ACIT, CIRCLE-16(1), MUMBAI vs. M/S TALENTUBE ENTERTAINMENT PVT. LTD., MUMBAI

आदेश / O R D E R

PER PAVAN KUMAR GADALE:

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“i) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of Rs.2,83,61,631/- without appreciating the fact that the assessee company has claimed huge expenses as compared to the income offered for taxation? ii) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of Rs.2,83,61,631/- without appreciating the fact that the said expenses can be classified as "PRE OPERATIVE EXPENSES", which are in the nature of capital expenditure and not a revenue expenditure? iii) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of Rs.2,83,6 1,631/- without appreciating the fact that the said expenses carry enduring and long term benefit to the assessee and therefore, are not current expenses to be allowed as Revenue Expenditure?

M/s Talentube Entertainment Pvt. Ltd. - 3 - iv) Whether on the facts, in the circumstances of the case and as per law, the Ld.CIT(A) has erred in directing to delete the disallowance of Rs.2,83,61,631/- without appreciating the fact that there is no significant business activity in the assessee company during the year. v) The appellant prays that the order of Ld.CIT(A) on the above grounds be set-aside and that of the assessing officer be restored. vi) The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

M/s Talentube Entertainment Pvt. Ltd. - 4 - 3,93,91,032/- and the assessee has offered meager income from online application fees of Rs. 2,56,011/-.The AO asked the assessee to justify the claim and in response, the assessee has filed explanations vide letter dated 12.02.2016 referred at para 4.1 of the order. Whereas the A.O has bifurcated the office & administrative expenses, pre-operative expenses and disallowed expenses of Rs 2,83,16,631/- and observed that the assessee has not made any business activity in the said financial year and assessed the total income of Rs.(-) 27,57,673/- and passed the order u/s 143 (3) dated 09.03.2016.

5. Aggrieved by the CIT(A) order, the Revenue has filed the appeal before the Hon’ble Tribunal. At the time of hearing, the Ld.DR submitted that the assessee has not carried on M/s Talentube Entertainment Pvt. Ltd. - 5 - any business activity and all the expenses are in the nature of preoperative expenses and further the Ld.CIT (A) has erred in granting the relief. Contra, the Ld.AR supported the order of the Ld.CIT(A) and relied on the judicial decisions, written submissions and prayed for dismissal of the revenue appeal.

6. We heard the rival submissions and perused the material on record. The Ld.DR submitted that the nature of expenditure does not qualify for claim in the profit and loss account because of low income earnings by the company. The Ld.AR emphasized that the assessee company is a startup company and was incorporated in December 2011.The A.O.has erred in disallowing the expenditure as preoperative and expenses not relating to the business. We find the Ld.CIT (A) has considered the judicial decisions of the co-ordinate Bench of the Hon’ble Tribunal and observed at page 4 para 6.2.1 to 6.2.3 of the order and granted relief, which is read as under :-

“6.2.1 The appellant also placed reliance on the judgment of Hon’ble ITAT Mumbai Bench ‘K’ in the case of Radhashir Jewellery Co. (P) Ltd. v. ACIT , Circle-8(3). The relevant part of judgment is reproduced as under: It is a fact the TPO had compared results of selected 12 comparables without bringing them on same platform, that he

M/s Talentube Entertainment Pvt. Ltd. - 6 - ignored the fact that the assessee was a new unit, that effective sales happened only in 3 months of the calendar year 2008, i.e., September, October and November of the year under consideration. For making TP adjustments, as pe.r the provisions of section 92, comparison has to be made between the two equals. An assessee who starts business in a particular year cannot be compared with the assessees who are doing business for many a years even if comparison of such an assessee has to be made then it has to be seen that both are at same level No assessee can achieve full capacity of production for an assessment year. if it starts business in the later part of that year In the case under appeal major sales are not throughout the whole year, whereas the expenses incurred by it are same or almost the same as compared to the expenses of the next year. It is a fact that the assessee had achieved sales of Rs. 62 crores in next assessment year. It is not a more coincidence. The above results for the next year were achieved because processes got stabilised by that time though the assessee was working on almost the same Asset Base in both the years. It is a fact that assessee had used only 21 per cent of its total production capacity. The Annual Accounts of the assessee-company proves the above facts and it is also true that the fact has not been disputed by the departmental authorities. [Para 5.1] ..An analysis of the annual accounts indicates that the profit on materials consumed was 9.80 per cent for assessment year 2008- 09 and 10.70 per cent for the assessment year 2009-2010. It is a vital factor to decide the issue. The assessee had suffered loss during the year because expenses incurred by it commensurated with sales of the next year (Ps. 60 crores, whereas it could achieve sales of Ps. 16 crores only in the year under appeal. It is also a fact that availability of working capital and size of inventories affect the profit of the companies. Business is not a simple arithmetical formula-so many factors affect the final outcome, i.e., the profit. Therefore, for arriving at fair and just conclusion such facts cannot and should not be ignored-otherwise

M/s Talentube Entertainment Pvt. Ltd. - 7 - an absurd and distorted result will follow. The basic purpose of taxation proceedings. including the TP proceedings, is to determine the due taxes for the sovereign. Without considering all the relevant and material facts due taxes cannot be assessed In the case: the basic fact of capacity-under utilisation has been ignored. Besides, depreciation would also have bearing on taxable income. Even in cases of domestic companies it plays a vital role. In the initial years most of the manufacturing companies suffer losses because of high depreciation. In short, for determining fair TP adjustments, the TPO/FAA should have considered these vital factors and given finding. Along with the depreciation certain fixed operating costs, like Factory Rent, Testing Research & Development Cost etc. would have to be incurred irrespective of the level of production Respectfully following the cases relied upon by the AR that appropriate adjustment, i.e., capacity underutilization and depreciation has to be allowed while computing the net margins in the case of tested party to facilitate comparability analysis (Para 5.2]. From the above decided case, the following emerge. 1) To judge whether there was start of business activity, the activities of the business have to be compared with activities of similar businesses. 2) The comparison has to be at similar levels.

6.2.2 Further, reliance was placed on the judgement of Hon'ble ITAT Mumbai Bench 'I in the case of Agrani Telecom Ltd. v. ACIT. Circle- 8(1), [2013] 39 taxmann.com 155. The relevant part of judgement is reproduced as under:

From the records, it is seen that the assessee was already in the business of trading and transportation service for which it has shown receipts and offered income therefrom. In this year. the assessee had ventured into service industries in fleet management service and providing security products and networking solutions. For the purpose of this service industry, the assessee has entered into a consultancy

M/s Talentube Entertainment Pvt. Ltd. - 8 - agreement. It is not a case of the department that there is no continuity of business with common management and fund. If there is continuity of business with common management and fund. then even if the assessee has started a new line of business in this year, the payment made for carrying out such running of new business, is nothing but a business expenditure which has to be allowed in the year in which it has been incurred.

The expenditure incurred in the form of consultancy charges though may be for enduring benefit of service industry started by the assessee, however, falls in revenue field and cannot be held to be capital in nature.

For deciding the issue whether the expenditure is capital or revenue in nature, the concept of enduring benefit is quite a paramount factor but such test of enduring benefit at times gets failed as not each and every advantage of enduring nature can be of capital field. There may be a case where expenditure have been incurred for obtaining advantage of enduring benefit but nonetheless -they may be on revenue account. What has to be seen is the nature of advantage in a commercial sense whether it is in the capital field or for the running of the business. If the advantage is necessitating the business operations for enabling the assessee to do business for earning some profit without having impact on fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage may endure in future. Thus, the test of enduring benefit cannot he held to be conclusive.

In the instant case, there is no augmentation of asset to the assessee but the expenditure has helped the assessee to develop a proper guidance for running the new line of service industries. Thus, the payment for consultancy charges is on account of revenue field only and has to be allowed as revenue expenditure under section 37(1) as it is wholly and exclusively for the purpose of business. [Para 7] From the above decided case, the following emerge.

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In case of continuity of business, then payment made for carrying out such running of new business has to be allowed as business expenditure

6.2.3 Business of the assessee was started in immediately preceeding year that is A.Y. 2012-13. The Ld. AO allowed all such expenses in earlier year. During the year under consideration there were receipts although in small amounts. The facts of the appellant are similar to the facts decided by Honble ITATs in case of Pinebridge India (P.) Ltd. v. ACIT(supra), Agrani Telecom Ltd. v. ACIT(supra) and Radhashir Jewellery Co. (P.) Ltd. v. ACIT(supra). Therefore, respectfully following the judgement of Hon'ble ITAT as discussed in the foregoing paras appeal of the assessee is allowed and adhoc disallowances made by the AO are deleted.”

The Ld. DR could not controvert the observations of the Ld. CIT (A) with new cogent material information and has relied on the observations and the findings of the AO. Whereas, the Ld.CIT(A) considered the facts on startup company and relied on the judicial decisions and passed a reasoned order. Accordingly, we do not find any infirmity in the order of the Ld.CIT(A) and uphold the same and dismiss the grounds of appeal of the revenue.

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Order pronounced in the open court on 09.03.2021.