In a recent case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that branding expenses by a Start-Up before the commencement of business constitute “Business Loss” and a claim by the assessee was allowed.
M/s Qyuki Digital Media Private Limited, the assessee challenged the order passed by the CIT(A)-21, Mumbai, which upholds the disallowance of business loss of Rs.13,04,62,517/- without appreciating that the assessee had already commenced its business and the AO had wrongly denied to compute and allow carry forward of such business loss.
The assessee filed the return of income declaring a loss of Rs.13,04,62,517/- filed 30.09.2013. The notice under section 143(2) of the Income Tax Act, 1961 was issued. The A.O observed that the assessee has not carried out its regular business activities and no income has been credited to the P & L account except interest earned on a bank deposit of Rs.1,16,20,005/- and noticed that the assessee has debited various expenses totalling Rs.13,59,72,075/- to the profit and loss account.
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 an independent interactive platform for various purposes including for business, social groups, entertainment, education and knowledge networking and other information etc. It was also explained that assesse was neither a trader nor a manufacturer and its business was set up immediately by acquiring an office and appointing various employees.
The A.O. observed that 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 CIT(A) has dismissed the appeal of the assesse.
It was observed that as a start-up company, the assesse has incurred costs for branding the company which creates popularity and helps the promotion of content at the time of its product launch. The assesse company has also appointed a chief marketing officer during the financial years.
On perusal of the balance sheet of the assesse a Coram comprising of Shri Amarjit Singh, AM & Shri Rahul Chaudhary, JM noticed that the assesse has shown fixed assets under the head tangible assets of Rs.45,46,616/- and intangible assets of Rs.11,30,761/- and also shown current asset under the head trade receivable at Rs.5,61,800/-, cash and cash equivalent Rs.7,97,69,045/, short term loan and advances Rs.33,70,647/- and other current assets at Rs.17,09,240/-.
While allowing the appeal, the Tribunal directed the assessing officer to allow the claim of business loss of Rs.13,04,62,517/- of the assesse.
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