$~38
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% DECIDED ON: 23rd April, 2015
+ ITA 241/2015
COMMISSIONER OF INCOME TAX-5 ..... Appellant
Through Mr. Rohit Madan, Advocate
versus
JCDECAUX ADVERTISING INDIA (P) LTD. .... Respondent
Through Mr. Pawan Kunal, Advocate
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.K. GAUBA
S.RAVINDRA BHAT, J. (OPEN COURT)
1. The Revenue is aggrieved by the order of the Income Tax
Appellate Tribunal (for short, `the ITAT') dated 8 th September,
2014 in ITA No. 964/Del/2011. It urges that the direction to
deduct `3,17,91,180/- (as part of business expenses) is
unsustainable, reason being that the assessee has not commenced
business operations during the previous year (the assessment year
being 2007-08).
2. The assessee was incorporated in April, 2005 to carry on the
business of out of home advertisement, consisting of street
furniture (i.e. advertising on bus shelters, public utilities, parking
ITA 241/2015 Page 1 of 7
lots etc.) bill boards and transportation (such as advertisement in
airports, railway stations etc.). It was awarded its first contract by
New Delhi Municipal Corporation (NDMC) in March 2006 for
construction of 197 Bus Queue Shelters (BQSs) on Build-Operate
Transfer (BOT) basis. In terms of the contract, the assessee was
required to undertake preliminary investigations, study, design,
finance, construct, operate and maintain BQSs at its own cost. In
consideration, the assessee was allowed to commercially exploit
the space allotted in these BQSs by displaying advertisements for a
period of 15 years. During the said period, the title and other rights
were to vest in NDMC. During the year in question, the assessee
claimed deduction of `18,36,62,148/- towards discharge of its
obligations under the NDMC contract. This was of the capital
nature. The AO disallowed the claim of `18.36 crore by treating it
as capital expenditure. The assessee accepted this. The other head
of expenditure i.e. one in advertisement in the present case was
`3,17,91,180/-; it was claimed as deductible. The AO treated the
same as revenue expenditure but refused to allow deduction on the
ground that the business of the assessee had not commenced and
while so concluding, the AO held that the business would
commence when the BQSs would be ready for providing space for
advertisement, being the very reason for which the assessee
company entered into an agreement with the NDMC. On appeal,
the CIT (Appeals) confirmed the order of the AO. Then it went to
ITAT.
ITA 241/2015 Page 2 of 7
3. The ITAT noted that there are three stages in operational
business:- (i) setting up; (ii) post setting up but before
commencement of business; and (iii) commencement of business
and thereafter. It elaborated by stating that setting up of a business
refers to a situation when the activities are ready to take off or
when the business 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
functions. In the case of a manufacturing unit, the setting up would
mean installing all the necessary machines for manufacture; and
pre-setting up would mean the phase during which the place for
business is acquired, machinery purchased and then finally
installed so that the stage of setting up of business is attained. In
the case of a trader, setting up of a business means the stage upto
which the place of business is acquired and the things necessary to
start trading are done. Similarly, in case of a building contractor,
setting up would mean that the contractor has obtained all the
necessary tools and equipments for carrying on construction
activity.
4. Dealing with the third stage i.e. actual commencement of
business, ITAT observed as follows:-
"This stage simply means taking a first step in the doing of
the overall income producing activity. In the case of a
manufacturing unit, the stage would come when raw
material etc. is procured 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.
ITA 241/2015 Page 3 of 7
Similarly, a building contractor can be said to have
commenced his business when he undertakes the actual
contract work pursuant to the award of contract. The
second stage can be termed normally as a waiting period
between the ,,ready to start phase and the actual starting of
business. Thus it is evident that the third stage of
commencement of business can either coincide with the
doing of work in the actual execution of order received from
customers for sale or provision of services etc. or even prior
to that when the businessman purchases or manufactures the
goods for sale, without there being any advance order."
5. It was held that the assessee formally signed the contract
with NDMC on 8th March, 2006 which fell in the preceding year.
On 30th March, 2006, it entered into a manufacturing agreement
with Uttam Sucrotech International Pvt. Ltd. for manufacture and
installation of BQSs and also made advance payment. In the
preceding year, the assessee arranged for credit facility and
obtained overdraft limit and also paid a security deposit of Rs. 1
crore to the NDMC. Noting that, according to the authorities
below, the business would have commenced only when the BQSs
are ready for providing space to the assessee for advertisement, the
ITAT held that there was a basic fallacy in the appreciation of the
concept of setting up of business. It was clarified that in the facts
of the present case, when the assessee entered into construction
contract and took the first stage of construction, it ought to have
commenced its business and then it could not be said that the
business was not set up till the constructions undertaken pursuant
to the contract goes on.
ITA 241/2015 Page 4 of 7
6. Dealing with the facts of this case, it was held that the
assessee was given the contract in the preceding year. Not only
that, the assessee started the execution of the contract in the
preceding year itself by taking steps such as entering into
manufacturing agreement with a third person for manufacture and
installation of BQSs on making advance payment. The project of
NDMC for construction of BQSs was not set up but insofar as the
assessee is concerned, it had certainly commenced its business with
the execution of contract awarded by NDMC. The ITAT held that
the authorities below have tagged the setting up of business with
the provision of space for advertisement by NDMC. This is
certainly a post commencement business stage of the assessee.
Such an event would mark the generation of actual income on
commencement of business and cannot be construed as the setting
up of business. The ITAT was of the opinion that the assessee's
business was set up when it prepared itself for undertaking the
activity of building BQSs on receipt of contract from NDMC. It
cannot be in relation to the completion of construction of BQSs.
As the setting up of the business was over in the preceding year, at
the maximum, on entering into manufacturing agreement for
manufacture and installation of BQSs on 30th March, 2006, it was
held that not only the business of the assessee was set up but had
also commenced in the instant year. As Section 3 read with
Section 4 refers to the starting of previous year from the date of
setting up of a new business, the ITAT had no hesitation in holding
that the business stood already set up in the preceding year and as
ITA 241/2015 Page 5 of 7
such, there can be no question of canvassing a view that the
business would be set up in a subsequent year when BQSs would
be ready for providing space to the assessee for advertisement.
7. This Court notices that in quoting that as it did, the ITAT
relied upon the two judgments of this Court - Commissioner of
Income Tax v. ESPN Software India Pvt. Ltd. (2009) 184 Taxman
452 (Del); and second, Commissioner of Income Tax v. Samsung
India Electronics Ltd. (2013) 356 ITR 354 (Del). The latter of
these decisions was relied upon in a subsequent ruling in ITA No.
42/2014 Carefour WC&C India Private Limited v. Deputy
Commissioner of Income Tax, 2014 ITR 392.
8. The Court in Carefour crucially observed that activity or
exercise which is a perquisite to the commencement or proposed
set up would be treated as that connected with commencement of
business. After quoting the observations in ESPN Software (supra),
it was held that in the facts of that case, nothing barred the assessee
from making the first purchase (that was a case of wholesale
business) after necessary legal approvals but the fact that the
appellant wanted to commence actual trading after negotiations
with other parties would not postpone the date when the business
was set up.
9. It is also noted that the Tribunal relied upon the decision of
the Bombay High Court in Western India Vegetables Products Ltd.
v. CIT (1954) 26 ITR 151 wherein the issue was as follows:-
ITA 241/2015 Page 6 of 7
"The important question that has got to be considered is
from which date are the expenses of this business to be
considered permissible deductions and for that purpose the
section that we have got to look to is section 2(11) and that
section defines the ,,previous year and for the purpose of a
business the previous year begins from the date of setting up
of the business. Therefore, it is only after the business is set
up that the previous year of that business commences and in
that previous year the expenses incurred in the business can
be claimed as permissible deductions. Any expenses
incurred prior to setting up a business would obviously not
be permissible deductions because those expenses would be
incurred at a point of time when the previous years of the
business would not have commenced."
10. Having regard to the facts of the present case, we are of the
opinion that the decision of the ITAT does not call for any
interference because it is a plausible view and no substantial
question of law arises for consideration.
11. The appeal is, therefore, dismissed.
S. RAVINDRA BHAT
(JUDGE)
R.K. GAUBA
(JUDGE)
APRIL 23, 2015/sd
ITA 241/2015 Page 7 of 7
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