Commencement of business simply means taking first step in performing overall income producing activity

 Brief Facts of the case-

• The Revenue is aggrieved by the order of the Income Tax Appellate Tribunal (‘ITAT’).
• The assessee was incorporated in April, 2005 to carry on the business of out of home advertisement, consisting of street furniture, bill boards and transportation.
• 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 the contract, the assessee was required to undertake preliminary investigations, study, design, finance, construct, operate and maintain BQSs at its own cost. In consideration, the assessee was allowed to commercially exploit the space allotted in these BQSs by displaying advertisements for a period of 15 years.
• The assessee claimed an expenditure of Rs. 3,17,91,180/- incurred on advertisement. However, the same was disallowed by the AO on the ground that the business of the assessee had not commenced. On appeal, the CIT (Appeals) confirmed the order of the AO. Then it went to ITAT which pronounced a favorable ruling.

Contention of the revenue

The business would commence when the BQSs would be ready for providing space for advertisement, being the very reason for which the assessee company entered into an agreement with the NDMC.

Observations by ITAT

• The 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.
• In case of a building contractor, setting up would mean that the contractor has obtained all the necessary tools and equipments for carrying on construction activity.
• The third stage of commencement of business can either coincide with the doing of work in the actual execution of order received from customers for sale or provision of services etc. or even prior to that when the businessman purchases or manufactures the goods for sale, without there being any advance order.
• When the assessee entered into construction contract and took the first stage of construction, it ought to have commenced its business and then it could not be said that the business was not set up till the constructions undertaken pursuant to the contract goes on.
  

Held by Respective Court

• The assessee formally signed the contract with NDMC on 8th March, 2006 which fell in the preceding year. On 30th March, 2006, it entered into a manufacturing agreement with Uttam Sucrotech International Pvt. Ltd. for manufacture and installation of BQSs and also made advance payment.
• Dealing with the facts of this case, it was held that the assessee was given the contract in the preceding year. Not only that, the assessee started the execution of the contract in the preceding year itself by taking steps such as entering into manufacturing agreement with a third person for manufacture and installation of BQSs on making advance payment.
• Reliance was placed on the two judgments of Delhi High Court – CIT v. ESPN Software India Pvt. Ltd. (2009) 184 Taxman 452 (Del); and CIT v. Samsung India Electronics Ltd. (2013) 356 ITR 354 (Del). Further reliance was placed on the decision of the Bombay High Court in Western India Vegetables Products Ltd. v. CIT (1954) 26 ITR 151.
• Accordingly, the decision of ITAT was held valid and appeal was dismissed.