M/s Jcdecaux Advertising India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 964/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81651 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 04-09-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 18-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SULEKHA VERMA
• Assessee Lawyers: KARAN K
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : D : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO. 964/DEL/2011 ASSESSMENT YEAR : 2007-08 JCDECAUX ADVERTISING INDIA PVT. LTD., 231, PHASE III, OKHLA INDUSTRIAL ESTATE, NEW DELHI. PAN : AABCJ6312Q VS. DCIT, CIRCLE 4 (1), ROOM NO.407, CR BUILDING, IP ESTATE, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.M. GUPTA, ADVOCATE AND SHRI KARAN K., CA DEPARTMENT BY : MS SULEKHA VERMA, CIT, DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE CIT(A) ON 09.12.2010 IN RELATION TO T HE ASSESSMENT YEARS 2007-08. ITA NO.964/DEL/2011 2 2. GROUND NOS. 3 AND 5 TO 7 OF THE APPEAL ARE DISMI SSED AS NOT PRESSED BY THE LD. AR. 3. THE ONLY ISSUE WHICH SURVIVES IN THE REMAININ G GROUNDS IS AGAINST THE REFUSAL TO ALLOW DEDUCTION OF THE EXPEN SES OF `3,17,91,180/-, ON THE REASONING THAT THE BUSINESS OF THE ASSESSEE HAD NOT COMMENCED DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE WAS INCORPORATED IN APRIL, 2005 TO CARRY ON THE BUS INESS OF OUT OF HOME ADVERTISEMENT, CONSISTING OF STREET FURNITURE (SUCH AS ADVERTISING ON BUS SHELTERS, PUBLIC UTILITIES, PARK ING LOTS, ETC.) BILL BOARDS AND TRANSPORTATION (SUCH AS ADVERTISEMENT IN AIRPORTS, RAILWAY STATIONS, ETC.). THE ASSESSEE WAS AWARDED I TS FIRST CONTRACT BY NEW DELHI MUNICIPAL CORPORATION (NDMC) IN MARCH, 2006 FOR CONSTRUCTION OF 197 BUS QUEUE SHELTERS (BQSS) ON BU ILD-OPERATE- TRANSFER (BOT) BASIS. AS PER THIS CONTRACT, THE AS SESSEE WAS REQUIRED TO UNDERTAKE PRELIMINARY INVESTIGATIONS, S TUDY, DESIGN, FINANCE, CONSTRUCT, OPERATE AND MAINTAIN BQSS AT IT S OWN COST. IN CONSIDERATION, THE ASSESSEE WAS ALLOWED TO COMMERCI ALLY EXPLOIT ITA NO.964/DEL/2011 3 THE SPACE ALLOTTED IN THESE BQSS BY MEANS OF DISPLA Y OF ADVERTISEMENT ETC. FOR A PERIOD OF 15 YEARS. DURIN G THE SAID PERIOD OF 15 YEARS, THE TITLE AND OTHER RIGHTS IN B QSS WERE TO VEST IN NDMC. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE CLAIMED DEDUCTION FOR A SUM OF ` 18,36,62,148/- INC URRED IN DISCHARGE OF ITS OBLIGATIONS UNDER THE NDMC CONTRAC T. SUCH EXPENDITURE WAS OF CAPITAL NATURE. HERE, WE WANT T O MAKE IT CLEAR THAT THE AO MADE DISALLOWANCE OF ` 18.36 CRORE BY T REATING IT AS CAPITAL EXPENDITURE, AGAINST WHICH THE ASSESSEE IS NOT AGGRIEVED INASMUCH AS IT HAS NOT PRESSED GROUND NO. 3 ON THIS ISSUE. THE SECOND EXPENDITURE AMOUNTING TO ` 3,17,91,180/- WAS INCURRED AND CLAIMED BY THE ASSESSEE AS DEDUCTIBLE. THE AO A CCEPTED SUCH EXPENDITURE AS OF THE REVENUE NATURE BUT REFUSED TO ALLOW DEDUCTION ON THE GROUND THAT THE BUSINESS OF THE AS SESSEE HAD NOT COMMENCED. IN REACHING THIS CONCLUSION ABOUT T HE NON- COMMENCEMENT OF BUSINESS, THE AO HELD THAT THE BUSI NESS WOULD COMMENCE ONLY WHEN THE BQSS WOULD BE READY FOR PROV IDING SPACE FOR ADVERTISEMENT TO THE ASSESSEE, BEING THE VERY REASON FOR WHICH THE ASSESSEE COMPANY ENTERED INTO AN AGRE EMENT WITH THE NDMC. THIS RESULTED INTO DISALLOWANCE OF ` 3.1 7 CRORE. THE LD. ITA NO.964/DEL/2011 4 CIT (A) UPHELD THE ASSESSMENT ORDER. THE ASSESSEE I S AGGRIEVED AGAINST TREATING THE BUSINESS AS NOT SET UP AND CON SEQUENTLY NOT ALLOWING DEDUCTION FOR THIS REVENUE EXPENDITURE. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. SECTION 3 OF THE INCO ME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) DEFINING PREVIOUS YEAR PROVIDES, INTER ALIA , THAT IN THE CASE OF A BUSINESS OR PROFESSION, NEWLY SET UP, THE PREVIOUS YEAR SHALL BE THE PERIO D BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS ENDING WITH THE SAID FINANCIAL YEAR. HERE IT IS SIGNIFICANT TO TAKE NOTE OF THE CHARGING SECTION 4, WHICH STATES THAT THE INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR IN RESPECT OF THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. ON A CONJOINT REA DING OF THESE SECTIONS, IT CLEARLY EMERGES THAT THE INCOME OF A N EWLY SET UP BUSINESS IS CALCULATED, STARTING WITH THE DATE OF S ETTING UP AND ENDING WITH THE FINANCIAL YEAR. THE RELEVANT POINT TO BE HIGHLIGHTED IS THAT THE PREVIOUS YEAR IN THE CASE O F A NEWLY SET UP BUSINESS, OR IN OTHER WORDS, THE STARTING POINT OF TAXABILITY OF INCOME OR ALLOWABILITY OF DEDUCTION, IS THE SETTI NG UP OF THE BUSINESS AND NOT THE COMMENCEMENT OF BUSINESS. ITA NO.964/DEL/2011 5 6. THERE CAN BE BROADLY THREE STAGES IN MAKING A BUSINESS OPERATIONAL, VIZ., (I) UP TO THE SETTING UP OF BUSI NESS; (II) POST SETTING UP BUT BEFORE COMMENCEMENT OF BUSINESS ; AN D (III) COMMENCEMENT OF BUSINESS AND THEREAFTER. SETTING UP OF A BUSINESS REFERS TO A SITUATION IN WHICH THE BUSINES S IS READY TO DISCHARGE THE FUNCTIONS FOR WHICH IT IS SET UP. PRE -SETTING UP WOULD MEAN DOING OF ALL THE NECESSARY THINGS CULMINATING INTO THE ATTAINMENT OF THE STAGE OF READY TO DISCHARGE FUN CTIONS. IN THE CASE OF A MANUFACTURING UNIT, THE SETTING UP WOULD MEAN INSTALLING ALL THE NECESSARY MACHINES ETC. FOR MANUFACTURE. PR E-SETTING UP WOULD MEAN THE PHASE DURING WHICH THE PLACE FOR BUS INESS IS ACQUIRED, MACHINERY PURCHASED AND THEN FINALLY INST ALLED, SO THAT THE STAGE OF SETTING UP OF BUSINESS IS ATTAINED, NA MELY, READY FOR STARTING THE MANUFACTURING ACTIVITY. IN THE CASE O F A TRADER, SETTING UP OF A BUSINESS MEANS THE STAGE UP TO WHIC H THE PLACE OF BUSINESS IS ACQUIRED AND THE THINGS NECESSARY TO ST ART TRADING, ARE DONE. SIMILARLY, IN THE CASE OF A BUILDING CONTRACT OR, SETTING UP OF THE BUSINESS WOULD MEAN THAT THE CONTRACTOR HAS OBT AINED ALL THE NECESSARY TOOLS AND EQUIPMENTS NECESSARY FOR CARRYI NG ON CONSTRUCTION ACTIVITY. THE SUM AND SUBSTANCE OF TH E SETTING UP OF ITA NO.964/DEL/2011 6 A BUSINESS IS TO FULLY GEAR UP FOR UNDERTAKING THE WORK FOR WHICH THE BUSINESS IS TO BE CARRIED ON AND REACHING A STA GE WHEN SUCH THE BUSINESS ACTIVITY CAN BE CARRIED ON THE BLOW OF A WHISTLE. 7. THE THIRD STAGE IS THE ACTUAL COMMENCEMENT OF BUSINESS. THIS STAGE SIMPLY MEANS TAKING A FIRST STEP IN THE DOING OF THE OVERALL INCOME PRODUCING ACTIVITY. IN THE CASE OF A MANUFAC TURING UNIT, THIS STAGE WOULD COME WHEN RAW MATERIAL ETC. IS PRO CURED FOR THE START OF ACTUAL MANUFACTURING. A TRADER CAN BE SAID TO HAVE COMMENCED HIS BUSINESS ON PURCHASING MATERIAL TO BE SOLD TO THE CUSTOMERS. SIMILARLY, A BUILDING CONTRACTOR CAN BE SAID TO HAVE COMMENCED HIS BUSINESS WHEN HE UNDERTAKES THE ACTUA L CONTRACT WORK PURSUANT TO THE AWARD OF CONTRACT. THE SECOND STAGE CAN BE TERMED NORMALLY AS A WAITING PERIOD BETWEEN THE RE ADY TO START PHASE AND THE ACTUAL STARTING OF BUSINESS. THUS IT IS EVIDENT THAT THE THIRD STAGE OF COMMENCEMENT OF BUSINESS CAN EIT HER COINCIDE WITH THE DOING OF WORK IN THE ACTUAL EXECUTION OF O RDER RECEIVED FROM CUSTOMERS FOR SALE OR PROVISION OF SERVICES ET C. OR EVEN PRIOR TO THAT WHEN THE BUSINESSMAN PURCHASES OR MANUFACTU RES THE GOODS FOR SALE, WITHOUT THERE BEING ANY ADVANCE ORD ER. ITA NO.964/DEL/2011 7 8. NOW, LET US EXAMINE THE FACTS OF THE CASE TO DET ERMINE IF THE BUSINESS WAS SET UP IN THE INSTANT YEAR. IN THIS RE GARD, IT IS RELEVANT TO NOTE THAT THE ASSESEE FORMALLY SIGNED C ONTRACT WITH THE NDMC ON 08.03.2006, WHICH FALLS IN THE PRECEDIN G YEAR. ON 30.3.2006, THE ASSESSEE ENTERED INTO MANUFACTURING AGREEMENT WITH UTTAM SUCROTECH INTERNATIONAL PVT. LTD. FOR MA NUFACTURE AND INSTALLATION OF BQSS AND ALSO MADE ADVANCE PAYMENT. IN THE PRECEDING YEAR ITSELF, THE ASSESSEE ARRANGED FOR CR EDIT FACILITY AND OBTAINED OVERDRAFT LIMIT AS WELL AS TERM LOAN. A S ECURITY DEPOSIT OF ` 1 CRORE WAS PAID TO NDMC UNDER THE CONTRACT. ALL THESE ACTIVITIES TOOK PLACE IN THE PRECEDING YEAR. THE AU THORITIES BELOW HAVE MADE OUT A CASE THAT THE BUSINESS WOULD COMMEN CE ONLY WHEN BQSS ARE READY FOR PROVIDING THE SPACE TO THE ASSESSEE FOR ADVERTISEMENT, BEING THE SOURCE OF ITS INCOME. IN O UR CONSIDERED OPINION, THERE IS A BASIC FALLACY IN THE APPRECIATI ON OF THE CONCEPT OF SETTING UP OF BUSINESS. IT HAS BEEN NOTICED ABO VE THAT THE BUSINESS OF A BUILDING CONTRACTOR IS SET UP ON HIS HAVING ALL THE NECESSARY TOOLS AND EQUIPMENTS READY TO TAKE UP THE CONSTRUCTION ACTIVITY. ONLY WHEN HE GETS CONSTRUCTION CONTRACT AND TAKES THE FIRST STEP IN THE DIRECTION OF DOING THE CONSTRUCTI ON ACTIVITY, HE ITA NO.964/DEL/2011 8 COMMENCES HIS BUSINESS. IT CANNOT BE SAID THAT THE BUSINESS OF THE CONTRACTOR HAS NOT BEEN SET UP TILL THE CONSTRU CTION WORK, UNDERTAKEN PURSUANT TO CONTRACT, GOES ON. IF SUCH CONSTRUCTION IS DONE BY THE CONTRACTOR FOR AND ON BEHALF OF OR FOR THE BENEFIT OF SOME THIRD PARTY, WHO HAS TO INSTALL A MANUFACTURIN G UNIT IN IT, THE BUSINESS OF SUCH THIRD PARTY MAY BE IN THE PROCESS OF SETTING UP DURING THE PERIOD OF CONSTRUCTION. BUT, INSOFAR AS THE CONTRACTOR IS CONCERNED, HIS BUSINESS COMMENCED WHEN HE TOOK STEP S IN UNDERTAKING THIS CONSTRUCTION ACTIVITY. THE CONTRAC TOR, IN SUCH CIRCUMSTANCES, DOES NOT DO THE CONSTRUCTION ACTIVIT Y IN ORDER TO SET UP HIS BUSINESS, BUT TO EXECUTE THE CONTRACT AW ARDED TO HIM, WHICH PRE-SUPPOSES THE COMMENCEMENT OF HIS BUSINESS , BEING THE THIRD STAGE. 9. AGAIN COMING BACK TO THE FACTS OF THE EXTANT C ASE, WE FIND THAT THE ASSESSEE WAS GIVEN CONTRACT IN THE PRECEDI NG YEAR. NOT ONLY THAT, THE ASSESSEE STARTED THE EXECUTION OF CO NTRACT IN THE PRECEDING YEAR ITSELF BY TAKING STEPS, SUCH AS, ENT ERING IN TO MANUFACTURING AGREEMENT WITH A THIRD PERSON FOR MAN UFACTURE AND INSTALLATION OF BQSS ON MAKING ADVANCE PAYMENT. WE CAN SAY THAT THE PROJECT OF NDMC FOR CONSTRUCTION OF BQSS W AS NOT SET UP, ITA NO.964/DEL/2011 9 BUT INSOFAR AS THE ASSESSEE IS CONCERNED, IT HAD CE RTAINLY COMMENCED ITS BUSINESS WITH THE EXECUTION OF CONTRA CT AWARDED BY NDMC. THE AUTHORITIES BELOW HAVE TAGGED THE SET TING UP OF BUSINESS WITH THE PROVISION OF SPACE FOR ADVERTISEM ENT BY NDMC. THIS IS CERTAINLY A POST COMMENCEMENT BUSINESS STAG E OF THE ASSESSEE. SUCH AN EVENT WOULD MARK THE GENERATION O F ACTUAL INCOME ON COMMENCEMENT OF BUSINESS AND CANNOT BE CO NSTRUED AS THE SETTING UP OF BUSINESS. IN OUR CONSIDERED O PINION, THE ASSESSEES BUSINESS WAS SET UP WHEN IT PREPARED ITS ELF FOR UNDERTAKING THE ACTIVITY OF BUILDING BQSS ON RECEIP T OF CONTRACT FROM NDMC. IT CANNOT BE RELATED TO THE COMPLETION O F CONSTRUCTION OF BQSS. AS THE SETTING UP OF THE BUSINESS WAS OVER IN THE PRECEDING YEAR, AT THE MAXIMUM, ON ENTERING INTO M ANUFACTURING AGREEMENT FOR MANUFACTURE AND INSTALLATION OF BQSS ON 30.03.2006, WE HOLD THAT NOT ONLY THE BUSINESS OF T HE ASSESSEE WAS SET UP BUT HAD ALSO COMMENCED IN THE INSTANT YE AR. AS SECTION 3 READ WITH SECTION 4 REFERS TO THE STARTIN G OF PREVIOUS YEAR FROM THE DATE OF SETTING UP OF A NEW BUSINESS, WE HAVE NO HESITATION IN HOLDING THAT THE BUSINESS STOOD ALREA DY SET UP IN THE PRECEDING YEAR AND AS SUCH THERE CAN BE NO QUESTION OF ITA NO.964/DEL/2011 10 CANVASSING A VIEW THAT THE BUSINESS WOULD BE SET UP IN A SUBSEQUENT YEAR WHEN BQSS WOULD BE READY FOR PROVID ING SPACE TO THE ASSESSEE FOR ADVERTISEMENT. 10. OUR VIEW IS FORTIFIED BY CERTAIN DECISIONS R ELIED ON BY THE LD. AR TO BUTTRESS HIS PROPOSITION. IN CIT VS. ESPN SOFTWARE INDIA PVT. LTD. (2009) 184 TAXMAN 452 (DEL) , THE ASSESSEE ACQUIRED LICENSE FROM ITS PARENT COMPANY ON 15.8.95 TO SUB-LICENSE E SPN SERVICES FOR DISTRIBUTION OF PROGRAMMES IN INDIA. BY VIRTUE OF THE LICENCE, THE ASSESSEE ENTERED INTO AN AGREEMENT ON 01.10.95 WITH A COMPANY AND APPOINTED IT AS THE SOLE DISTRIBUTOR FO R ESPN PROGRAMMES IN INDIA. CERTAIN EXPENSES WERE INCURRE D WHICH WERE CLAIMED AS DEDUCTION. THE AO OPINED THAT THE BUSIN ESS OF THE ASSESSEE DID NOT COMMENCE DURING THE RELEVANT YEAR AND TREATED ALL EXPENSES AS HAVING BEEN INCURRED PRIOR TO COMME NCEMENT OF BUSINESS. THE TRIBUNAL HELD THAT THE BUSINESS WAS SET UP ON 15.08.95 ON THE DATE OF ACQUIRING OF LICENCE FROM I TS PARENT COMPANY. THE HONBLE HIGH COURT UPHELD THE VIEW TAK EN BY THE TRIBUNAL. IN CIT VS. SAMSUNG INDIA ELECTRONICS LTD. (2013) 356 I TR 354 (DEL), IT HAS BEEN HELD BY THE HONBLE DELHI HIGH COURT THAT A BUSINESS IS SET UP WHEN IT IS ESTABLISHED AND IS RE ADY TO ITA NO.964/DEL/2011 11 COMMENCE BUSINESS. THE HONBLE BOMBAY HIGH COURT IN WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT (1954) 26 ITR 151 (BOM) HAS HELD THAT THE FIRST PURCHASE OF RAW MATERIAL SHOULD BE CONSIDERED AS THE DATE OF SETTING UP OF THE BUSINESS. 11. IN VIEW OF THE FOREGOING DISCUSSION, WE ACCE PT THE ASSESSEES CLAIM ON THIS ISSUE AND HOLD THAT THE BU SINESS WAS SET UP IN THE PRECEDING YEAR. 12. IN SO FAR AS THE CLAIM FOR DEDUCTION OF ` 3.17 CRORE IS CONCERNED, IT IS SEEN AS AN ADMITTED POSITION THAT THE AO ALSO HELD SUCH EXPENDITURE TO BE OF REVENUE NATURE, BUT, STILL DISALLOWED AS, IN HIS OPINION, IT WAS INCURRED BEFO RE THE COMMENCEMENT OF THE BUSINESS AND, HENCE, WAS IN THE NATURE OF PRE-OPERATIVE EXPENSES. IN VIEW OF OUR DECISION ON THE SETTING UP OF THE BUSINESS IN THE PRECEDING YEAR, ALL THE REVE NUE EXPENSES INCURRED DURING THE YEAR BECOME ELIGIBLE FOR DEDUCT ION. AS THE NATURE OF SUCH EXPENSES, BEING THAT OF THE REVENUE, HAS NOT BEEN DISPUTED BY THE AO, WE REVERSE THE IMPUGNED ORDER O N THIS ISSUE AND DIRECT THE GRANTING OF DEDUCTION FOR A SUM OF ` 3.17 CRORE. ITA NO.964/DEL/2011 12 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE ABOVE TERMS. 14. THE ORDER PRONOUNCED IN THE OPEN COURT ON 08.09 .2014. SD/- SD/- [ A.T. VARKEY ] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 08 TH SEPTEMBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.