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Jcdecaux Advertising India Pvt. Ltd., 231, Phase III, Okhla Industrial Estate, New Delhi. Vs. DCIT,Circle 4 (1), Room No.407, CR Building, IP Estate, New Delhi.
September, 09th 2014
              DELHI BENCHES : D : NEW DELHI


                        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.


  (Appellant)                             (Respondent)

           Assessee By       :    Shri K.M. Gupta, Advocate and Shri
                                  Karan K., CA

           Department By     :    Ms Sulekha Verma, CIT, DR



     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

                                                     ITA No.964/Del/2011

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.

                                                     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.
                                                      ITA No.964/Del/2011

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

                                                      ITA No.964/Del/2011

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.

                                                      ITA No.964/Del/2011

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

                                                      ITA No.964/Del/2011

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,
                                                        ITA No.964/Del/2011

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

                                                      ITA No.964/Del/2011

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
                                                     ITA No.964/Del/2011

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.

                                                     ITA No.964/Del/2011

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.


Copy forwarded to:

     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                             AR, ITAT, NEW DELHI.

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