2019 (4) TMI 1309 - AT - Income Tax

Allowability of administrative expenditure as business expenditure - proof of set up of business - Commencement of operations - CIT(A) 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 - HELD THAT - We are not in agreement with the observation of the CIT(A) just because assessee has not got approval before the end of the current AY, 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. Assessee has made basic infrastructure in order to commence its business. AO has confirmed that assessee has shown income in subsequent AY i.e. AY 2013-14. It does indicate that assessee has received relevant approvals and commenced its business activities in the subsequent AY. Further, it indicates that without basic set up or infrastructure assessee would not have achieved running its activities in subsequent AY itself. Therefore, in our view, assessee has set up its business and commenced its operation in the subsequent AY i.e. 2013-14. Assessee has already set up its business and is eligible to claim basic administrative expenditure as business expenditure in the AY under consideration. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the business of the assessee was set up during the assessment year (AY) 2012-13.
2. Whether the expenses claimed by the assessee during AY 2012-13 are allowable as revenue expenses.

Detailed Analysis:

1. Whether the business of the assessee was set up during the assessment year (AY) 2012-13:

The assessee, a company engaged in the business of distribution or dissemination of news, filed its return of income for AY 2012-13 declaring a loss. The Assessing Officer (AO) observed that the assessee had claimed various expenses but had not commenced business activities, thus disallowing several expenditures. The assessee contended that it had proposed to expand its activities into running a news channel, amended its main objects, and submitted an application for change in objects to the Registrar of Companies (ROC) on 15.06.2011. The company entered into agreements and rented premises, recruited staff, and incurred expenses towards setting up the operations.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the business had not been set up as the requisite approvals had not been received by the end of the previous year under consideration. The CIT(A) concluded that mere application for change of objects and approval for setting up the business was not sufficient to consider the business as set up.

Upon appeal, it was argued that the assessee had taken significant steps towards setting up the business, such as entering into an agreement with Tata Communications Ltd. for digital uplinking facilities and applying to the Ministry of Information and Broadcasting for uplinking a news channel. The Tribunal noted that the assessee had modified its objects, entered into agreements, rented premises, recruited staff, and incurred expenses towards setting up the business. The Tribunal concluded that the business was set up during the AY 2012-13, relying on the principles laid down in various judicial precedents, including CIT vs. Saurashtra Cement & Chemical Industries Ltd. and CIT vs. Hughes Escorts Communications Ltd.

2. Whether the expenses claimed by the assessee during AY 2012-13 are allowable as revenue expenses:

The AO disallowed several expenditures, including stores and consumables, power and fuel, insurance, rates and taxes, commission, distribution expenses, network, leased line charges, telecast and uplinking charges, costumes and cosmetic charges, and miscellaneous expenditure, amounting to ?65,25,508/-. The AO allowed only statutory payments and depreciation on basic infrastructure.

The CIT(A) upheld the AO's decision, stating that the business had not been set up as requisite approvals were not received by the end of the previous year. The CIT(A) held that the expenses incurred prior to the receipt of approvals could not be allowed as revenue expenses.

The Tribunal, however, disagreed with the CIT(A)'s observation and concluded that the business was set up during the AY 2012-13. The Tribunal held that the assessee had taken substantial steps towards setting up the business, including modifying its objects, entering into agreements, renting premises, and recruiting staff. The Tribunal relied on judicial precedents to conclude that expenses incurred after the business was set up but before the commencement of revenue generation are allowable as revenue expenses.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the business was set up during AY 2012-13 and the expenses claimed were allowable as revenue expenses. The Tribunal relied on judicial precedents to conclude that the business was set up when the first activity necessary for the business was started, and expenses incurred during the interregnum between setting up and commencement of business are deductible as revenue expenses. The appeal was partly allowed, permitting the assessee to claim the basic administrative expenditure as business expenditure for the AY under consideration.