Assessee's Business Expenses Allowed Pre-Revenue Generation

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 concluded that expenses incurred after the business was set up but before revenue generation are deductible as revenue expenses. The appeal was partly allowed, permitting the assessee to claim basic administrative expenditure as business expenditure for the relevant assessment year.

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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 Rs. 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.

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