IN HIGH COURT OF DELHI AT NEW DELHI DECIDED ON: 23rd April, 2015 ITA 241/2015 COMMISSIONER OF INCOME TAX-5 Appellant Through Mr. Rohit Madan, Advocate versus JCDECAUX ADVERTISING INDIA (P) LTD Respondent Through Mr. Pawan Kunal, Advocate CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA S.RAVINDRA BHAT, J. (OPEN COURT) 1. Revenue is aggrieved by order of Income Tax Appellate Tribunal (for short, ITAT ) dated 8 th September, 2014 in ITA No. 964/Del/2011. It urges that direction to deduct `3,17,91,180/- (as part of business expenses) is unsustainable, reason being that assessee has not commenced business operations during previous year (the assessment year being 2007-08). 2. assessee was incorporated in April, 2005 to carry on business of out of home advertisement, consisting of street furniture (i.e. advertising on bus shelters, public utilities, parking ITA 241/2015 Page 1 of 7 lots etc.) bill boards and transportation (such as advertisement in airports, railway stations etc.). It 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. In terms of contract, assessee was required to undertake preliminary investigations, study, design, finance, construct, operate and maintain BQSs at its own cost. In consideration, assessee was allowed to commercially exploit space allotted in these BQSs by displaying advertisements for period of 15 years. During said period, title and other rights were to vest in NDMC. During year in question, assessee claimed deduction of `18,36,62,148/- towards discharge of its obligations under NDMC contract. This was of capital nature. AO disallowed claim of `18.36 crore by treating it as capital expenditure. assessee accepted this. other head of expenditure i.e. one in advertisement in present case was `3,17,91,180/-; it was claimed as deductible. AO treated same as revenue expenditure but refused to allow deduction on ground that business of assessee had not commenced and while so concluding, AO held that business would commence when BQSs would be ready for providing space for advertisement, being very reason for which assessee company entered into agreement with NDMC. On appeal, CIT (Appeals) confirmed order of AO. Then it went to ITAT. ITA 241/2015 Page 2 of 7 3. ITAT noted that there are three stages in operational business:- (i) setting up; (ii) post setting up but before commencement of business; and (iii) commencement of business and thereafter. It elaborated by stating that setting up of business refers to situation when activities are ready to take off or when business is ready to discharge functions for which it is set up. Pre-setting up would mean doing of all necessary things culminating into attainment of stage of ready to discharge functions. In case of manufacturing unit, setting up would mean installing all necessary machines for manufacture; and pre-setting up would mean phase during which place for business is acquired, machinery purchased and then finally installed so that stage of setting up of business is attained. In case of trader, setting up of business means stage upto which place of business is acquired and things necessary to start trading are done. Similarly, in case of building contractor, setting up would mean that contractor has obtained all necessary tools and equipments for carrying on construction activity. 4. Dealing with third stage i.e. actual commencement of business, ITAT observed as follows:- This stage simply means taking first step in doing of overall income producing activity. In case of manufacturing unit, stage would come when raw material etc. is procured for start of actual manufacturing. trader can be said to have commenced his business on purchasing material to be sold to customers. ITA 241/2015 Page 3 of 7 Similarly, building contractor can be said to have commenced his business when he undertakes actual contract work pursuant to award of contract. second stage can be termed normally as waiting period between ready to start phase and actual starting of business. Thus it is evident that third stage of commencement of business can either coincide with doing of work in actual execution of order received from customers for sale or provision of services etc. or even prior to that when businessman purchases or manufactures goods for sale, without there being any advance order. 5. It was held that assessee formally signed contract with NDMC on 8th March, 2006 which fell in preceding year. On 30th March, 2006, it entered into manufacturing agreement with Uttam Sucrotech International Pvt. Ltd. for manufacture and installation of BQSs and also made advance payment. In preceding year, assessee arranged for credit facility and obtained overdraft limit and also paid security deposit of Rs. 1 crore to NDMC. Noting that, according to authorities below, business would have commenced only when BQSs are ready for providing space to assessee for advertisement, ITAT held that there was basic fallacy in appreciation of concept of setting up of business. It was clarified that in facts of present case, when assessee entered into construction contract and took first stage of construction, it ought to have commenced its business and then it could not be said that business was not set up till constructions undertaken pursuant to contract goes on. ITA 241/2015 Page 4 of 7 6. Dealing with facts of this case, it was held that assessee was given contract in preceding year. Not only that, assessee started execution of contract in preceding year itself by taking steps such as entering into manufacturing agreement with third person for manufacture and installation of BQSs on making advance payment. project of NDMC for construction of BQSs was not set up but insofar as assessee is concerned, it had certainly commenced its business with execution of contract awarded by NDMC. ITAT held that authorities below have tagged setting up of business with provision of space for advertisement by NDMC. This is certainly post commencement business stage of assessee. Such event would mark generation of actual income on commencement of business and cannot be construed as setting up of business. ITAT was of opinion that assessee s business was set up when it prepared itself for undertaking activity of building BQSs on receipt of contract from NDMC. It cannot be in relation to completion of construction of BQSs. As setting up of business was over in preceding year, at maximum, on entering into manufacturing agreement for manufacture and installation of BQSs on 30th March, 2006, it was held that not only business of assessee was set up but had also commenced in instant year. As Section 3 read with Section 4 refers to starting of previous year from date of setting up of new business, ITAT had no hesitation in holding that business stood already set up in preceding year and as ITA 241/2015 Page 5 of 7 such, there can be no question of canvassing view that business would be set up in subsequent year when BQSs would be ready for providing space to assessee for advertisement. 7. This Court notices that in quoting that as it did, ITAT relied upon two judgments of this Court - Commissioner of Income Tax v. ESPN Software India Pvt. Ltd. (2009) 184 Taxman 452 (Del); and second, Commissioner of Income Tax v. Samsung India Electronics Ltd. (2013) 356 ITR 354 (Del). latter of these decisions was relied upon in subsequent ruling in ITA No. 42/2014 Carefour WC&C India Private Limited v. Deputy Commissioner of Income Tax, 2014 ITR 392. 8. Court in Carefour crucially observed that activity or exercise which is perquisite to commencement or proposed set up would be treated as that connected with commencement of business. After quoting observations in ESPN Software (supra), it was held that in facts of that case, nothing barred assessee from making first purchase (that was case of wholesale business) after necessary legal approvals but fact that appellant wanted to commence actual trading after negotiations with other parties would not postpone date when business was set up. 9. It is also noted that Tribunal relied upon decision of Bombay High Court in Western India Vegetables Products Ltd. v. CIT (1954) 26 ITR 151 wherein issue was as follows:- ITA 241/2015 Page 6 of 7 important question that has got to be considered is from which date are expenses of this business to be considered permissible deductions and for that purpose section that we have got to look to is section 2(11) and that section defines previous year and for purpose of business previous year begins from date of setting up of business. Therefore, it is only after business is set up that previous year of that business commences and in that previous year expenses incurred in business can be claimed as permissible deductions. Any expenses incurred prior to setting up business would obviously not be permissible deductions because those expenses would be incurred at point of time when previous years of business would not have commenced. 10. Having regard to facts of present case, we are of opinion that decision of ITAT does not call for any interference because it is plausible view and no substantial question of law arises for consideration. 11. appeal is, therefore, dismissed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) APRIL 23, 2015/sd ITA 241/2015 Page 7 of 7 Commissioner of Income-tax-5 v. Jcdecaux Advertising India (P) Ltd