2019 (3) TMI 1295 - AT - Income Tax

Allowability of expenses u/s 37 - SEBI approval on 17.10.2012 - asset management company - certificate of registration for the mutual fund scheme from SEBI after end of financial year - twin conditions, firstly that the tax- payer company should be registered under the Companies Act, 1956 and secondly it should be approved as such by SEBI - HELD THAT - Thus, we hold that the business of the assessee before us was set up and ready to commence its business on 17.10.2012 when it got approval from SEBI vide Sub-regulation (2) of Regulation 21 of the 1996 Regulation. We, therefore, hold that the assessee is entitled to a deduction of admissible business expenses incurred by it on or after 17.10.2012 when the business can be said to have been set up by the assessee. We, therefore, direct the Assessing Officer to quantify the amount of expenses in the light of our decision above and allow the same as per law after examining and verifying the genuineness of the expenses and their admissibility under the provisions of Income-tax Act which were incurred post 17.10.2012 till the end of the relevant previous year under consideration before us. The AO shall provide reasonable opportunity of being heard to the assessee while quantifying the amount of business expenses incurred by the assessee on or after 17.10.2012 till the end of the relevant previous year under consideration before us. Since, both the authorities below failed to consider this relevant and vital event of grant of SEBI approval in favour of the assessee on 17.10.2012, we direct the assessee to produce the copy of aforesaid SEBI approval before the AO for necessary verification and records - The appeal of the Revenue is partly allowed as indicated above.

Issues Involved:
1. Whether the assessee's business was set up during the impugned assessment year to claim deduction of expenses under Section 37(1) of the Income-tax Act, 1961.
2. Whether the expenses incurred by the assessee prior to obtaining SEBI approval can be allowed as business/revenue expenses.

Issue-wise Detailed Analysis:

1. Whether the assessee's business was set up during the impugned assessment year to claim deduction of expenses under Section 37(1) of the Income-tax Act, 1961:

The main issue in this appeal was to determine whether the assessee's business was set up during the assessment year 2013-14, allowing it to claim expenses incurred as business/revenue expenses under Section 37(1) of the Income-tax Act, 1961. The assessee, an asset management company incorporated on 8th August 2011, required SEBI approval to commence its business. The assessee claimed that its business was set up and commenced from the date of incorporation, while the Assessing Officer (AO) contended that the business was not set up as it had not received SEBI approval during the relevant financial year.

The Tribunal examined the provisions of Section 3 of the Income-tax Act, which defines the "previous year" as the financial year immediately preceding the assessment year. It stipulates that in the case of a newly set up business, the previous year shall begin from the date of setting up the business. The Tribunal noted that the business is considered set up when it is established and ready to commence operations, even if actual business activities have not started.

The Tribunal referred to several case laws, including the decision of the Hon'ble Bombay High Court in Western India Vegetable Products Limited v. CIT, which emphasized that the business is set up when it is ready to commence operations. The Tribunal found that the assessee received SEBI approval to act as an asset management company on 17th October 2012, which was a statutory requirement for commencing its business. Thus, the Tribunal concluded that the assessee's business was set up on 17th October 2012, and it was entitled to claim expenses incurred from that date.

2. Whether the expenses incurred by the assessee prior to obtaining SEBI approval can be allowed as business/revenue expenses:

The AO disallowed the expenses claimed by the assessee on the grounds that the business was not set up as it had not received SEBI approval during the relevant financial year. The AO treated the expenses as pre-operative expenses and not allowable under Section 37(1) of the Income-tax Act. The CIT(A) allowed the expenses, relying on the decision of the ITAT Delhi in the case of Whirlpool of India Limited and the decision in the assessee's own case for the preceding year.

The Tribunal analyzed the nature of the business and the statutory requirements for an asset management company. It noted that the business of an asset management company is highly regulated, and the assessee could not commence its business without SEBI approval. The Tribunal held that the expenses incurred prior to obtaining SEBI approval were preparatory steps and not allowable as business expenses. It concluded that the assessee's business was set up and ready to commence on 17th October 2012, when SEBI granted approval. Therefore, only the expenses incurred from 17th October 2012 onwards were allowable as business expenses, provided other conditions for allowability were met.

Conclusion:

The Tribunal directed the AO to quantify the expenses incurred by the assessee from 17th October 2012 till the end of the relevant financial year and allow them as business expenses after verifying their genuineness and admissibility under the Income-tax Act. The appeal of the Revenue was partly allowed, and the assessee was directed to produce the SEBI approval for verification. The Tribunal's decision was based on the interpretation of relevant statutory provisions, case laws, and the specific facts and nature of the assessee's business.

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