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 Vs. DCIT,
Pvt. Ltd., Circle 4 (1), Room No.407,
231, Phase III, CR Building, IP Estate,
Okhla Industrial Estate, New Delhi.
New Delhi.
PAN : AABCJ6312Q
(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 the order
passed by the CIT(A) on 09.12.2010 in relation to the assessment
years 2007-08.
ITA No.964/Del/2011
2. Ground nos. 3 and 5 to 7 of the appeal are dismissed as not
pressed by the ld. AR.
3. The only issue which survives in the remaining grounds is
against the refusal to allow deduction of the expenses 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 the assessee
was incorporated in April, 2005 to carry on the business of out of
home advertisement, consisting of street furniture (such as
advertising on bus shelters, public utilities, parking lots, etc.) bill
boards and transportation (such as advertisement in airports,
railway stations, etc.). The assessee 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. As per this 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
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the space allotted in these BQSs by means of display of
advertisement etc. for a period of 15 years. During the said
period of 15 years, the title and other rights in BQSs were to vest
in NDMC. During the year under consideration, the assessee
claimed deduction for a sum of ` 18,36,62,148/- incurred in
discharge of its obligations under the NDMC contract. Such
expenditure was of capital nature. Here, we want to make it clear
that the AO made disallowance of ` 18.36 Crore by treating 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 accepted such
expenditure as of the revenue nature but refused to allow
deduction on the ground that the business of the assessee had
not commenced. In reaching this conclusion about the non-
commencement of business, the AO held that the business would
commence only when the BQSs would be ready for providing
space for advertisement to the assessee, being the very reason
for which the assessee company entered into an agreement with
the NDMC. This resulted into disallowance of ` 3.17 crore. The ld.
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ITA No.964/Del/2011
CIT (A) upheld the assessment order. The assessee is aggrieved
against treating the business as not set up and consequently 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 Income-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 period 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 reading of these
sections, it clearly emerges that the income of a newly set up
business is calculated, starting with the date of setting up and
ending with the financial year. The relevant point to be
highlighted is that the previous year in the case of a newly set up
business, or in other words, the starting point of taxability of
income or allowability of deduction, is the `setting up of the
business' and not the commencement of business.
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6. There can be broadly three stages in making a business
operational, viz., (i) up to the setting up of business; (ii) post
setting up but before commencement of business ; and (iii)
commencement of business and thereafter. Setting up of a
business refers to a situation in which 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 etc. for manufacture. 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, namely, ready for
starting the manufacturing activity. In the case of a trader,
setting up of a business means the stage up to which the place of
business is acquired and the things necessary to start trading, are
done. Similarly, in the case of a building contractor, setting up of
the business would mean that the contractor has obtained all the
necessary tools and equipments necessary for carrying on
construction activity. The sum and substance of the setting up of
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a business is to fully gear up for undertaking the work for which
the business is to be carried on and reaching a stage 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 manufacturing unit,
this 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. 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.
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8. Now, let us examine the facts of the case to determine if the
business was set up in the instant year. In this regard, it is
relevant to note that the assesee formally signed contract with
the NDMC on 08.03.2006, which falls in the preceding year. On
30.3.2006, the assessee entered into manufacturing agreement
with Uttam Sucrotech International Pvt. Ltd. for manufacture and
installation of BQSs and also made advance payment. In the
preceding year itself, the assessee arranged for credit facility and
obtained overdraft limit as well as term loan. A security deposit
of ` 1 crore was paid to NDMC under the contract. All these
activities took place in the preceding year. The authorities below
have made out a case that the business would commence only
when BQSs are ready for providing the space to the assessee for
advertisement, being the source of its income. In our considered
opinion, there is a basic fallacy in the appreciation of the concept
of setting up of business. It has been noticed above 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 construction activity, he
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commences his business. It cannot be said that the business of
the contractor has not been set up till the construction 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 manufacturing 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 steps in
undertaking this construction activity. The contractor, in such
circumstances, does not do the construction activity in order to
set up his business, but to execute the contract awarded to him,
which pre-supposes the commencement of his business, being
the third stage.
9. Again coming back to the facts of the extant case, we find
that the assessee was given contract in the preceding year. Not
only that, the assessee started the execution of contract in the
preceding year itself by taking steps, such as, entering in to
manufacturing agreement with a third person for manufacture
and installation of BQSs on making advance payment. We can say
that the project of NDMC for construction of BQSs was not set up,
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but insofar as the assessee is concerned, it had certainly
commenced its business with the execution of contract awarded
by NDMC. 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. In our considered opinion, 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 related 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
30.03.2006, we hold 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, we have no
hesitation in holding that the business stood already set up in the
preceding year and as such there can be no question of
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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.
10. Our view is fortified by certain decisions relied 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 ESPN 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 for ESPN
programmes in India. Certain expenses were incurred which were
claimed as deduction. The AO opined that the business of the
assessee did not commence during the relevant year and treated
all expenses as having been incurred prior to commencement of
business. The Tribunal held that the business was set up on
15.08.95 on the date of acquiring of licence from its parent
company. The Hon'ble High Court upheld the view taken by the
Tribunal. In CIT vs. Samsung India Electronics Ltd. (2013) 356 ITR
354 (Del), it has been held by the Hon'ble Delhi High Court that a
business is set up when it is established and is ready to
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commence business. The Hon'ble 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 accept the
assessee's claim on this issue and hold that the business 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 before 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 revenue expenses
incurred during the year become eligible for deduction. As the
nature of such expenses, being that of the revenue, has not been
disputed by the AO, we reverse the impugned order on this issue
and direct the granting of deduction for a sum of ` 3.17 crore.
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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, 08th September, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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