HIKE PVT LTD,DELHI vs. ACIT, CIRCLE-11(2), NEW DELHI

PER SHAMIM YAHYA, ACCOUNTANT MEMBER:

“1. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the action of learned Assessing officer in re-characterizing the business expenses amounting to Rs. 21,02,30,236/- as capital expenditure allegedly on the ground that the assessee is engaged in brand building and does not presented any revenue model before the learned AO and the learned CIT(A).

2. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the action of learned Assessing officer and not appreciating the fact that the Income Tax law does not provide for any type of self- generated brand as asset under Section 32 of the Act.”

“The fact of the case is totally different from the fact of cases relied upon the assessee. In all the above referred cases, efforts have been made to earn income but income could not be realized whereas in this case, the assessee has not started any effort to earn income. It is just in process of making a brand for future utilization of earning income so any expenses thereupon can’t be held to be held in the expenses in the nature of revenue. Moreover, when there is no income chargeable u/s 28, no expenses u/s 30 to 37 can be claimed in this regard. In view of the total expenses claimed in the P&L a/c of Rs. 21,02,03,236/- is hereby disallowed and capitalized.”

“I have considered the finding of the AO and submission of the appellant. On going through the expenditure claimed by the appellant such as development fees, SMS and activation cost, management consultancy charges, huge salary expenses to the Professionals, these expenses cannot be termed as pure revenue expense to be allowable u/s 30 to 37 when there is no income chargeable to tax u/s 28 of the Act. No material facts has been brought on record by the Ld.AR substantiate its claim as revenue nature of expenses. The nature and characteristics of these expenses have the element of giving benefit to the appellant for a longer period and of enduring nature. The view of the AO that the assessee has no income which is chargeable under the head 'Profits and gains of business or profession’ is upheld. Further, as has also been pointed out by the AO, once there is no income which is chargeable under the head ‘Profits and gains of business or profession’, deductions which are specific to the said head on income are not admissible. It is also a fact that the appellant has not tried to evolve a model where income start generating. Even in subsequent years, no income has been generated. These expenditure has not been incurred for ongoing business where revenue has been generated earlier and there is a low on revenue front at present. It is a case where no revenue model has been presented by the appellant even before AO and in appeal. Ld.AR has not shown any model in which revenue is likely to be generated. In view of these facts, I agree with the finding of the AO that the appellant is in the process of making a brand for future utilization of earning income. Brand name is an intangible asset and the said view finds support from AS-26 i.e. Accounting Standard issued by the Institute of Chartered Accountants of India. AO has rightly disallowed these expenses and treated as expense of the capital nature. Further, reliance is placed on the decision of Hon’ble Bombay High Court in the case of ALD Automotive Pvt. Ltd. Vs. DCIT (2018) 254 taxmann 233 & also on the decision of Hon’ble Calcutta High Court in the case of Video Plaza Vs. ITO, 385 ITR 404. The Ground of appeal is dismissed.”

5. Against the above order assessee is in appeal before us. We have heard both the parties and perused the records. Ld. Counsel of the assessee contended that assessee is a tech start-up and there is long gestation period for such enterprises. He further submitted that the Revenue authorities’ view that earning of income is a precondition for allowing the expenditure is without any basis.

He further pleaded that the nature of these expenses is totally revenue. He further submitted that Revenue authorities have not understood the business model of the assessee wherein revenue can be earned at any time during the course of business. He submitted that assessee has already built a messenger app namely ‘hike’ which was used by public in same manner as Whatsapp. He submitted that the presumption that the assessee has not made any effort to earn is misplaced. He further submitted that the case laws relied upon by the Ld. CIT(A) are not at all applicable on the facts of the case. He further submitted that the expenditure incurred after setting up of business is an allowable expense. That the expenditure was accepted and allowed in preceding years.

Further, Ld. Counsel of the assessee placed reliance upon several case laws for the proposition that these expenditures are not capital in nature for brand building. He further submitted that there is no provision in law to recognize self-generated intangible asset. Further he relied upon Hon’ble Delhi High Court decision in the case of Maruti Insurance Broking Pvt. Ltd. Vs. DCIT 127 taxman.com 685. Further, he placed reliance upon ITAT decision in assessee’s own case for AY 2012-13 in vide order dated 05.07.2022 where while quashing the order passed section 263 ITAT has observed that the view that earning of income is necessary for allowance expenditure is not sustainable. Per contra ld. DR for the Revenue relied upon the orders of authorities below.

“It was held in this case that business does not conform to ‘cold start’ doctrine and most cases, there was gap between time a person or entity is ready to do business and when business is conducted and during this period, expenses are incurred towards keeping business primed up and these expenses cannot be capitalized. Hence, it was held that expenditure incurred between setting up and commencement of business could not have been capitalized and was to be allowed as business expenditure.”