2014 (1) TMI 949 - AT - Income Tax

Allowability to Set off - Cost of erection of barricades and maintenance to be set off against advertisement income Held that - If the cost of barricades and maintenance are to be considered as a part of pre-operative expenditure, then the income arising out of advertisement placed on such barricades, would only go to reduce the pre-operative expenditure - It is not akin to interest on fixed deposits - Interest earned on deposit, is considered under the head Income from other sources when surplus funds are kept in bank - On the other hand, erection of barricade was a necessary operation required for execution of the project of the assessee, which was construction of roads. Earning of income from advertisement placed on such barricades, might have been incidental, but nevertheless, without such barricades, the income could not have been earned - If the advertisement income is to be considered under the head income from other sources , then necessarily cost of barricades had to be considered as expenditure wholly and exclusively incurred for the purpose of making such income - If, on the other hand, the cost of barricades were to be considered as preliminary and pre-operative expenditure, revenue earned on advertisement would only go to reduce such expenditure - the assessee was entitled for claiming the barricade expenditure as expenses against income on advertisement Decided in favour of Assessee.

Summary

Issues Involved:
Claim of cost of erection of barricades and maintenance against advertisement income.

Analysis:
The appeal was filed by the assessee challenging the disallowance of the cost of erection of barricades and maintenance amounting to Rs. 52,20,830 against the advertisement income of Rs. 30,60,000. The assessee, engaged in a construction project on build, operate, and transfer basis, incurred expenses for erecting barricades to control traffic flow during road construction. The assessee placed advertisements on these barricades, generating income. The Assessing Officer disallowed the claim, considering the expenses as preliminary and pre-operative, not directly related to earning revenue. The CIT(Appeals) upheld the disallowance, stating that no valid reason was provided for reducing the pre-operative expenditure by the amount spent on barricades.

The main argument presented by the assessee was based on Section 57(iii) of the Income-tax Act, claiming that the barricades were essential for earning the advertisement income. The assessee contended that without the barricades, the advertisement income could not have been generated. The nature of the barricades being temporary was emphasized. The Assessing Officer and the Departmental Representative argued that the expenses on barricades should be treated as pre-operative since commercial operations had not commenced.

The Tribunal analyzed the situation, noting that the Assessing Officer categorized the advertisement income under "income from other sources." The Tribunal opined that the cost of barricades should not be considered as pre-operative expenditure but as a necessary expense for earning the advertisement revenue. The Tribunal highlighted that the barricades were crucial for the project execution and the income from advertisements, though incidental, was dependent on the presence of the barricades. Consequently, the Tribunal concluded that the cost of barricades should be allowed as an expense against the advertisement income. The appeal was allowed in favor of the assessee.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing that the cost of erecting barricades and maintenance should be considered as expenses directly related to earning the advertisement income. The Tribunal found that without the barricades, the advertisement income could not have been earned, making the cost of barricades a legitimate deduction against the advertisement revenue.