Ss. 3, 4 – The business of selling ad space on bus queue shelters is set up on entering into a contract with a municipal body. Once the business is set up revenue expenditure incurred becomes eligible for deduction.
Facts:
The assessee company was incorporated to carry on the business of advertising on bus shelters, public utilities, parking lots, bill boards, etc. The assessee was awarded its first contract by New Delhi Municipal Corporation (NDMC) in March 2006 for construction of 197 Bus Queue Shelters (BQS) on Build-Operate-Transfer (BOT) basis. Under this contract, the assessee was required to undertake preliminary investigations, study, design, finance, construct, operate and maintain BQS’s at its own cost. In consideration, the assessee was allowed to commercially exploit the space allotted in these BQS’s by means of display of advertisement 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 previous year the assessee claimed a deduction of Rs. 18,36,62,145 incurred in discharge of its obligations under NDMC contract. The assessee also claimed deduction of Rs. 3,17,91,180. The AO disallowed Rs. 18,36,62,145 on the ground that it is capital expenditure and sum of Rs. 3,17,91,180 was admitted by the AO to be revenue in nature but was not allowed since according to the AO the business would commence only when the BQSs would be ready to provide space for advertisement to the assessee.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO by observing that the business was not set up and therefore the revenue expenditure is also not deductible.
Aggrieved, the assessee preferred an appeal to the Tribunal where it did not press its ground for allowability of capital expenditure.
Held
The Tribunal noted that during the previous year the assessee formally signed a contract with NDMC on 08-03- 2006. On 30-03-2006, the assessee entered into manufacturing agreement with a supplier for manufacture and installation of BQSs and also made advance payment. It also arranged for credit facility and obtained overdraft limit as well as term loan. A security deposit was also placed with NDMC under the contract.
The Tribunal noted that the case made out by the lower authorities was that the business would commence only when the BQSs are ready for providing the space to the assessee for advertisement, being the source of its income. This, according to the Tribunal, was fallacious understanding of the concept of setting up of business. It held 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 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 the contractor, goes on.
The assessee’s business was set up when it was prepared 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 previous year, at the maximum, on entering into manufacturing agreement for manufacture and on installation of BQSs on 30-03-2006 not only the business was set up but had also commenced. Section 3 read with section 4 refers to the starting of the previous year from the date of setting up of a new business.
The expenditure of Rs. 3.17 crore had been disallowed since it was held to be incurred before commencement of the business and hence was in the nature of pre-operative expenses. Upon setting up of the business, all revenue expenses become eligible for deduction. The Tribunal held that the sum of Rs. 3.17 crore was allowable as deduction.
This ground of appeal of the assessee was allowed.
