rs.7,12,411/-, i.e. Rs.1,59,831/- and Rs.5,29,950/- out of

rental income and income on sale of scrap respectively. Assessee

considered the entire income as business and set off the same against the

expenditure before claiming the benefit of carry forward of loss for set off

in future assessment years. AO taxed Rs.1,59,831/- (rental income) and

Rs.5,29,950/- (income from sale of scrap) under the head income from

other sources. However, the CIT(A) confirmed the AO’s action regarding

Rs.1,59,831/-. However, CIT(A) upheld the AO’s view on the

discontinuation of business and consequent claim of set off of carry

forward of losses.

Further, Ld. Counsel submitted that the claim of assessee for taxing

Rs.5,29,950/- under the head business income is sustainable and relied

on the judgment in the case of Vellore Electric Corporation Ltd. (supra).

Further, he also submitted that the expenditure incurred on personnel

(VRS + Gratuity of establishment etc.) constitutes business expenditure

and the same needs to be allowed u/s.37 of the Act.

29 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

DR for the Revenue submitted that allowability of these expenses becomes

relevant only if the issue relating to continuation of business is decided

against the Revenue. He also submitted that assessee did not have the

recognition required for granting of VRS. Therefore, it is a case of removal

of employees in view of closure of business. Further, Ld. DR argued that

the claim of VRS expenditure is capital nature as it is a one-time

expenditure. However, when the assessee referred to the Approval dated

24-05-2012 of the Labour Commissioner, Maharashtra Govt., and

demonstrated the business nature of it.

sides on this issue, perused the orders of the Revenue and the paper book

filed by the assessee. Further, we have also perused the decisions relied

on by both the sides. The fact on VRS of 1522 employees of the company

was also analysed. In this regard, the case of the assessee is that there is

no point in bearing the employee cost when the request for renewal of

license is not yet decided by the MERC, who ordered for handover of the

power distribution network to MSEDCL. Assessee also demonstrated the

business nature of each and every account debited to profit and loss

account. Further, justifying the expenditure, assessee claims that the

business of the assessee is subjected to up & downs due to many adverse

circumstances around it. Any business has its financial risks of various

kinds which forces the management to take financial decision.

Declaration of VRS to the employees is a commercial decision of the

assessee and the same is rightly justified. The same is done with the

approval of the State Govt. Ld. Counsel also mentioned that the assessee

30 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

is in the process of getting the renewal of license soon and in the event of

positive on this, the same is followed by the fresh requirement of the

employees. Ld. Counsel requests for granting the set off to the extent of

available current year profit of Rs.5,29,950/- and prayed for grant of the

benefit of carry forward of the expenditure of such losses.

Genuineness of Expenditure : we find that the assessee claimed total

expenditure of Rs.40.90 crores against the total income of the year at

Rs.7,12,411/-. Genuineness of expenditure was never the issue before

the AO/CIT(A) for the reason that they concluded against the assessee on

the issue of discontinuation/cessation of business of electricity

distribution. This issue of discontinuation of business was independently

raised in Ground No.1 and the same stands adjudicated by us in favour of

the assessee. Consequently, the genuineness, the allowability etc.

becomes relevant now.

Therefore, on this issue, 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.

Hence, we find it relevant to 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 Rs.40.90 crores. We direct the AO to pass a

31 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

speaking order on the claim in all individual accounts debited to profit

and loss account. AO shall note that employee cost constitutes an

business expenditure and there are specific provisions in the Act for

allowing the VRS expenditure. AO is directed to admit any evidence for

adjudication of this issue. AO shall grant reasonable opportunity of being

heard to the assessee in the said remand proceedings as per the set

principles of natural justice. Accordingly, this part of the ground No.2 is

allowed for statistical purposes.

Before us, on the issue of giving set off of business loss against the

receipts earned on sale of scrap as well as on the issue of grant of benefit

of carry forward of unabsorbed loss for set off against income in

subsequent assessment years, both the counsels submitted that this

issue needs to be decided as per the provisions of the Act. They also

mentioned that the same is linked to the finding of the Tribunal on the

Ground No.1 in the Grounds of appeal.

On hearing both the sides on this technical or consequential issue,

we find that the set off of carry forward of the unabsorbed loss issue

needs to be decided as per the provisions of Section 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.

32 ITA No.1776/PUN/2016 M/s. Mula Pravara Electric Co-op. Society Ltd.,

In the remand proceedings on this issue, AO shall consider our favourable finding on Ground No.1, i.e. continuation of business and decide these linked-issues too after considering the said provisions on one side and the judgmental laws on the other. AO shall grant reasonable opportunity of being heard to the assessee. Accordingly, this part of Ground No.2 is allowed for statistical purposes.

Order pronounced on 28th day of September, 2018. Sd/- Sd/- (िवकास अव�थी िवकास अव�थी /VIKAS AWASTHY) (डी डी. क�णाकरा राव क�णाकरा राव/D. KARUNAKARA RAO) िवकास अव�थी िवकास अव�थी डी डी क�णाकरा राव क�णाकरा राव �याियक सद�य �याियक सद�य/JUDICIAL MEMBER लेखा सद�य �याियक सद�य �याियक सद�य लेखा सद�य लेखा सद�य/ACCOUNTANT MEMBER लेखा सद�य

पुणे / Pune; �दनांक / Dated : 28th September, 2018. Satish

आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत

अपीलाथ� / The Appellant. 1. 2. ��यथ� / The Respondent. 3. The CIT (Appeals)-2, Pune. 4. The Pr. CIT-1, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “बी बी बी” ब�च, बी 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

आदेशानुसार / BY ORDER,

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.