Income Tax Appellate Tribunal - Mumbai
Bermaco Enegy Systems Ltd, Navi Mumbai vs Assessee on 1 December, 2009
आयकर अपील य अ धकरण " आई " यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI
ी बी.आर. म तल, या यक सद य एवं ी संजय अरोड़ा,लेखा सद य के सम
BEFORE SHRI B.R. MITTAL, JM AND SHRI SANJAY ARORA, AM
आयकर अपील सं./I.T.A. No. 2356/Mum/2010
( नधारण वष / Assessment Year: 2006-07
Bermaco Energy Systems बनाम/ Asst. Commissioner of
Ltd. D-73/1, TTC Income Tax 10(3), Mumbai
Vs.
Industrial Area, MIDC
Turbhe, Navi Mumbai-
400 705
थायी ले खा सं . / PAN/ GIR No. AAACB 2727 N
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ क ओर से / Shri Pramod Kumar Parida
&
Appellant by : Ms. Sanjukta Choudhury
यथ क ओर से/ Ms. Neeraja Pradhan
Respondent by :
सनु वाई क तार ख / : 06.06.2013
Date of Hearing
घोषणा क तार ख /
: 03.07.2013
Date of Pronouncement
आदे श / O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee arising out of the Order by the Commissioner of Income Tax (Appeals)-22, Mumbai ('CIT(A)' for short) dated 01.12.2009, dismissing the assessee's appeal contesting its assessment for assessment year (A.Y.) 2006-07 vide order u/s. 143(3) of the Income Tax Act, 1961('the Act' hereinafter) dated 31.12.2008.
2ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT 2.1 At the very outset it was observed that the assessee's appeal is barred by time, being filed on 25.03.2010 as against the due date of 03.03.2010, so that it delayed by a period of 22 days. The assessee has filed a condonation petition, stating that the appeal had been in the first instance inadvertently filed with the office of the ld. CIT(A), and it was only subsequently when the error was realized that the appeal papers were retrieved from the said office, which took time, and filed with the registry of the Tribunal. The reasons have not been controverted on facts, and constitute, in our view, a reasonable cause for the delay. The appeal was, accordingly, admitted, and hearing thereof proceeded with.
2.2 The appeal raises three issues per its grounds A, B & C, and which we shall take up in seriatim.
3. The assessee's first ground is in respect of confirmation of a disallowance of expenditure on account of amount/s written off at Rs.49,65,446/-. The background facts are that of the same Rs.48,24,365/- represents the balance outstanding in the assessee's accounts from M/s. Jalkheri Power Pvt. Ltd. (JPPL). Expenditure to the tune of Rs.69.24 lacs stood incurred (during financial years (f.ys.) 2001-02 to 2003-04) on various expenses, viz. salaries, traveling, telephone, professional charges, rent etc., on project related work, i.e., on project development, in respect of rice/wheat straw based power projects to be setup at different locations in Punjab by it in consortium with JPPL, for which the Consortium had bid to build and operate such power plants, entering into agreement/s for the purpose with Punjab State Electricity Board (PSEB). The sums were expended by it for and on behalf of the 'project owner', and were to be reimbursed on the sale of power to PSEB from the nine power projects allotted by it to the Joint Venture (JV) consisting of the assessee and JPPL. However, as subsequently the projects could not be setup, the said amount remain to be received; the company having not received any amount apart from Rs.21 lacs from JPPL in the first year (fy 2001-02) in which the bulk of the expenditure, i.e., Rs. 57.92 lacs, stood incurred. The same was thus written off in accounts as irrecoverable, and constituted a valid deductible business expenditure, i.e., 3 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT in computing the assessee's business income for the current year. This formed the assessee's case before the authorities below.
4.1 Before us, the assessee's case was that there was in fact no joint venture (JV) but only a consortium (of partners) to come together for development and running the power projects in Punjab. Copy of the Power Purchase Agreement (PPA) dated 29.04.2003, paginated as pages 38 - 91, and the JV withdrawal correspondence dated 27.03.2006 (at page 92), i.e., in continuation of the paper-book (with pages 1 to 37F) already filed, and marked as Paper Book-II, was requested for being admitted. All other agreements, it was submitted, would be furnished before the Assessing Officer (A.O.), to whom matter may be remitted for consideration of the same and adjudication afresh.
On merits, it was submitted by him that the loss arising to the company is only in the course of its business and, thus, liable for deduction u/s. 36(1)(vii) r/w s. 28(i). The withdrawal from the arrangement by JPPL and also by the assessee was due to the un- remunerative power sale rate/s being offered, so that the projects were not deemed viable at those rates, being much lower than the rate of Rs. 4.10 per unit which was the rate arrived and discussed at the negotiation stage. This is particularly so as the company is admittedly in the business of project consultants.
4.2 The ld. DR, on the other hand, would rely on the orders by the authorities below, stating of them to be consistent with the facts of the case of the law in the matter.
5. We have heard the parties, and perused the material on record. 5.1 We firstly observe that the assessee's plea for admission of additional evidence is total un-substantiated inasmuch as no case for the same has been made out. In fact, the contention that there was no JV in place, but only a consortium, so that, as we presume, both the partners, i.e., the assessee-company and JPPL, would be individually responsible for the project, and also entitled to the profits arising from the project, is also not supported by any material. The ld. AR on being specifically questioned as to why the documents being now presented before the Tribunal for the first time, were not produced 4 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT before the authorities below, could not furnish any satisfactory answer. In fact, at para 2.4 of his order, the ld. CIT(A) has specifically recorded as many as five dates on which the assessee was granted opportunity to produce the 'relevant documents'. Further, it was also conceded by the ld. AR that the material in support of the said claim was not available for being produced before us, though would be submitted before the A.O. in the remand proceedings, request for which was made.
We find the assessee's prayer as not meriting acceptance. The power of the appellate authority to admit additional evidence, which is to be judicially exercised, considering all the fact and circumstances of the case, is increasing circumscribed by law as to procedure, getting more stringent as the appellate proceedings advance from one stage in the hierarchy to another. Case law on the matter is legion, and for which we may refer to two decisions by the hon'ble jurisdictional High Court, viz. CIT vs. Kamal C. Mehboobbani (Smt.) [1995] 214 ITR 15 (Bom.) and Velji Deoraj and Co. vs. CIT [1968] 68 ITR 708 (Bom.).
As afore-stated, no case for admission of additional evidence stands made out, i.e., on facts. On the contrary, the assessee accepts to still not have the entire material, i.e., on which it wishes to rely upon, with it, and which is claimed would be produced before the assessing authority. We, accordingly, decline to admit the 'additional evidence'. In fact, as shall be presently seen, i.e., while discussing the assessee's case on merits, the same would not materially impact the merits of its case.
5.2 We may now examine the assessee's case on its merits. The appellant and its associate, JPPL, entered into a JV for development and operating wheat/rice straw (biomass fuel) based power plants at different locations in the State of Punjab, in terms of the New & Renewable Sources of Energy (NRSE) Policy, 2001 formulated by the Government of Punjab in an endeavor toward adoption of new and non-conventional sources of energy as well as conservation of conventional fuels. An open, competitive bidding process was adopted, and the consortium of the assessee and JPPL ('the company' or 'the Project Owner' hereinafter) allotted nine of the twelve small (up to 10 5 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT MW) biomass power projects to be set up in the state of Punjab, through PSEB, acting on behalf of the Government of Punjab, and to whom the power to be generated therefrom was to be sold. Accordingly, PPAs for an initial term of 20 years, extendable by another 10 years, were entered into between the project owner and PSEB, wherein it was agreed that the project owner would approach the regulatory commission, i.e., PSERC, for approval of the power tariff and other commercial terms and conditions for the sale of power from these projects to PSEB. Accordingly, the company (project owner) petitioned PSERC vide Petition No. 14 of 2003. Vide its order dated 04.10.2005 (PB pages 37A- 37F), the Commission, after hearing both the parties, as well as PEDA, the nodal agency in respect of NRSE projects, fixed the power tariff at Rs.3.01 per unit (for f.y. 2001- 2002), the base year. Five escalations would apply, and the rate for f.y. 2006-07 so determined would remain in force for the remaining term of PPA in the interest of the consumers. However, in the event of revision in the NRSE policy in future regarding escalation, the project owner's right to approach the Commission (PSERC) for suitable orders was not infringed.
As stated earlier, this rate was much below the 'originally offered' price of Rs.4.10 per unit by PSEB, which was expected to be confirmed. The appellant, however, had carried out various works relating to the projects, i.e., toward project development, in anticipation. As per the JV arrangement, the same were to be incurred by the assessee- appellant in the first instance, and be reimbursed for the same from the revenue generated on the sale of power to PSEB. The appellant, however, could recover only Rs. 21 lacs of the total 69.24 lacs, leaving a balance of Rs.48,24,365/-. The same being paid on behalf of JPPL, was written off in accounts on finding the same as no longer recoverable, as JPPL was not interested in participating in the project (refer PB pages 33-37).
The expenditure incurred was debited by the assessee in its accounts to the account of JPPL. The same were for setting up of the project on behalf of the consortium. How, we wonder, could the same could be claimed either under section 36(1)(vii), which is also subject to the condition of s. 36(2)(i), and or even u/s. 28. The consortium is a different entity, which had bid for, and had accordingly been allotted the power projects 6 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT by PSEB on built, own and operate basis, entering into agreements (PPAs) for nine such projects. Even if no Special Purpose Vehicle (SPV), as, say, a company was incorporated for the purpose, the same would only be an Association of Persons (AOP), a separate taxable entity though. The expenses, which stand now written off, i.e., on the JV or the project owner being no longer interested in executing the projects/s, was, firstly, only and on behalf of the JV or the AOP aforesaid. The assessee was merely financing the expenditure for the time being as a promoter of a member of the said AOP. The amount represented only a claim receivable; that received from JPPL being the extent to which the project development stood, under the circumstances, financed by it; the position of JPPL being para materia with that of the assessee. The loss under reference is therefore of the AOP, and not the assessee's loss; the balance loss being borne by JPPL, its JV partner or associate. These amounts, were the project/s to be set up, recorded in the books of the JV or the project owner as toward project cost.
Secondly, and without prejudice, the expenses were incurred for project development, i.e., on capital account. As such, the loss, even if considered as of the assessee-company, is in the capital field; the relevant expenditure having become infructuous on the abandoning the project or on deciding on not carrying out the projects, being not viable under the circumstances. The bulk of the expenditure incurred (Rs.57.92 lacs), as well as it's part reimbursement from JPPL, is for the first year, i.e., fy 2001-02, toward initializing the project, as is also evident from the nature of the expenditure incurred. The same were therefore clearly to set up power project/s, a capital asset/s, and do not by any score represent the stock-in-trade of the assessee's business, and which was to be realized by operating the said projects and sale of power generated there-from to PSEB. There is further, to our mind, no question of any rate having been negotiated earlier, as the allotment (of the project) was made in an open, transparent and competitive manner. And, further, the power tariff was to be decided subsequently on reference to the regulatory body, which was to, as it actually did, decide on the same after hearing all the parties, including the nodal agency (PEDA) for implementing the policy under which the power projects were being set up. What, therefore, would have been agreed upon at the 7 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT pre-negotiation stage would be the basis of arriving at the tariff, as, say, the rate of return that the power project should yield to the project owner. The actual rate would depend on the financial data on various parameters. In fact, we need not travel into this area further; the decision not to continue with the project, despite having spent so much time and resources thereon, being decidedly a business decision, taken in business interest. The same would not, however, convert what is essentially a capital expenditure to of revenue nature. Capital expenditure, it may be appreciated, is incurred as much for business purposes as is the revenue expenditure. However, it is only the latter which is deductible in computing the business income, while specific allowances, as u/ss.32, 35, 35D, etc. are provided for under the Act in respect of the former. In the instant case, the transaction not fructifying has led to a loss of capital, so that the Revenue's stand is in agreement with the settled position of the law. Reference in this context may be made to the decisions by the hon'ble apex court in the case of Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927 (SC), whereat, again, the claim of loss of deposit as a business loss u/s.28 of the Act was pressed. In the facts of that case, the assessee had deposited Rs.20 lacs with the licensor company for the purpose of securing a license under which the assessee had acquired to work the licensor's cotton mills. The deposit, it was held, was made, clearly, for acquisition of a profit-making asset, to carry on the business in cotton. The loss of such deposit, on it remaining unpaid, following the liquidation of the licensor company, was suffered on capital account and not on revenue account, so as to be treated as a business loss. The said decision, even as the exact facts would be specific and unique to the fact situation of each case, in our clear view, is squarely applicable in its ratio. Rather, first principles admit of no difference, so that the said decision was put forth only to impress the unequivocal and the settled position of law in the matter, i.e., as an example of the application of those principles by the hon'ble apex court. In the case of Hasimara Industries Ltd vs. CIT [1998] 231 ITR 842 (SC), again, the loss qua irrecoverable advance to the lessor, on account of the latter's incapacity to repay, was held as a capital loss; the same having been made by the assessee-leasee to modernize the cotton mill under a leave and license agreement, obtaining operating rights in its respect with an 8 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT intention to enter the cotton manufacturing business. Reliance is also placed on the decision in the case of Indian Aluminium Co. Ltd. vs. CIT [1971] 79 ITR 514, 518 (SC) and CIT vs. Subramanya Pillai (S.R.) [1950] 18 ITR 85, 93 (Mad.), to the effect that only losses arising or springing directly from the carrying on of the trade or business and incidental thereto are deductible, while those not arising out of the operations of the trade or business are really losses of capital. Reference in this context may also be made to the decision by the tribunal in the case of Integrated Technology Solutions Pvt. Ltd. v. ITO (in ITA No. 3695/Mum/2011 dated 28/6/2013).
We may at this stage also clarify that in discussing this ground of appeal, we have relied upon the material on record, including the assessee's submissions before the authorities below. Our findings are in fact only an endorsement of those by the assessing authority (refer para 4 of the assessment order). Further, the assessee's argument of there being no JV, raised de hors any material on record, is in fact contrary to the assessee's case as well as the material on record, i.e., represents a new case altogether, though, as would be apparent from the foregoing, to no moment.
We further observe that the amount in respect of the Joint Venture written off is at Rs.48.24 lacs only, while the impugned amount, i.e., per the assessee's ground `A' is at Rs.49,65,446/-, which we find to be in agreement with the amount actually written off and added back in assessment (Rs.49,65,556/-), leaving a balance, so that there are amounts in the sum of Rs.1.41 lacs apart from the write off in respect of the JV afore- referred. However, there is no reference to these amounts nor any details thereof, either in the assessment order or in the impugned order. Even no submissions in this regard were made before them or by the ld. AR before us. Under the circumstances, therefore, we have no basis to modify the findings in respect of this amount, which stands added back similarly. Our decision would therefore be in respect of the entire impugned amount of Rs. 49.65 lacs. We decide accordingly.
6. The assessee's second ground is in respect of disallowance for the sum of Rs.2,87,061/- on account of interest. The assessee's accounts bore an interest expenditure 9 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT at the impugned amount of Rs.2,87,061/-, as well as investments to the tune of Rs.376.32 lacs, as also earnings by way of short term capital gain on sale of equity shares at Rs.13.64 lacs, the A.O. disallowed the interest inferring the application of the borrowed funds for investments in equity shares yielding capital gains, so that the same cannot be allowed as a business expenditure. In appeal, the ld. CIT(A), noting the aforesaid facts, finding that no explanation had been advanced by the assessee before the AO, confirmed the said disallowance.
7. Before us, the assessee's case was of sufficient own funds, i.e., to fund the investments, which were at Rs. 1.52 crores at the beginning of the year, while the ld. DR would state of the said contention/s having been considered by the ld. CIT(A).
A bare reference to the balance-sheet (PB pgs. 4-20), would show that the assessee-company is a profitable company, disclosing a profit of Rs.133.06 lacs for the current year; the aggregate of share capital and reserves and surplus being in excess of Rs.950 lacs as at the year-end. The investment in fixed assets, on the other hand, is only at Rs.90 lacs, of which Rs.38 lacs is financed by way of secured loans. Similarly, the investment in the current assets, net of current liabilities, is at Rs.116 lacs only. It is thus not understand as to how it could be said that the amount invested by the assessee in shares and securities, being at Rs.376 lacs as at the year-end, is out of borrowed funds, which, apart from secured loans, which are for fixed assets (as noted hereinabove), are by way of unsecured loans at Rs.641 lacs. Under the circumstances, therefore, we find no basis for the disallowance of financial expenses, which stands incurred at a minimal amount, i.e., in relation to the borrowings, of which the secured loans (Rs. 38 lacs as at the year-end) we have found to be for the financing of vehicles. No case for disallowance, looking at the financials in any manner, is thus made out. The impugned disallowance is accordingly directed for deletion.
8. The third and final ground by the assessee, i.e., Ground 'C', is in respect of confirmation of the disallowance under section 14A by the A.O. at Rs.163840/-, worked out by applying rule 8D(2)[(ii) and( iii)]; the assessee having earned dividend income at 10 ITA No.2356 /Mum/2010 (A.Y. 2006-07) Bermaco Energy Systems Ltd. vs. Asst. CIT Rs.2,95,810/- for the year. The assessee's case is that r. 8D is not mandatory for the year, while that of the Revenue is that the same nevertheless is a reasonable basis for disallowance.
9. Rule 8D, though not mandatory for the current year, yet can not be said to be unreasonable, so that the same can only be said to be form a reasonable basis for the disallowance u/s. 14A(1). Having said that, we wonder as to how the Revenue could invoke r. 8D(2)(ii), disallowing interest expenditure there-under; having already disallowed the entire interest u/s. 36(1)(iii). In fact, we have found the entire of it as allowable as a business expense u/s. 36(1)(iii), considering the sources and application of funds (refer para 7 supra), so that no disallowance qua interest expenditure u/r. 8D(2(ii) would arise in the facts and circumstances of the case. We, therefore, direct restriction of the disallowance qua dividend income u/s. 14A to the amount determined with reference to r. 8D(2)(iii) only, i.e., toward indirect expenditure, even as no infirmity in its working, nor for non invocation of the formula suggested thereby for the same, has been brought to our notice by the assessee. We decide accordingly.
10. In the result, the appeal of the assessee is partly allowed.
प रणामतः नधा रती क अपील आं शक वीकृत क जाती है ।
Order pronounced in the open court on July 03, 2013
आदे श क घोषणा खुले यायालय म दनांकः जुलIई 03, 2013 को क गई ।
Sd/- Sd/-
( B.R. MITTAL ) (SANJAY ARORA)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai; दनांकDated : 03.07.2013
Ashish Kumar Singh, PS
11
ITA No.2356 /Mum/2010 (A.Y. 2006-07)
Bermaco Energy Systems Ltd. vs. Asst. CIT
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई /
DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai