Expenses incurred after setting up of business but before the commencement of business are deductible as revenue expenses.

Short Overview : Assessee having already set up its business was eligible to claim basic administrative expenditure as business expenditure though business operations were commenced in the subsequent year.

Assessee having proposed to expand its line activities into running news channels. claimed various business  expenses including employee expenditure and other administrative expenses and it declared meagre business income in the relevant assessment year. AO disallowed the expenses on the ground that assessee had not commenced business operations.

it is held that  As apparent, assessee had taken up a place to set up the above business as well as recruited about 30 employees to carry out the objects. In that process, it had installed power, basic machinery, internet, leased line, uplinking and administrative activities, such as collection of news, etc. It clearly indicated that assessee had made basic infrastructure in order to commence its business. Further, AO had confirmed that assessee showed income in subsequent assessment year, i.e., assessment year 2013-14. It did indicate that assessee had received relevant approvals and commenced its business activities in the subsequent assessment year. Therefore, all expenses incurred after setting up of business but before the commencement of business were deductible as revenue expenses.

Decision: In assessee’s favour.

Referred: CIT v. Hughes Escorts Communications Ltd. (and another appeal) (2009) 311 ITR 253 (Del) : 2009 TaxPub(DT) 162 (Del-HC), CIT, Gujarat I v. Saurashtra Cement and Chemical Industries Limited. (1973) 91 ITR 170 (Guj) : 1973 TaxPub(DT) 307 (Guj-HC) and Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom) : 1954 TaxPub(DT) 84 (Bom-HC).

IN THE ITAT, HYDERABAD BENCH

1. MADHAVI DEVI, J.M. & S. RIFAUR RAHMAN, A.M.

Vil Media (P) Ltd. v. Dy. CIT

ITA No. 537/Hyd/2017

18 April, 2019

Assessee by: B. Satyanarayana Murthy

Revenue by: Matta Padma

ORDER

1. Rifaur Rahman, A.M.

This appeal filed by the assessee is directed against the order of Commissioner (Appeals)–6, Hyderabad, dated, 06-1-2017 for assessment year 2012-13.

2. Brief facts of the case are, the assessee is a company engaged in the business of distribution or dissemination of news through various Networks/Media and has filed return of income for the assessment year 2012-13 on 29-9-2012 declaring loss of Rs. 2,0186,462. Subsequently, assessee filed revised return of income on 10-10-2012 declaring loss of Rs. 86,80,480, which was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’). Subsequently, notices under section 143(2) and 143(1) were issued and served on the assessee. During the course of assessment proceedings, it was noticed that assessee has claimed various expenses and has declared meagre business income in the relevant assessment year When the same was asked as to why expenses shall not be disallowed, the assessee submitted the following submissions, which are reproduced below :–

“The company has proposed to expand: its line of activity into running News Channel and has amended its main objects and submitted its’ application for change in Objects to ROC on 15-6-2011 (copy. enclosed).

–To carry on the business of distribution or dissemination of news, weather, stocks, views, messages through wireless network, electronic media, print media and also to carry on the business of broad casting business, video communication, mass media communication, television communication, news communication, electronic media, advertisement agencies, movie studios, movie production centres.

–To run set-up, establish, acquire, maintain television news channels, radio channels, satellite channels, digital information technology enabled telecasting, media centers, datal news collection, centers, laboratories for development and printing of films, colour laboratories, news laboratories, studios, news libraries, audio and video recording centers.”

2.1 assessing officer rejected the submissions of the assessee and observed that no business activities were carried out by the assessee, hence, expenses claimed by the assessee were restricted to the extent of statutory payments and depreciation on basic infrastructure, as the assessee has shown income in the assessment year 2013-14 and proposed to expand its line activities into running news channels, assessing officer accepted the allowability of certain basic expenditure. Accordingly, he disallowed the following expenditure:

(Amt. in Rs.)
1.	Stores & Consumables	1,86,773
2.	Power and Fuel	4,28,137
3.	Repairs to Buildings	33,825
4.	Repairs to Machinery	5,637
5.	Insurance	2,00,618
6.	Rates & Taxes	17,27,277
7.	Travelling & Conveyance	2,40,393
8.	Commission	9,49,266
9.	Advertisement	26,400
10.	Distribution Expenses	2,48,584
11.	Internet, Website charges	1,21,180
12.	Leased Line charges	99,728
13.	Telecast & Uplinking charges	2,94,086
14.	Vehicle expenses	76,649
15.	Costumes & cosmetics charges	3,84,080
16.	Miscellaneous Expenses	15,02,875
	Total	65,25,508

3. Aggrieved with the above order, assessee preferred an appeal before the Commissioner (Appeals) and before the Commissioner (Appeals) the assessee made the following submissions :–

“03.0 In appeal it was submitted that the assessee company was incorporated under the Companies Act, 1956. It was formerly known as Nikit Investments (P) Ltd. and was incorporated during the year 2000 with the object of investments in stocks and shares. The company had proposed to expand its line of activity into running News Channel and had amended its main objects and submitted its application for change on Objects to ROC on 15-6-2011. In the process as one of the prerequisite the company had entered into MCPC agreement on 18-6-2011 with Tata Communications Limited to provide Digital Uplinking facilities, through its MCPC platform for one free to air TV Channel by name of V6 from Tata Communication’s Earth station at Chennai. The company on 24-6-2011 had made an application before the Ministry of Information and Broadcasting for Up Linking a News Channel “V6”.

During the month of August 2011, the company had entered into a rental agreement for the premises situated at MLA Colony, Road No. 12, Banjara Hills, Hyderabad to commence its operations and had recruited staff required for setting up the operations and had started incurring expenditure towards rent, salary and other maintenance expenses for running the business. It was submitted that the main activity of the company was to engage in business of distribution or dissemination of news and to involve in all satellite up linking and down linking activities required to run a television channel. In connection with it, 30 employees were employed. Placing reliance on decisions of various High Courts, viz., Western India Vegetable Products Ltd., v. CIT (1954) 26 ITR 151 (Bom) : 1954 TaxPub(DT) 84 (Bom-HC), CIT v. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj) : 1973 TaxPub(DT) 307 (Guj-HC) it was submitted that all the activities which went to make up the business need not be started simultaneously in order that the business may commence. The business would commence when activity which was first in point of time and which must necessarily precede other activity was started. Also placing reliance on the decision of CIT v. Hughes Escorts Communications Ltd. (2009) 311 ITR 253 (Del) : 2009 TaxPub(DT) 162 (Del-HC) it was submitted that the assessee in that case was engaged in the business of satellite communication system. As soon as the purchase order for the said equipment was placed, it was’ held that the assessee had set up the business. According to the assessee, all expenses incurred on setting up of business, but prior to the commencement of the business were allowable as revenue expenses. It was submitted that to consider generation of revenue as tr-e sole criteria for determining the setting up of the business was against the law.”

4. After considering the submissions of the assessee, the Commissioner (Appeals) rejected the submissions of the assessee by observing as under :–

“4.1 In this case, the assessing officer’s finding that the business had not commenced is not disputed. But, as discussed above, the relevant question to be asked is not whether the business had commenced, but whether it had been setup. According to the assessee, it had applied for change of its main objections as well as approval for setting up the business of News channel.

Mere application is not enough; it has to show that requisite approvals had been received, before it can be said that business was setup. There is nothing on record to suggest that the same had happened by the end of previous year under consideration. It is not therefore possible to hold that business of News channels was setup and hence the deduction claimed by the assessee is not allowable. The addition is confirmed albeit for different reasons than those given in the assessment order. The decisions referred to by the assessee relate to situation where the business had been set up and hence are of e no assistance to the assessee.”

5. Aggrieved by the order of Commissioner (Appeals), the assessee is in appeal before us raising the following grounds of appeal :–

“1. The Order of the Hon’ble Commissioner, in so far as it is against the appellant-company, is contrary to the facts of the case and provisions of law.

2. The Hon’ble Commissioner should have seen that the loss declared by the appellant-company in the Revised Return was Rs. 2,01,86,462 which included unabsorbed depreciation of Rs. 86,80,480.
3. The Hon’ble Commissioner should have seen that the assessing officer has considered the unabsorbed depreciation of Rs. 86,80,4801- as the total loss instead of correct loss of Rs. 2,01,86,462.
4. The Hon’ble Commissioner is not justified in sustaining the disallowance of expenditure of Rs. 65,25,508 incurred by the appellant-company in the course of its business of running a news channel on television.
5. The Hon’ble Commissioner should have seen that the appellant company has already set up its business of running a news channel when It has entered into agreements for uplinking and downlinking the data, as it has already made an application to the Ministry of Information & Broadcasting for uplinking the news channel- V6 and as it has completed the other formalities connected thereto.
6. The Hon’ble Commissioner should have seen that the appellant company has complied with all the formalities in setting up of business and therefore, the Hon’ble Commissioner should have seen that the business of the appellant-company was set up and that the appellant-company is entitled to claim the expenditure incurred in the course of the business.
7. Alternatively, it is claimed that the Hon’ble Commissioner should have seen that the disallowance of expenditure of Rs. 65,25,508 is highly excessive and arbitrary.

For these and other grounds that may be urged at the time of hearing, it is submitted that the Order of the lower authorities be set aside or modified as may be deemed fit.”

6. Ground No. 1 is general and Ground Nos. 2 & 3, which were raised disputing declared loss in revised return of income, but, learned Authrorised Representative has not made any submission on these grounds of appeal. We notice that loss considered by the assessing officer is as per the revised return of income. Therefore, these grounds raised by the assessee are dismissed as not argued.
7. The only dispute is with regard to disallowance of expenditure of Rs. 65,25,598, which is raised in ground Nos. 4 to 7 of grounds of appeal.

7.1 In this regard, learned Authrorised Representative submitted that originally the name of the company was Nikit Investments (P) Ltd., was incorporated during the year 2000 with the object of investments in stocks and shares. The company proposed to expand its line of activity in running news channels and accordingly, revised its main objects and submitted its application for change of objects to the ROC on 15-6-2011.

Similarly, in order to achieve the above objects, it had entered into MCPC agreement on 18-6-2011 with Tata Communications Ltd. to provide digital up-linking facilities through MCPC platform for one free to air TV Channel in the name of V6. Further, the company on 24-6-2011, has made an application before the Ministry of Information and Broadcasting for up-linking news channel. He submitted that the above activities to get the news channel registered and shows that the business has already set up, therefore, assessee should be allowed to claim the business expenditure incurred during the year as allowable business expenditure.

For this proposition, he relied on the decision of the Hon’ble Delhi High Court in the case of CIT v. Hughes Escorts Communications Ltd., (2009) 311 ITR 253 (Del) : 2009 TaxPub(DT) 162 (Del-HC) wherein it was held that assessee was engaged in the business of satellite communication system. The first step in the business of the assessee was purchase of VSAT equipment and as soon as the purchase order of the said equipment was placed, it could be said that the assessee has set up the business and application of DOT for license and the receipt of satellite signals were held to be consequential stages and accordingly, all expenses incurred on setting up of business but prior to the commencement of the business were held as allowable as revenue expenses.

7.2 Further, he relied on the decision of the Hon’ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd., (1973) 91 ITR 170 (Guj) : 1973 TaxPub(DT) 307 (Guj-HC), as per which, the Hon’ble Court held that all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily provide other activity is started and it connotes a continuous course of activities.

8. On the other hand, learned Departmental Representative, besides relying on the Commissioner (Appeals)’s order, submitted that no doubt assessee has modified the objects and entered into MCPC agreement with Tata Communications Ltd., however, she brought to our notice page 85 of the paper book, as per which, subject to clearance/approvals from Ministry of I & B obtained by the Broadcaster and the term clearly indicates that from the date of such approval from the I&B Ministry, the services shall commence within the period of 10 days of such approval, it clearly indicates that assessee has not got approval and not started the operations.
9. Considered the rival submissions and perused the material on record. We notice that assessee has claimed various business expenditures, which includes employee expenditure and other administrative expenses and it has declared the revenue from operations to the extent of Rs. 9,066, according to the assessing officer, which is not considerable to claim the above expenditure. We further notice that assessing officer has allowed the complete employee benefit expenditure, rent, auditor’s remuneration and loss on sale of assets/shares. Further, we notice that in order to expand the assessee’s line of activities into running news channel, assessee has modified its objects, entered into MCPC agreement with Tata Communications Ltd. on 18-6-2011, filed application before Ministry of I&B on 24-6-2011 for up-linking the news channel, it has entered into rental agreement for premises to commence its operations and it has recruited required staff for setting up operations in the month of August, 2011. In order to commence the news channel, it has employed about 30 employees for the purpose to develop, collect news data from different sources.

9.1 We notice that assessing officer has disallowed the administrative expenses, like, stores and consumables, power and fuel, insurance, rates and taxes, commission, distribution expenses, net work, leased line charges, telecast and uplinking charges, costumes and cosmetic charges and miscellaneous expenditure to the extent of Rs. 65,25,508.

Assessing officer has disallowed the above said expenditure as there is no business income in the current assessment year which is under consideration, but, she has not disputed the genuineness of the expenditure. Further, we notice that Commissioner (Appeals) in her findings held that assessee has not set up its business, but it had applied for change of its main objects as well as approval for setting up the business of news channel. She observed that mere application is not enough, but, it has to show that the requisite approval had been received before it can be said that business was set up, as there is nothing on record to suggest that the same had happened during the PY under consideration. Therefore, she rejected the plea of the assessee. We are not in agreement with the observation of the Commissioner (Appeals) just because assessee has not got approval before the end of the current assessment year, it cannot be said that the assessee has not set up its business. In our view, assessee company was already incorporated in 2000 and it has modified its objects and taken steps to get the approval from the Ministry of I&B.

These are all mere approvals required for commencement of the revenue for the business. However, it has to have infrastructure in order to put in place all the facilities as soon as approvals are granted. As we observed earlier, assessee has taken up a place to set up all the above business as well as recruited about 30 employees to carry out the above objects. In that process, it has installed, power, basic machinery, internet, leased line, uplinking and administrative activities, such as collection of news etc. It clearly indicates that assessee has made basic infrastructure in order to commence its business. Further, we notice that assessing officer has confirmed that assessee has shown income in subsequent assessment year i.e. assessment year 2013-14. It does indicate that assessee has received relevant approvals and commenced its business activities in the subsequent assessment year Further, it indicates that without basic set up or infrastructure assessee would not have achieved running its activities in subsequent assessment year itself. Therefore, in our view, assessee has set up its business and commenced its operation in the subsequent assessment year i.e. 2013-14. Our conclusion is supported by the following ratios laid down by the Hon’ble Courts in the respective cases, which are as under :–

1. In the case ofCIT v. Saurashtra Cement & Chemical Industries Ltd. (supra), the Hon’ble Gujarat High Court held as under :–

“The activities which constituted the business of the assessee were divisible into three categories: the first category consisted of the activity of extraction of limestone by quarrying leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilised in manufacture of cement. The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose ; and the third category consisted of the activity of selling manufactured cement. These three activities combined together constituted the business of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on any one of these activities, the business would come to an end. Each one of these activities constituted an integral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities? The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. This activity came first in point of time and laid the foundation for the second activity and the second activity, when completed, laid the foundation for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organisation for sale of manufactured cement was established. But, business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede the other activities is started. The argument of the Revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business. This confusion is the result of a loose description of business of the assessee as business of manufacture and sale of cement. The Revenue says that when the business is of manufacture and sale of cement, how can the assessee be said to have commenced the business when manufacture has not started? This argument suffers from the fault of over-simplification and ignores the true nature of the activities which constitute the business of the assessee. As soon as an activity, which is an essential activity in the course of carrying on the business, or which, in other words, is a business activity is started, the assessee must be held to have commenced the business. To take any other view would not only be illogical but also irrational.”

2. In the case ofCIT v. Hughes Escorts Communications Ltd.,(supra), the Hon’ble Delhi High Court has held as under :–

“A plain reading of the provision of s. 3(1) shows that for a new business the previous year is the period beginning with the date of setting up of the business. The business of the assessee involved different activities in which the first step was the purchase of the VSAT equipment. There was no question of assessee having to place a purchase order for a purpose other than that of its business. The said purchase order was placed on 28th July, 1994. The application to DOT for licence and the receipt of the satellite signals were the consequential stages. The signals were to be received after the VSAT equipment was installed in the premises of the customer. In the circumstances, the business of the assessee should be held to have been set up on 28th July, 1994. This is the relevant date for determining the nature of the expenses incurred thereafter. The expenses incurred in the previous year, prior to the commencement of the business but after the setting up of its business, which two dates need not be the same, would be deductible as revenue expenses. No ground for interference with the judgment of the Tribunal is made out.”

3. In the case ofWestern India Vegetable Products Ltd. v. (1954) 26 ITR 151 (Bom) : 1954 TaxPub(DT) 84 (Bom-HC), the Hon’ble Bombay High Court has held as under:-

“The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum would be permissible deductions under section 10(2) of the Income Tax Act, 1922. Now, applying that test to the facts here, the company actually commenced business only on the 1-11-1946, when it purchased a groundnut oil mill and was in a position to crush groundnuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal has taken into consideration. The Court is not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke the advisory jurisdiction of the Court which after all is a very limited jurisdiction.”

Relying on the above ratios, we hold that the assessee has already set up its business and is eligible to claim basic administrative expenditure as business expenditure in the assessment year under consideration. Accordingly, grounds raised by the assessee on this issue are allowed.

10. In the result, appeal of the assessee is partly allowed.