Ita/91/2015 Of The Commissioner Of Income Tax v. M/S. Karnataka Power Transmission Corpn. Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 26 DAY OF JULY 20271 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’/BLE MR. JUSTICE HEMANT CHANDANGOUDAR1LT.A. NCO.91 OF 2O1 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TA® 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. LID.,7TH FLOOR, KAVERI BHAVANKEMPEGOWDA ROADBANGALORE.PAN: AABCK /28 .., 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 PASSEDIN ITA NO.1266/BANG/2013 FOR THE ASSESSMENT YEAR 200/708, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALOREIN ITA NO.1266/BANG/2013 DATED 31.10.2014 AND CONFIRMTHE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE.ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,LTU, BANGALORE. THIS I.7T.A. COMING ON FOR’ HEARING, THIS’ DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the revenue against the orderdated 31.10.2014 passed by Income Tax AppellateTribunal (hereinafter referred to as the tribunal forsnort). Tne subject matter of the appeal pertains to theAssessment year 2007-08. The appeal was admitted bya bench of this Court on the following substantialquestions of law:| (1)Whetner the Tribunel wes|correct in holding tnat tne assessee nasnot gained any benefit from tne order ofthe government without appreciating thefact that the transactions of the assesseewith the government and that with M/s. KPCL are on different accounts as one Ison capital account and the other is ontrading account and the debt due from thegovernment is a capital account whichcannot be set off against the tradingliability? (il)Whether the Tribunel wedscorrect in allowing the assessee’s appealwithout holding that the cessation ofliability by M/s. KPCL was a deemedrevenue receipt which cannot be set offagainstthecapitalreceiptfromthegovernment of Karnataka needs to beupheld? (ili) WhethertheTribunalIS.correct in allowing the appeal filed by theassessee without appreciating the orderpassed by the appellate Commissionerwho upheld the itnvoking of provisionsUu/s.41(1) of the Act which is a deemingprovision in respect of the transaction withM/s. KPCL?. 2 |Facts leading to filing of this appeal brieflystated are that assessee is a undertaking of theGovernment of Karnataka and Is Involved ine thedistribution of electricity. The electricity is purchased .,.KarnatakaPower|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/-. Thereturn filed by the assessee was selected for scrutinyand a notice dated 09.09.2008 as issued under Section|143(2) of the Act and the assessment was completed on11.12.2009. Thereafter, the assessment was re-opened|and a notice under Section 148 was issued to the'assessee on 18.04.7011. 3The expenditure for purchase of electricity bythe assessee has been claimed as expenditure bydebiting the cost of power to the profit and loss accountand Karnataka Power Corporation Limited was shown as. 3The expenditure for purchase of electricity bythe assessee has been claimed as expenditure bydebiting the cost of power to the profit and loss accountand Karnataka Power Corporation Limited was shown as. trade creditor and total liability was shown as Rs.360.Crores. The Government of Karnataka paid a sum of.Rs.170 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 expendituretowards purchase of power and debited to the profit andloss 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 Orgthe assessee and the same was brought to tax. Theassessee 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 orderdated 31.10.7014 inter alia held that no benefit has/been accrued to the as. And therefore, the provisions of Section 41(1) of the Act are not attracted to the factsituation of the case. In the result, the appeal preferredby the assessee was allowed. In the aforesaid factualbackground, this appeal has been filed. 4Learned counsel for the revenue submittedthat 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 underSection 41(1) of the Act. It is also submitted that even ifit 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 assesseeNas 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)ofthe Act are attracted. Alternatively it is submitted thatthe loan to be discharged / reimbursed by theGovernment of Karnataka was in the capital field, aS a. consequence of discharge of trading liability of the|assessee the same would constitute cessation /remissionof trading liability and therefore, provisions of Section|41(1) of the Act is attracted. In support of aforesaidsubmissions, reliance has been placed on decisions in.7COMMISSIONER VS. MAHINDRA AND MAHINDRA|LTD.",(2018)93TAXMANN,.COMcr.(SC),‘'COMMISSIONEROF INCOME-TAX, GULBARGA VS.PRAGATHIGRAMINABANK,(2018)OlTAXMANN.COM 343 (KAR), ‘COMMISSIONER OFINCOME-TAX, LTU VS. COMPAQ ELECTRIC LTD..,|(2011) 16 TAXMANN.COM 385, ‘COMMISSIONEROF INCOME-TAX VS. GUGAULI SUGAR WORKS (P.).LTD, (1999) 102 TAXMAN 713 (SC). 5.|On the other hand, learned counsel for theassessee submitted that tribunal on the basis of materialavailable on record has recorded a finding tnatprovisions of Section 41(1) of the Act is not applicable to.the case of the assessee as no real or notional benefit| 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 Dy way of cessation / remission. The|assessee in the instant case has not received any benefitand therefore, the tribunal has rightly held that the|provisions of Section 41(1) of the Act are not applicableto the facts of the case. It Is also submitted that the|aforesaid finding is a finding of fact, wnich has not been.shown|CO be|perverse.InSUPDOTTofaforesaidsubmissions, reliance has been placed on decisions in.‘COMMISSIONER VS. MAHINDRA AND MAHINDRA|LTD.",(2018)404ITR1(SC),'CHIEFCOMMISSIONER OF INCOME-TAX VS, KESARIA TEACO.LTD.,(2002)254[TR434(SC),‘COMMISSIONER OF INCOME-TAX, MADRAS VS.PONNI SUGARS & CHEMICALS LTD.', (2008) 306.ITR 392 (SC), COMMISSIONER OF INCOME-TAXVS, METROPOLITAN TRASNPORT CORPORATION (CEHENNAI) LTD.', (2020) 421 ITR 307 (MAD). (CEHENNAI) LTD.', (2020) 421 ITR 307 (MAD). 6.|We have considered the submissions made.by learned counsel for the parties and have perused therecord. The issue, which arises for consideration in this|appeal is whether the assessee has obtained a benefitby virtue of remission / cessation, in order to attractapplicability of Section 41(1) of the Act. The relevantextract of Section 41(1) of the Act reads as under: 41. (1) Where an allowance or deductionhas been made in the assessment for any.year in respect of loss, expenditure or tradingliability incurred by the assessee (hereinafter|referred to as the first-mentioned person) and subsequently during any previous year,— (a)thefirst-mentionedDersOr)has.obtained, whether in cash or in any othermanner whatsoever, any amount in respect of such loss or expenditure or some benefit inrespect of such trading liability by way of.remission or cessation thereof, the amount|obtained by sucn person or tne value of benefit accruing to him shall be deemed to beprofits 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 theallowance or deduction has Deen mede Is In)existence in that year or not; J.|The conditions precedent for invocation ofSection 41(1) of the Act can be summarized as follows: (i) an allowance or deduction has beenmade in respect of the _ trading liabilitincurred by the assessee in the course of.assessment for previous year. (ii) Subsequently a_ benefit has beenobtained in such trading liability by way of.remission / cessation thereof. (ili) In such a case, value of benefitaccruing to the assessee is deemed to be the|profits and gains of business which otherwisewould not be the [Income of the assessee. 8 _In the instant case, from perusal of theGovernment Order, it is evident that the assessee had. paid the loans of Rs.487.66 Crores on behalf of theGovernment of Karnataka. Therefore, the aforesaidamount 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 fromKarnataka Power Transmission Corporation Limited.Thus, adjustment of dues and debts between the partiesdid not give any advantage to tne assessee. On theother hand, the assessee on adjustment of the dues.sustained a loss to the extent of Rs.1277.66 Crores. Thetribunal 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 bDased on meticulousappreciation of material on record and cannot be termedas perverse. It is pertinent to mention here that theaforesaid finding has not been challenged on the groundthat it is perverse. It is also pertinent to note thatAssessing Officer by an order dated 21.12.2020 passed in respect of subsequent Assessment Year 2008-09 has.held as follows: The other important fact that needs to benoticedISthat|aS|adpart|ofthereimbursement, the assessee received Rs.120Crores from the Government. This amount [s|not offered to tax as a revenue receipt. Thus|when the receipt is not treated as revenue innature, the corresponding loss should also begiven the same treatment. There cannot be|two yardsticks to measure two parts of the.Same transactions. — In addition to the amount received fromthe Government, there was also remission Of the assessees liability to KPCL totaling to.Rs.240 Crores - by way of payment byGovernment as well as balance being written|off by the creditor as per tne instructions ofthe Government. Even this amount to bereimbursed by the Government, the amounts|actually reimbursed (directly or indirectly) is.not considered as revenue. On the other§nand, the portion not reimbursed is sought to.be treated as a revenue loss. This is not. acceptable. In addition to the amount received fromthe Government, there was also remission Of the assessees liability to KPCL totaling to.Rs.240 Crores - by way of payment byGovernment as well as balance being written|off by the creditor as per tne instructions ofthe Government. Even this amount to bereimbursed by the Government, the amounts|actually reimbursed (directly or indirectly) is.not considered as revenue. On the other§nand, the portion not reimbursed is sought to.be treated as a revenue loss. This is not. acceptable. 9. It is pertinent to note that Supreme Court inMAHINDRA AND MAHINDRA LTD. supra has held thatthere 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 iInrespect 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 substantialquestions of law involved in this appeal are answeredagainst the revenue and in favour of the assessee. �������������"�����������!������ ���������������������"����������!����������������� ������������ ����������� ��� �����������