Pre-operative expenses are not allowable as business expenses

Facts and Issues of the Case

The assessee has raised the following substantive grounds of appeal :-

“1. That on facts and in law, the orders passed by both the Assessing Officer {hereinafter referred to as the “AO”} and the Commissioner of Income Tax (Appeals) {hereinafter referred to as “the CIT(A)”} are bad in law an void ab initio.

2. That on facts and in law the CIT(A) erred in holding that the business of the Assessee was not set up during the previous year relevant to AY 20^9-10, and that, it was not in a position to procure business and deliver its services of studio in the year under consideration.

3. That on facts and in law the CIT(A) erred in upholding disallowance of Rs 52,25,161/– claimed by the Assessee as an allowable business expenditure in the year under consideration.

4. That without prejudice, on facts and in law the CIT(A) erred in not directing the AO to capitalize the expenditure of Rs 52,25,161/- and allow benefit of depreciation ?allowance on same.”.

The facts of the case are that the return of income filed declaring income of Rs. 21,03,02,529/- which was processed u/s 143(1) of the Act, subsequently, selected for scrutiny and notices were issued. The assessment proceedings have been initiated against the assessee and the assessee has participated through its representative. The assessment order came to be passed on 17/12/2012 against the assessee by disallowing the claim of Rs. 52,25,161/- made by the assessee as business expenditure. Aggrieved by the assessment, the assessee has preferred an Appeal before the CIT(A). The Ld.CIT (A) dismissed the Appeal of the assessee by confirming the order of the Ld. A.O.

The Ld. Counsel for the assessee vehemently submitted that, the Ld.CIT(A) has erred in holding that the ‘business of the assessee was not set up during the previous year relevant to Assessment Year 2009-10 and that it was not in operation to procure business and deliverits service of studio in the year under consideration’. Further submitted that, the Ld.CIT(A) committed an error in upholding the disallowance of Rs. 52,25,161/- claimed by the assessee as an allowable business expenditure for the year under consideration and without prejudice to the same, the Ld. Counsel for the assessee submitted that the Ld.CIT(A) has erred in not directing the A.O to capitalize the expenditure to Rs. 52,25,161/- and allow benefit of depreciation allowances on the same. Per contra, the Ld. DR by relying on the order of Ld. A.O and CIT(A) submitted that the orders of the Lower Authorities are well reasoned, supported by the settled principles of the Law, which requires no interference.

Observation by the Court

The court had heard the parties, perused the material on record and gave our thoughtful consideration. The Ld. A.O while framing assessment order held that the ‘business of the assessee had not been set up during the year under consideration and all the expenses claimed by the assessee are pre-operative in nature which should have been capitalized. Thus the Ld. A.O held that the expenses claimed by the assessee are not deductible as business expenditure’ and the same has been disallowed. Further the interest income earned by the assessee was assessed as “income from other sources” and same has been brought to tax.In Appeal filed by the Assessee, the Ld. CIT (A) has upheld the said assessment order, which is the order impugned in the present Appeal.

The moot question in the present Appeal is to whether the assessee has set up the business during the previous year relevant to y 2009-10 or not. In this regard, the question as to when the business can be said to have been set up is the question of fact which has to be ascertain on the facts and circumstances of each case and considering the nature and type of the particulars business. There cannot be universal test or formal applicable to all the types of business can be laid down. In the present case, the Assessee, for the purpose of setting up the studio on the commercial property got signed the Letter of Intent (LOI)on 04-04-2008 from Indiabulls Properties Pvt. Ltd. From the clause (2) of Letter to Intent (LOI) dated 04.04.2008 between Indiabulls Properties Pvt. Ltd. and New Delhi Television ltd, read with Letter of Novation (LON) dated 11.12.2008 transferring all the rights and liabilities of N’DTV related to LOI to NDTV Studios Ltd., It can be seen that the 7th and 8th floor of Tower 1 of One of Indiabulls Centre was to be handed over by the licensor i.e. Indiabulls to licensee i.e. the Assessee for fit out works on or before 01.05.2008 or the actual date of handover for fit out.

The said date is specified as ‘fit out commencement date’ also says that the building in which the premise is situated is under construction. Fit out period was for 5 months from ‘fit out commencement date’. The cl, 2.3 & 2.4 LOI also says that ‘License Commencement Date’ shall be from the date of occupancy and license fee, car parking fee, maintenance fee shall be paid from the date of occupancy. From the balance sheet it is evident the fit out works, building of studios and production facilities carried out by the assessee was under progress during the relevant previous year. In the balance sheet expenses of Rs. 6.25 crores on fit out works have been shown under capital work in progress. In the P&L account only interest income of Rs. 21.55 crores and foreign exchange fluctuation of Rs. 10,059/- was credited during the year.

Further, for hiring the 7th Floor premise the Assessee had entered into a Leave and License Agreement with Indiabulls Properties Pvt. Ltd. on 05.06.2009. From the Leave and License Agreement dated 05.06.2009 between Indiabulls Properties Pvt. Ltd. as licensor and the Assessee company as licensee, the Assessee was allowed to use and occupy the 7lh floor premise of tower 1 Indiabulls Centre on leave and license basis for the period of 60 months w.e.f. 1st April 2009 for a license fee of Rs. 58,96,676/- per month. To sublease the above premise Assesseeentered a sublicense agreement with NDTV ltd. on 29.09.2009. As per the Leave and License Agreement dated 29.09.2009 between the Assessee company as sub-licensor and NDTV ltd. as sub-licensee the above 7th floor premise was sub-licensed by the Assessee to NDTV Ltd. w.e.f. 27.04.2009 till 31.03*2010 on a monthly sub-license fee of Rs. 69,36,411/-.”

From the above facts, it is clear that the fit out works related to building of Studio and production facilities was under progress during the relevant previous year and the premises area occupied only after completion of fit out work which can be corroborated with the Leave and License Agreement with India Bulls. Thus, in any stretch of imagination the assessee was not in a position to procure business and delivery its service prior to June, 2009.

Further the decisions Hotel Alankar Vs. CIT, and other decisions, relied on by the Counsel for the Assessee are misplaced and distinguishable on facts and the same are not applicable to the facts and circumstances of the case. In the case of Hotel Alankar v. CIT the assessee had acquired the building to carry out the business of boarding and lodging house. In the case of CIT Vs. ESPN Software (India) (P) Limited, (supra) the assessee had obtained a license for providing ESPN Services and appointed distributors. In the case of Whirlpool India Limited, the business was held to have been when the company was ready and in a position to commence its activities by appointing regional managers and branch managers and the computers were acquired and installed. In the case of CIT v. Dhoomketu Builders & Development (P.) Ltd. it was held that when an assessee whose business is to develop real estates, is able to perform certain acts towards the acquisition of land, that would clearly show that it was ready to commence business and, as a corollary, that it has already been set-up.

In the case in hand, it is emerging from the record that the assessee has merely carrying out the fit-out work during the relevant previous year. Further, it is also clear that during the relevant previous year, the assessee is not ready for running the service of Studio and the assessee was not ready and, in a position, to commence its activities. The assessee had also not taken the premises on rent and had not completed the setting up of the facilities for running the studio. Therefore, the assessee was not in a position to solicit customers till the end of May 2009 before the start of Leave and License Agreement 05/06/2009. In view of the above, we have no hesitation to hold that the business had not been set up during the previous year relevant to Assessment Year 2009-10. Further, in our opinion, disallowance made by the A.O which has been confirmed by the Ld.CIT(A) is in order and we do not find any error or legal infirmity the approach of the Lower Authorities. Accordingly, we dismiss the Assessee’s grounds of Appeal No. 1 to 3.

The assessee has also raised Ground No.4 without prejudice to the Grounds No. 1 to 3, contending that the Ld.CIT(A) has committed an error not directing the A.O to capitalize the expenditure and allow the benefit of depreciation allowances on the same. As per the balance sheet of the Assessee, it hadSuo-Moto capitalized the item of expenditure Rs. 6.25 crores as capital work in progress for bringing fixed assets into existence. The remaining expenses that were not capitalized by the Assessee were debited in the P & L Account.

Further, the assessee has not filed any particular before the Authorities bellow to substantiate that the expense debited in the P &L account are incurred for bringing fixed asset into existences. Therefore, the submission of the Ld. Counsel for the assessee that,Ld.CIT(A) has committed an error not directing the A.O to capitalize the expenditure and allow benefit of depreciation allowances on the same is not sustainable. For the above said discussions we do not find merit in the Assessee’s Grounds of Appeal No.4. Accordingly, Assessee’s the Grounds of Appeal No.4 is dismissed.