THE COMMISSIONER OF INCOME TAX vs. M/S. KARNATAKA POWER TRANSMISSION CORPN. LTD.,

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 26TH DAY OF JULY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.91 OF 2015 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX

JSS TOWERS, BSK III STAGE

BANGALORE-560085. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX

JSS TOWERS, BSK III STAGE

BANGALORE-560085. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. KARNATAKA POWER TRANSMISSION CORPN. LTD., 7TH FLOOR, KAVERI BHAVAN KEMPEGOWDA ROAD BANGALORE PAN:AABCK7281 ... RESPONDENT (BY SRI. CHYTHANYA K.K. ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31.10.2014 PASSED IN ITA NO.1266/BANG/2013 FOR THE ASSESSMENT YEAR 2007- 08, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE.

2 (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.1266/BANG/2013 DATED 31.10.2014 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue against the order dated 31.10.2014 passed by Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court on the following substantial questions of law:

(i) Whether the Tribunal was correct in holding that the assessee has not gained any benefit from the order of the government without appreciating the fact that the transactions of the assessee with the government and that with M/s.

3 KPCL are on different accounts as one is on capital account and the other is on trading account and the debt due from the government is a capital account which cannot be set off against the trading liability?

(ii) Whether the Tribunal was correct in allowing the assessee's appeal without holding that the cessation of liability by M/s. KPCL was a deemed revenue receipt which cannot be set off against the capital receipt from the government of Karnataka needs to be upheld?

(iii) Whether the Tribunal is correct in allowing the appeal filed by the assessee without appreciating the order passed by the appellate Commissioner who upheld the invoking of provisions u/s.41(1) of the Act which is a deeming provision in respect of the transaction with M/s. KPCL?

4 2. Facts leading to filing of this appeal briefly stated are that assessee is a undertaking of the Government of Karnataka and is involved in the distribution of electricity. The electricity is purchased by the assessee from another undertaking of the Government of Karnataka viz., Karnataka Power Corporation Limited. The assessee filed the return of income for the Assessment Year 2007-08 on 30.10.2007 and declared a total income of Rs.38,92,12,664/-. The return filed by the assessee was selected for scrutiny and a notice dated 09.09.2008 as issued under Section 143(2) of the Act and the assessment was completed on 11.12.2009. Thereafter, the assessment was re-opened and a notice under Section 148 was issued to the assessee on 18.04.2011. 3. The expenditure for purchase of electricity by the assessee has been claimed as expenditure by debiting the cost of power to the profit and loss account and Karnataka Power Corporation Limited was shown as

5 trade creditor and total liability was shown as Rs.360 Crores. The Government of Karnataka paid a sum of Rs.120 Crores each to the assessee and to Karnataka Power Corporation Limited and directed the Corporation to write off the remaining dues. The liability of the assessee was discharged to the extent of Rs.240 Crores. The assessee did not offer the aforesaid income to tax as the said amount was claimed as an expenditure towards purchase of power and debited to the profit and loss account. The Assessing Officer by an order dated 18.03.2013 invoked provisions of Section 41(1) of the Act and treated as sum of Rs.240 Crores as income of the assessee and the same was brought to tax. The assessee thereupon filed an appeal. The Commissioner of Income Tax (Appeals) by an order dated 22.07.2013 dismissed the appeal. The assessee thereupon filed an appeal before the tribunal. The tribunal by an order dated 31.10.2014 inter alia held that no benefit has been accrued to the as. And therefore, the provisions of

6 Section 41(1) of the Act are not attracted to the fact situation of the case. In the result, the appeal preferred by the assessee was allowed. In the aforesaid factual background, this appeal has been filed. 4. Learned counsel for the revenue submitted that it is well settled in law that if the assessee has claimed an expenditure and if the same has been allowed and subsequently the said amount is recovered, the assessee is required to offer it to income under Section 41(1) of the Act. It is also submitted that even if it is assumed that payment by the Government of Karnataka to the assessee towards loan account, the net effect remains that the trading liability of the assessee has ceased and liability to an extent of Rs.240 Crores which was claimed as an expenditure has been recovered and therefore, provisions of Section 41(1)of the Act are attracted. Alternatively it is submitted that the loan to be discharged / reimbursed by the Government of Karnataka was in the capital field, as a

7 consequence of discharge of trading liability of the assessee the same would constitute cessation /remission of trading liability and therefore, provisions of Section 41(1) of the Act is attracted. In support of aforesaid submissions, reliance has been placed on decisions in 'COMMISSIONER VS. MAHINDRA AND MAHINDRA LTD.', (2018) 93 TAXMANN.COM 32 (SC), 'COMMISSIONEROF INCOME-TAX, GULBARGA VS. PRAGATHI GRAMINA BANK', (2018) 91 TAXMANN.COM 343 (KAR), 'COMMISSIONER OF INCOME-TAX, LTU VS. COMPAQ ELECTRIC LTD.', (2011) 16 TAXMANN.COM 385, 'COMMISSIONER OF INCOME-TAX VS. GUGAULI SUGAR WORKS (P.) LTD', (1999) 102 TAXMAN 713 (SC). 5. On the other hand, learned counsel for the assessee submitted that tribunal on the basis of material available on record has recorded a finding that provisions of Section 41(1) of the Act is not applicable to the case of the assessee as no real or notional benefit

8 has been obtained by the assessee. It is also argued that in order to attract the applicability of Section 41(1) of the Act the assessee has to receive benefit in respect of trading liability by way of cessation / remission. The assessee in the instant case has not received any benefit and therefore, the tribunal has rightly held that the provisions of Section 41(1) of the Act are not applicable to the facts of the case. It is also submitted that the aforesaid finding is a finding of fact, which has not been shown to be perverse. In support of aforesaid submissions, reliance has been placed on decisions in 'COMMISSIONER VS. MAHINDRA AND MAHINDRA LTD.', (2018) 404 ITR 1 (SC), 'CHIEF COMMISSIONER OF INCOME-TAX VS. KESARIA TEA CO. LTD.', (2002) 254 ITR 434 (SC), 'COMMISSIONER OF INCOME-TAX, MADRAS VS. PONNI SUGARS & CHEMICALS LTD.', (2008) 306 ITR 392 (SC), 'COMMISSIONER OF INCOME-TAX VS. METROPOLITAN TRASNPORT CORPORATION

9 (CEHENNAI) LTD.', (2020) 421 ITR 307 (MAD). 6. We have considered the submissions made by learned counsel for the parties and have perused the record. The issue, which arises for consideration in this appeal is whether the assessee has obtained a benefit by virtue of remission / cessation, in order to attract applicability of Section 41(1) of the Act. The relevant extract of Section 41(1) of the Act reads as under: 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,— (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of

10 benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; 7. The conditions precedent for invocation of Section 41(1) of the Act can be summarized as follows: (i) an allowance or deduction has been made in respect of the trading liability incurred by the assessee in the course of assessment for previous year. (ii) Subsequently a benefit has been obtained in such trading liability by way of remission / cessation thereof. (iii) In such a case, value of benefit accruing to the assessee is deemed to be the profits and gains of business which otherwise would not be the income of the assessee. 8. In the instant case, from perusal of the Government Order, it is evident that the assessee had

11 paid the loans of Rs.487.66 Crores on behalf of the Government of Karnataka. Therefore, the aforesaid amount was acknowledged as debt by the Government. The Government of Karnataka gave a direction to the assessee to square up the debt in full against payment of Rs.120 Crores and adjustment of Rs.240 Crores from Karnataka Power Transmission Corporation Limited. Thus, adjustment of dues and debts between the parties did not give any advantage to the assessee. On the other hand, the assessee on adjustment of the dues sustained a loss to the extent of Rs.127.66 Crores. The tribunal therefore, held that provisions of Section 41(1) of the Act are not attracted in the case of the assessee. The aforesaid finding of fact is based on meticulous appreciation of material on record and cannot be termed as perverse. It is pertinent to mention here that the aforesaid finding has not been challenged on the ground that it is perverse. It is also pertinent to note that Assessing Officer by an order dated 21.12.2020 passed

12 in respect of subsequent Assessment Year 2008-09 has held as follows: The other important fact that needs to be noticed is that as a part of the reimbursement, the assessee received Rs.120 Crores from the Government. This amount is not offered to tax as a revenue receipt. Thus when the receipt is not treated as revenue in nature, the corresponding loss should also be given the same treatment. There cannot be two yardsticks to measure two parts of the same transactions. In addition to the amount received from the Government, there was also remission of the assessee's liability to KPCL totaling to Rs.240 Crores - by way of payment by Government as well as balance being written off by the creditor as per the instructions of the Government. Even this amount to be reimbursed by the Government, the amounts actually reimbursed (directly or indirectly) is not considered as revenue. On the other hand, the portion not reimbursed is sought to be treated as a revenue loss. This is not

13 acceptable. 9. It is pertinent to note that Supreme Court in MAHINDRA AND MAHINDRA LTD. supra has held that there should be an allowance or deduction claimed by the assessee for any assessment year in respect of loss, expenditure or trading liability incurred by the assessee. Therefore, the aforesaid decision is of no assistance to the revenue. The contention of the revenue that in respect of an amount of Rs.240 Crores, which was claimed by the assessee as an expenditure in the form of trading liability, provisions of Section 41 of the Act are applicable cannot be accepted. For the aforementioned reasons, the substantial questions of law involved in this appeal are answered against the revenue and in favour of the assessee.

14 In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss