2022 (9) TMI 491 - AT - Income Tax

Assessee's Business Expenses Disallowed, Appeal Dismissed

M/s. NDTV Studios Ltd. [Now merged with New Delhi Television Limited] Versus Income Tax Officer, Ward : 13 (1), New Delhi.

The Tribunal upheld the decisions of the lower authorities, dismissing the appeal filed by the assessee. The business was deemed not set up during the ... Disallowance of business expenses - business of the assessee was not set up during the previous year - HELD THAT:- As 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 i.e. from 05/06/2009 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. The identical issue has come up for consideration before the coordinate bench of this Tribunal in the case of DCIT v. Akzo Nobel Car Refinishes India (P.) Ltd. [2008 (8) TMI 604 - ITAT DELHI]merely on the basis of incorporation of a company it cannot be concluded that business was set up. As observedearlier carrying on a business is a regular and systematic activity. Nothing that sort of facts or circumstances could be brought before us - assessee failed to demonstrate either with the direct evidence or with the circumstantial evidence that its business was set up in the accounting period. Whatever has been pointed out, i.e., incorporation of the assessee and appointment of the director are concerned, we are of the view that these two factors are not sufficient to record a finding that business has 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 - 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. 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 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 ground of appeal. CIT-A directing the A.O to capitalize the expenditure and allow the benefit of depreciation allowances on the same - HELD THAT:- 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. 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 assessee that 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. Issues Involved:1. Validity of the orders passed by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].2. Determination of whether the business of the assessee was set up during the previous year relevant to Assessment Year (AY) 2009-10.3. Disallowance of Rs. 52,25,161/- claimed by the assessee as business expenditure.4. Capitalization of the expenditure of Rs. 52,25,161/- and allowance of depreciation benefits.Detailed Analysis:1. Validity of Orders by AO and CIT(A):The assessee challenged the legality of the orders passed by the AO and CIT(A), claiming they were 'bad in law and void ab initio'. However, the Tribunal did not find any merit in this argument and did not specifically address this issue further, focusing instead on the substantive grounds of appeal.2. Business Set-Up During AY 2009-10:The primary issue was whether the assessee's business was set up during the relevant previous year. The Tribunal emphasized that the determination of when a business is set up is a factual question dependent on the specifics of each case. The assessee argued that the business was operational as they had signed a Letter of Intent (LOI) and were in the process of setting up studio facilities. However, the Tribunal noted that the fit-out works were ongoing and the premises were not ready for occupancy until June 2009. Therefore, the business was not in a position to procure business or deliver services during the relevant year.3. Disallowance of Rs. 52,25,161/- as Business Expenditure:The AO disallowed the claimed expenditure of Rs. 52,25,161/- on the grounds that the business had not been set up and the expenses were pre-operative in nature, which should be capitalized. The CIT(A) upheld this disallowance, and the Tribunal agreed, citing that the business activities had not commenced and the expenses were not deductible as business expenditure.4. Capitalization and Depreciation Allowance:The assessee argued that if the expenses were not allowed as business expenditure, they should be capitalized, and depreciation should be allowed. The Tribunal noted that the assessee had already capitalized Rs. 6.25 crores for fit-out works as capital work in progress. However, the remaining expenses were debited in the Profit & Loss Account without substantiating that these were for bringing fixed assets into existence. Therefore, the Tribunal found no merit in the claim for capitalization and depreciation allowance and dismissed this ground as well.Conclusion:The Tribunal dismissed the appeal filed by the assessee, upholding the decisions of the lower authorities. The business was not considered set up during the relevant year, the claimed business expenditure was rightly disallowed, and there was no basis for capitalizing the disallowed amount or allowing depreciation on it.