The Income Tax Appellate Tribunal (ITAT), Bangalore Bench held that internal financial arrangements to fund expenditure can not disentitle assessee to claim employee benefit expenses and depreciation.
The assessee, Power Company of Karnataka Ltd. (PCKL) is a public sector company owned by the Government owned public sectors. It is responsible for capacity addition by way of setting up of new power projects through the bidding process.
In order to bridge the short term demand and supply gap, PCKL has been procuring power on behalf of the ESCOMs from various sources including purchase of power through Energy Exchange, Banking (SWAP) as well bilateral transactions. PCKL also coordinates with other States and Central Government agencies on power related issues as well as through the forum of Southern Regional power Committee (SRPC).
The assessee purchases the power on behalf of the ESCOMS. For the purpose of purchase, ESCOMS pays the amount which is kept in the seed money and the payment will be made after the purchase of power for ESCOMS.
As a SPV, all the project related costs are allocated to seed money and only the cost which are related administration activities like accounts department, administrative department, company annual filing charges, auditor expenses, depreciation which are not directly related to the project activities are debited to profit and loss account.
The assessee company had filed its return of income for the year under consideration declaring business loss, income from other sources and net income.
The lower authorities observed that the assessee met the expenditure out of interest income earned or in case interest is not sufficient to meet the expenditure, it should be met by the seed money provided by the ESCOMs.
The coram consisting of George George K. and Chandra Poojari clarified that the internal financial arrangements made by the assessee with ESCOMs to fund the expenditure cannot disentitle the assessee to claim expenditure in accordance with the Act.
The ITAT held that the income of the assessee has to be computed under the provisions of the Act without looking into how the expenditure was financed by the assessee and it cannot cause any prejudice to the assessee as it was financed by the seed money or other mode of sources of fund.
“Only because there was no business receipt, it cannot be said that assessee’s business has not been set up. Since the assessee’s business is already set up and ready to commence its business activities during the previous year relevant to the assessment year under consideration, in our opinion, the assessee is entitled to the loss computed as claimed by the assessee,” the ITAT said.
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