Qyuki Digital Media Private Limited Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that a start-up company incurring cost for branding of the company and other relevant expenditure which creates popularity which helps promotion of contents at the time of its product launch is allowable expenditure.
Facts-
The assessee filed ROI declaring loss of Rs. 13,04,62,517/-. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued. During the course of assessment, AO observed that assessee has not carried out its regular business activities during the F.Y. 2012-13 and no income has been credited to the P & L account except interest earned on bank deposit of Rs. 1,16,20,005/- and noticed that assessee has debited various expenses totaling to Rs. 13,59,72,075/- to P&L account. After adjusting interest income the assessee has computed loss for the year under consideration at Rs. 13,04,62,517/-.
AO rejected assessee’s submission and observed that assessee had not carried out any business activity during the year under consideration and no income has been derived by it from its regular business activity. Therefore, loss claimed by the assesse company at Rs. 14,20,82,522/- was disallowed and business income was computed at Rs. NIL. The interest income credited in P&L account was assessed under the head income from other sources.
The assesse filed the appeal before the ld. CIT(A). The ld.CIT(A)has dismissed the appeal of the assesse.
Conclusion-
Observed that as a start-up company, the assessee has incurred cost for branding of the company which creats popularity which helps promotion of contents at the time of its product launch. The assessee company has also appointed a chief Marketing officers during the financial years.
In the case Western India Vegetables Products Ltd., as referred above the Hon’ble High Court of Bombay wherein held that when a business has established and is ready to commence business then it can be said that business is set up and the expenses incurred in the business can be claimed as permissible deduction.
Held that CIT(A) is not justified in not allowing the claim of deduction of expenses therefore, we direct the assessing officer to allow the claim of business loss of Rs. 13,04,62,517/- of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-21, Mumbai, dated 28.02.2019 for A.Y. 2013-14. The assessee has raised the following grounds before us:
“1. The Ld. CIT(A) erred in upholding the disallowance of business loss of Rs. 13,04,62,517/- without appreciating that the assessee had already commenced its business and the Ld. AO had wrongly denied to compute and allow carry forward of such business loss.
2. The Ld. CIT(A) erred in sustaining the disallowance of depreciation of
Rs. 95,13,602/- on intangible assets.
3. The Ld. CIT(A) erred in confirming the disallowance of Rs.32,92,445/- claimed as depreciation on tangible assets which were used for business
4. The Ld. CIT(A) erred in sustaining the order of the Ld. Assessing Officer who subjected to tax the interest income of Rs. 1,16,20,005/- as income from other sources without adjusting it against the loss of business of the current year.
5. The craves leave to amend or alter any of the above Grounds of Appeal or to add new Grounds of Appeal during the course of appeal proceedings.”
2. Fact in brief is that return of income declaring loss of Rs. 13,04,62,517/- was filed 30.09.2013. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 04.09.2014. During the course of assessment the A.O observed that assesse has not carried out its regular business activities during the F.Y. 20 12-13 relevant to the year under consideration and no income has been credited to the P & L account except interest earned on bank deposit of Rs. 1,16,20,005/- and noticed that assesse has debited various expenses totaling to Rs. 13,59,72,075/- to the profit and loss account. After adjusting interest income the assesse has computed loss for the year under consideration at Rs. 13,04,62,517/-. On query the assesse explained that it was in the business of production and development of internet programs, products, content, services and applications for creating and providing independent interactive platform for various purposes including for business, social group, entertainment, education and knowledge networking and other information etc. During the year the assesse company has started development of online platform for the purpose of creating network for creditors. It was also explained that assesse was neither a trader nor manufacturer and its business was set up immediately on acquiring office and appointed various employees. It had also incurred various expenses in the form of payment on its own employees and outside agencies for starting development of various programs and video contents during the year and also in the previous year for the purpose of the business that the assesse has already set up its business at an early stage of F.Y. 2011-12 and hence entitled to claim deduction. However, the A.O has not agreed with the submission of the assesse and observed that assesse had not carried out any business activity during the year under consideration and no income has been derived by it from its regular business activity. Therefore loss claimed by the assesse company at Rs. 14,20,82,522/- was disallowed and business income was computed at Rs.nil. The interest income credited in the profit and loss account was assessed under the head income from other sources.
3. The assesse filed the appeal before the ld. CIT(A). The ld.CIT(A)has dismissed the appeal of the assesse.
4. During the course of appellate proceedings before the ld. Counsel that vide letter dated 22.01.2016, the assesse had made detailed submission before the A.O in support of its claim of deduction of The ld. Counsel explained that the main business of the assesse was production and development of internet program products, contents etc. and during F.Y. the assesse was fully engaged in its business activity though revenue could not be generated in this year. It is also explained that assesse has made detailed submission before the assessing officer and assesse has claimed expenses of RS. 13,59,72,075/- and particulars of these expenses were also furnished before the assessing officer. These expenses also includes expenses of Rs.5,90,86,852/- on employees benefit, depreciation of Rs.51,14,484/- and other expenses of Rs.7,17,70,739/-. These expenses were incurred in normal course of business of the assesse which was started in assessment year 20 12-13. It was also explained that assesse was in the process of creating platform for its project for its customer, however, subsequently, it was realized that the concept under the particular platform was not workable and viable for the assesse. Therefore, this concept was dropped and the entire amount of Rs.7,50,96,480/- incurred on creation of the said platform was debited to the profit and loss account as exceptional items.
5. The ld. Counsel has also placed reliance on the following judicial pronouncements i.e Bengal Shriram Hitech City (P) Ltd. Vs. ACIT, Circle 2(1), Banglore (2021) 131 taxman.com 241 (Banglore Tribunal) and in the case of Orient Green Power Co. Ltd. Vs. ACIT (2022) 138 taxmann.com 383 (Chennai Tribunal) and in the case of DCIT vs. PPFAS Asst. Management (P) Ltd. (2019) 105 taxmann.com 103 (Mumbai Tribunal) and Hon’ble High Court of Madras in the case of Daimler India Commercial Vehicals (P) ltd. Vs. DCIT, Corporate Circle-1(1) (2019) 107 taxmann.com 243 (Madras) and Hon’ble High Court of Bombay in the case of Western India Vegetables Products Ltd. Vs. CIT (1954) 26 ITR 151 (Bom) and High Court of Delhi in the case of CIT Vs. L.G. Electronic (India) Ltd. (2005) 149 taxman.com 166 (Delhi) and Hon’ble High Court of Bombay in the case of CIT -3 Vs. Axis (P) Equity Ltd (2017) 88 taxmann.com 488 (Bom).
On the other hand, the ld. D.R has submitted that business of the assesse company was not commenced during the year and referred page no. 7 & 8 of the assessment order wherein the A.O has concluded that assesse has not carried out any business activity during the year under consideration and no income has been derived by it from its regular business activity. The ld. D.R. also submitted that at page no. 8 of the assessment order the A.O has stated that assesse has not given supporting evidences in support of its claim that all the expenditure were incurred for running of day to day business activity. The ld. Counsel also submitted that business of the assesse was at the set up stage and supported the order of the lower authorities.
6. Heard both the sides and perused the material on record. Without reiterating the facts as elaborated above in this order the assessing officer disallowed the claim of business loss of Rs. 13,04,62,517/- on the ground that assesse has not commenced its business and income has been derived by it from its regular business activity. During the course of assessment vide submission dated 22.01.2016 assessee has explained that it was in the business of production and development of internet program, products, contents, services, and application for creating and providing independent interactive platform for various purposes including for business, social group, entertainment, education and knowledge networking and other information through the internet or any other known or unknown means of communication and to produce, acquire distribute or purchase or license any audio & visual content including any edited or/remixed content for multimedia television, under working mobile, radio, cable started online platform and other networking mobile, radio, cable, satellite, online platform or other network or media etc. The output services of the assesse company was in the form of advertisements within the content (mainly video content) which can be telecasted/uploaded on any platform like you tube, television, face book, mobile etc. and then the revenue is generated from sponsors. As a start-up company, the assesse has incurred cost for branding of the company which creats popularity which helps promotion of contents at the time of its product launch. The assesse company has also appointed a chief Marketing officers during the financial years. During the course of assessment vide letter dated 16.02.2016 the assesse has also explained nature of various expenses incurred along with reason for incurring these expenditure The reason for incurring some of such expenses are given as under:
