COMMISSIONER'OF INCOME-TAX VS VELLORE ELECTRIC CORPORATION LTD., 2002 PTD-MADRAS-HIGH-COURT-INDIA 2058 (1998)

Income-tax---

----Business---Discontinuance---Acquisition of assessee's electric company by State Government---Appeals against validity of acquisition pending 'in Supreme Court ---Assessee maintaining an establishment and paying salaries and other expenses---Intention to resume business in the event of success in its appeals---Expenditure incurred by assessee after acquisition is allowable business expenditure.

The assessee was a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertakings (Acquisition) Act, 1973. After an unsuccessful attempt to challenge the validity of that Act in the High Court, the assessee had filed appeals before the Supreme Court which were pending during the relevant years, i.e., the assessment years 1975-76 to 1979-80. The Assessing Officer held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to ten percent. and the audit fee was limited to 15 percent. That was affirmed by the appellate authority. The Tribunal, however, held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee. On reference:

Held, that it could not be said that there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment was indication of its intention to resume business, if an opportunity for it arose by reason of the Supreme Court holding in its favour. The expenses incurred by it while awaiting the decision of the Supreme Court could not altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act., The possible resumption of the business was dependent on the outcome of the appeals pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal had taken a broad view of the matter and had held in favour of the-assessee. There was no ground to differ.

CIT v. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC) distinguished.

A. Sivaraman for the Commissioner.

P.P.S. Janarthana Raja for Subbaraya Aiyar, Padmandabhan and Ramamani for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.---The assessee is a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertakings (Acquisition) Act, 1973. After the unsuccessful attempt to challenge the validity of that Act in the High Court it had filed appeals before the Supreme Court which were pending during the relevant years. The assessment years are 1975-76 to 1979-80.

The Assessing Officer held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to ten percent. and the audit fee was limited to fifteen percent. That was affirmed by the appellate authority. The Tribunal, however, held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee.

The Supreme Court in the case of CIT v. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1, had an occasion to deal with the case of an electricity company which after the acquisition of its undertaking was only engaged in the payment of out-standings and realizing interest on the deposits. A majority of the Judges of the Supreme Court in that case held that the company had not started any other business and the mere fact that the company had not gone into liquidation did not establish that it had the intention to do business and it was irrelevant to inquire whether the business was permanently closed. Here, it cannot be said that, there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment is the indication of its intention to resume business, if an opportunity for it arises by reason of the apex Court holding in its favour. The expenses incurred by it while awaiting the decision of the apex Court cannot altogether be regarded as unconnected with the business that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act; the possible resumption of the business was dependent on the outcome of the appeal pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal has taken a broad view, of the matter and has held in favour of the assessee. We do not see any good grounds to differ.

The two questions referred to us viz.:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding and had valid materials to hold that all the expenses incurred by it in running the establishment should be allowed as a deduction in computing the income? and

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding and had valid materials to hold that there was no discontinuation of the business by the assessee-company?"

are therefore, answered in favour of the assessee and against the Revenue.

M.B.A./799/FC?????????????????????????????????????????????????????????????????????????????????? Reference answered.