IT: Where assessee construction company had erected barricades for smooth construction of roads, cost of their erection was to be allowed against income from advertisements placed on such barricades

IT: Where assessee construction company had erected barricades for smooth construction of roads, cost of their erection was to be allowed against income from advertisements placed on such barricades

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[2013] 37 taxmann.com 28 (Chennai - Trib.)

IN THE ITAT CHENNAI BENCH 'D'

IT Expressway Ltd.

v.

Income-tax Officer, Company Ward-II(1)*

ABRAHAM P. GEORGE, ACCOUNTANT MEMBER 
AND V. DURGA RAO, JUDICIAL MEMBER

IT APPEAL NO. 795 (MDS.) OF 2013
[ASSESSMENT YEAR 2006-07]

JULY  18, 2013 

Section 57 of the Income-tax Act, 1961 - Income from other sources - Deductions [Wholly and exclusively incurred] - Assessment year 2006-07 - Assessee, engaged in construction, had erected barricades for smooth constructions of roads, and earned income from advertisements placed on such barricades - Whether, where Assessing Officer treated income from advertisements placed on barricades as income from other source, cost of construction of such barricades was to be set off as expenditure wholly and exclusively incurred for purpose of making such income - Held, yes - Whether alternatively, if cost of barricades were to be considered as preliminary and pre-operative expenditure, income from advertisements would only go to reduce such expenditure - Held, yes [Para 6] [In favour of assessee]

M. Viswanathan for the Appellant. S. Dasgupta for the Respondent.

ORDER

 

Abraham P. George, Accountant Member - In this appeal filed by the assessee, its grievance is that cost of erection of barricades and maintenance Rs. 52,20,830/- was not allowed to be set off against advertisement income of Rs. 30,60,000/-.

2. Facts apropos are that assessee, engaged in construction of a portion of OMR from Madhya Kailash of Adyar upto Siruseri, was doing the project on build, operate and transfer basis. Expenditure incurred for construction of the road was considered by the assessee as project cost that was to be recouped from the Government of Tamil Nadu, lateron, when the road was handed over to the Government. During the road laying work, for controlling the heavy flow of traffic, barricades were erected. Cost of erection of barricades and maintaining such barricades, as per assessee, came to Rs. 52,20,830/-. Assessee had placed certain advertisements on such barricades which earned it an income of Rs. 30,60,000/-. Assessee had claimed set off of barricade erection and maintenance cost against such advertisement income. Assessing Officer put the assessee on notice as to how the cost of barricades could be reduced from advertisement income. Reply of the assessee was that barricades were temporary structures and to meet a part of the cost of barricades, advertisements were placed thereon. Therefore, as per the assessee, the barricades were necessary expenditure incurred for earning the advertisement income which had to be allowed to be set off. However, the Assessing Officer was not impressed. According to him, barricades erected were only to control vehicular traffic and assessee's business was not to earn revenue from advertisement income. As per the Assessing Officer, such advertisement income was only incidental. Just because these were temporary structures, it could not be considered as revenue outgo. Assessing Officer also noted that assessee had not commenced any commercial activity, since toll collections were yet to begin. Expenses incurred for barricades, according to A.O., were in the nature of preliminary and pre-operative expenses, which had to be capitalized. He, therefore, disallowed the claim of cost of barricades.

3. Assessee's appeal on this issue before the CIT(Appeals), did not meet with any success. According to ld. CIT(Appeals), assessee had reduced from its pre-operative expenditure the amount incurred by it for erection of barricades and no reason whatsoever was given for such reduction. Ld. CIT(Appeals) gave a finding that assessee's claim of the expenditure as a business outgo, could not be accepted.

4. Now before us, learned A.R., strongly relying on clause (iii) of Section 57 of Income-tax Act, 1961 (in short 'the Act'), submitted that but for the barricades, advertisement income could not have been earned. Barricades were necessarily used for earning the advertisement income. It was an admitted position that the barricades were temporary in nature. Hence, according to him, even if the income from advertisement were considered as income from other sources, cost of barricades had to be allowed as deduction.

5. Per contra, learned D.R. strongly supported the orders of authorities below. According to him, assessee had not started commercial operation. Expenditure incurred on barricades could only be considered as pre-operative expenditure. Earnings from advertisements were not business income since commercial operations had not started.

6. We have perused the orders and heard the rival submissions. There is no dispute that Assessing Officer had considered the income from advertisement placed on the barricades, under the head "income from other sources". As against this, assessee's claim is that expenditure incurred on barricades should not be considered as a part of pre-operative expenditure, but had to be allowed for set-off against advertisement revenue. In our opinion, if the cost of barricades and maintenance are to be considered as a part of pre-operative expenditure, then the income arising out of advertisement placed on such barricades, would only go to reduce the pre-operative expenditure. It is not akin to interest on fixed deposits. Interest earned on deposit, is considered under the head "Income from other sources" when surplus funds are kept in bank. On the other hand, erection of barricade was a necessary operation required for execution of the project of the assessee, which was construction of roads. Without such barricades, smooth construction or smooth execution of the project could not have been possible. In our opinion, earning of income from advertisement placed on such barricades, might have been incidental, but nevertheless, without such barricades, the income could not have been earned. If the advertisement income is to be considered under the head "income from other sources", then necessarily cost of barricades had to be considered as expenditure wholly and exclusively incurred for the purpose of making such income. If, on the other hand, the cost of barricades were to be considered as preliminary and pre-operative expenditure, revenue earned on advertisement would only go to reduce such expenditure. In any view of the matter, assessee was entitled for claiming the barricade expenditure as expenses against income on advertisement. We are thus of the opinion that the assessee has to succeed in its appeal.

7. In the result, appeal filed by the assessee is allowed.