Income Tax Officer, Ward-1(1)(3), Bangalore V. M/s. Bharat Energy Ventures Limited, Bangalore

ITA 1511/BANG/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2179 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 19-06-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; TDS; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI N.V VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER ITA No.1511/Bang/2019 Assessment year : 2014-15 The Income-tax Officer, Ward-1(1)(3), Bengaluru. Vs. M/s Bharat Energy Ventures Pvt. Ltd., No.64, Church Street, Bengaluru-560 015. PAN – AABCB 6642 H APPELLANT RESPONDENT Assessee by : Shri Manoj Kumar, AR Revenue by : Shri Srinivasa T Bidari, CIT(DR) Date of hearing : 26.04.2022 Date of Pronouncement : 17.05.2022 O R D E R Per Padmavathy S, Accountant Member This appeal filed by the assessee is directed against the order passed by the CIT(A)-1, Bangalore dated 21/03/2019 for the asst. year 2014-15. ITA No.1511 /Bang/2019 Page 2 of 12 2. The grounds of appeal raised by the assessee are as under:- “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the disallowance of Rs.7,20,67,831/- made by the Assessing Officer without appreciating the fact that these business expenses were claimed by the assessee even though no business was conducted by the assessee during the year. 3. On the facts and in the circumstances of the case and in law, is the Ld CIT(A) justified in deleting the disallowance of Rs.7,20,67,831/- made by the Assessing Officer by relying on the decision of the CIT(A) in the assessee's own case for the earlier years as the Department has not accepted the same and appeals are presently pending before the Hon'ble JTAT/ Hon'ble High Court of Karnataka. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition on account of interest claimed at Rs. 4.90Cr during the year in respect of funds invested indirectly into equity of a related concern and thus not spent for business purpose by directing for it to be capitalised. 5. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition of Rs.15,31,634/- made by the Assessing Officer on account of interest on the TDS which is not admissible expenditure. 6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. ITA No.1511 /Bang/2019 Page 3 of 12 CIT (A) be reversed and that of the Assessing Officer be restored. 7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.” 3. The assessee is engaged in the implementation of a power project for and on behalf of M/s. BPL Power Projects (AP) Pvt. Ltd., (BPL Power). BPL Power is engaged in business of putting up a Thermal Power Station in Ramagundam. As per the contract between the assessee and BPL Power, the assessee has to finance all expenses including the day to day expenditure for project and could raise a bill with agreed margin, on financial closure of Ramagundam Thermal Project. During the Financial Year relevant to Assessment Year 2014- 15, the assessee incurred various expenditures totaling Rs.11,04,95,545 on power project and debited the same to project implementation charges account and charged it to Profit and Loss A/c. The assessee incurred financial charges for funds borrowed and also normal administrative expenses like depreciation, audit fee, accounting charges, etc., the details of which were as follows: ITA No.1511 /Bang/2019 Page 4 of 12 4. The assessee had other income of Rs.1,00,309/- and after making the various disallowances under the Income Tax Act (the Act) the assessee declared loss of Rs.7,20,67,831/- as per the below details. 5. The AO examined the claim of the assessee for allowing loss of Rs. 7,20,67,831/- which was nothing but the day-to-day expenditure, administrative expenses, finance charges for implementing the thermal power station project at Ramagundamon behalf of the BPL Power. According to the AO the commencement of the commercial operations of the assessee are not started, the expenditure incurred can only be added to the project cost for capitalization as per the provisions of the Act and that there is no revenue account which can be taken for taxation purposes. The AO disallowed the entire loss of Rs.7,20,67,831 and brought the income to Nil, stating that After considering the business affairs of the assessee company, it is held that since the commencement of the commercial operations are not started, the expenditure incurred can only be added to the ITA No.1511 /Bang/2019 Page 5 of 12 project cost for capitalization as per the provisions of the Income tax Act. Hence in this case, it is held that there is no revenue account which can be taken for taxation purpose. However, the expenditure incurred towards the project can only be allowed for capitalization. In this regard, the finance cost ie interest paid on borrowing is held to be not incurred towards project cost since there is huge investment made by the company in subsidiary company in the form of equity subscription. The investments in equity made in subsidiary concerns is Rs 168,83,61,524/- which is a substantial amount. This shows that there is diversion of borrowed funds towards investments the income from which is exempt from tax. Though no dividend is received, there is expenditure booked towards interest payment to the extent of Rs 8,20,33,345/-. Hence the interest cost is not allowed to be capitalised and is held to be not incurred by the company for the purpose of its project. Further the disallowance u/s 14A read with Rule 8D of the Income tax Rule works out at at Rs 84,41,808/-. Therefore considering all these issues, the assessee not allowed to capitalize any amount shown in the profit and loss account for this year. Hence the capital work in progress remains the same as shown in asset schedule at Rs 4,06,06,807/-. 6. Aggrieved by the order of the AO, assessee filed appeal before the CIT(A). Before CIT(A), the assessee submitted that it is the principal investor and chief sponsor of Ramagundam project being set up by BPL Power. That it commenced work on the Ramagundam Power project in the year 1996-97. The objective of the assessee was to undertake all activity connected with development and construction phase of power projects. The Ramagundam Power project was allotted to the assessee by the Government of Andhra Pradesh. The Plan was a ITA No.1511 /Bang/2019 Page 6 of 12 2 X 260 Megawatt coal based power project for the purpose of generating and selling electrical energy to Andhra Pradesh State Electricity Board. The partners were Japan Power Corporation as a EPDC contractor. The assessee undertook the development of the said project on a turnkey basis. The scope of work of the assessee covered rendering services rendering to project activities like liasioning with various Government agencies for licenses and permissions, coordinating with various agency which carry out feasibility study and technical evaluation. Coordinating with engineering design consultants, procurement agencies and vendors as and when the project progress to construction stage. The scope of work also included sourcing quasi debt, credit support and monitoring deployment and proper utilisation of funds till financial closure and construction period up to achieving commercial operation of the first unit. The scope also includes, coordinating with and concluding agreements for Engineering Procurement and Construction Contract [EPC Contract], Operations and Maintenance Agreement, Coal supply agreement, Power Purchase agreement, Secondary fuel supply agreement, Fuel Transport Agreement, Insurance package, water agreement, and other project contracts. Invoices will be raised by the appellant based on closure of milestones and reviewed by BPL Power. The assessee was also required to coordinate with various financial agencies for financial closure for debt and equity. The assessee was also required to coordinate with potential equity participants and ensure closure of shareholder agreement etc. ITA No.1511 /Bang/2019 Page 7 of 12 7. As per the provisions of the agreement, the major milestones are Development and Preliminary expenses. Activities relating to other Non-EPC items, Activities relating to Establishment & Maintenance. Project development activities relating to specifications, legal, tax, insurance and other related matters. However, due to a long delay in project implementation, and change of the government from Andhra Pradesh to Telangana, the next most crucial mile stone was re-execute a power purchase agreement with the newly formed state. All expenses related to the project development was treated as work in progress and expenses related to the running and maintenance of the appellants office and meeting its statutory obligations was charged to its revenue accounts. The assessee followed completion method of accounting and as and when milestones were achieved, it would invoice the project company and recognize revenue. The assessee followed completion method of accounting and as and when milestones were achieved, it would invoice the project company and recognize revenue. The assessee contended that it was entitled to claim the expenditure incurred and offer income as an when the invoice is raised. 8. Without prejudice to the above claim, the assessee submitted that it was entitled to claim deduction of the above expenses as revenue expenditure. Earning of income or profit is not a criterion for an expenditure. The expenditure has been incurred genuinely for the purpose of the business of the assessee. The assessee drew attention of ITA No.1511 /Bang/2019 Page 8 of 12 CIT(A) to the order of the Income Tax Appellate Tribunal, Bangalore Bench in assessee own case for the assessment years 1997-98, 1998-99 and 1999-2000 wherein the Tribunal upheld order of CIT(A) allowing deduction of identical expenses under similar circumstances. The assessee submitted that it had not raised any invoice as the project was delayed due to various reasons and the set milestones were not achieved. It also brought to the notice of CIT(A) that negotiations are on to have a fresh agreement executed consequent to the change of State from Andhra Pradesh to Telangana. 9. The CIT(A) on consideration of the above submissions was of the view that it was undisputed that the assessee could not complete the project owing to various factors and the same method of accountancy has been followed by the assessee consistently. As the facts and circumstances of the current year being similar to that of the Assessment year for which the ITAT in its Order in ITA NO.1133/Bang/2003 in respect of the assessment year 1997-98 to 1999-00, held that expenses have to be allowed as deduction, the CIT(A) directed the AO to allow the said expenses disallowed in the impugned Order of the AO. 10. Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. We have heard the rival submissions. Learned DR reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal. It is clear ITA No.1511 /Bang/2019 Page 9 of 12 from the order of the CIT(A) that the Tribunal in assessee’s own case on identical issue has already allowed identical loss which was disallowed by the Revenue authorities on identical grounds. It is not in dispute before us that the facts and circumstances in the present Assessment Year 2014-15 is also identical. The statement of income and net loss in respect of the Ramagundam project from Assessment Year 1997-98 till Assessment Year 2014-15 is as follows: 11. In all the AYs identical claim for allowing loss in identical circumstances, has been allowed. We are of the view that following the rule of consistency, the claim of the assessee was rightly accepted by ITA No.1511 /Bang/2019 Page 10 of 12 the CIT(A). We, therefore, uphold the order of the CIT(A) and dismiss the appeal of the Revenue 12. The next issue raised by the revenue pertains to deletion of addition on account of interest claimed at R.4.90 cr during the year in respect of funds invested indirectly into equity of a related concern and this not spent for business purpose directing for it to be capitalized. In this regard the learned AR submitted that the disallowance should be in proportion to the additional investment made and not to the accumulated value of the investment as at the end of the financial year. The learned DR supported the decision taken by the AO to be correct. 13. We heard the rival submissions and perused the material on record. As per the accounting practice followed by the assessee, the project expenditure incurred by the assessee on behalf of BPL Power is shown as receivable in the Balance Sheet. This is settled through conversion into equity shares in BPL Power and is shown as investments under the head Loans and Advances in schedule 14 of the financials as at 31.03.2014 at Rs.168,83,61,524 (page 105 of paper book) 14. The revenue has raised the grounds for deletion of addition towards interest of Rs.4.90 Cr. by the CIT(A). On perusal of the AO’s order and the CIT(A)’s order we are unable to reconcile this amount which the revenue is claiming as being allowed by the CIT(A). In fact ITA No.1511 /Bang/2019 Page 11 of 12 the CIT(A) in his order has considered the figures pertaining to previous assessment year i.e. assessment year 2013-14 and not any figure pertaining to year under consideration. The AO’s order is not giving any clarity on this as the AO has concluded the assessment by adding the entire loss claimed by the assessee. Given this we are not in a position to adjudicate this matter on merits as the figures considered and the disallowance contended are not reconciling to the income statement of the assessee. We therefore remit this issue back to CIT(A) to consider the correct amounts relevant to the assessment year 2014- 15 afresh and decide the issue in accordance with law. This ground is allowed in favour of the revenue for statistical purposes. 15. In the result, the appeal of the revenue is partially allowed. Order pronounced in court on 17 th day of May, 2022 Sd/- Sd/- (N.V VASUDEVAN) ( PADMAVATHY S) Vice President Accountant Member Bangalore, Dated, 17 th May, 2022 / vms / ITA No.1511 /Bang/2019 Page 12 of 12 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.