2021 (4) TMI 875 - HC - Income Tax

Non setup of business - disallowance of deduction for expenditure incurred - Tribunal held that the business of the Appellant was set up only in February 2012 on grant of license by the Insurance Regulatory Development Authority - HELD THAT - As the assessee did all that, which was necessary, to set up the insurance broking business. Only to recapitulate, the assessee, after its incorporation opened a bank account, entered into an agreement for deputing employees (who were to further its insurance business), gave necessary training to the employees, executed operating lease agreements, and resultantly, set up offices at 29 different locations across the country. Besides this, as noticed above, the application for obtaining a license from IRDA was also filed on 01.12.2010. In the instant case, IRDA took more than a year in dealing with the assessee's application for issuance of a license. The license was issued only on 02.02.2012 although the assessee was all primed up, i.e., ready to commence its business, if not earlier, since 01.06.2011. The finding recorded by the Tribunal that the assessee set up its business only on 02.02.2012 was perverse and erroneous in law. Assessee, having acquired the necessary wherewithal and physical infrastructure for carrying on its business - it was only waiting for the approval of its application for commencement. Tribunal failed to appreciate the difference between the assessee being ready to commence business and the date from which it conducts business or, as in this, allowed to conduct. It has to be understood that business does not conform to, metaphorically speaking, the cold start doctrine. There is, in most cases, hiatus between the time a person or entity is ready to do business and when business is conducted. During this period, expenses are incurred towards keeping the business primed up. These expenses cannot be capitalized as suggested by the authorities below. We are of the view that if Mr. Bhatia s submission was to be accepted, then, it is quite likely that if, in a given situation, the statutory authority, which is required to grant the approval, delays the issuance of the license, the expenses incurred, in the interregnum, would not be allowed as business expenditure. As noticed above, in this case, the AO, based on the facts noted above, has concluded that the expenses incurred by the assessee are preoperative and have to be capitalised. This approach destroys business efficacy and is not countenanced by the law. Decided in favour of the assessee and against the revenue

Issues Involved:
1. Whether the Tribunal erred in holding that the business of the Appellant was not set up during the previous year relevant to AY 2012-13 and consequently deduction for expenditure incurred was not allowable.
2. Whether the Tribunal erred in law in holding that the business of the Appellant was set up only in February 2012 on grant of license by the Insurance Regulatory Development Authority (IRDA).
3. Whether the Tribunal’s finding that the assessee set up its business on 02.02.2012, when it was granted a license by IRDA, was perverse.

Detailed Analysis:

Issue 1: Tribunal's Error in Holding Business Not Set Up During AY 2012-13
The Tribunal concluded that the business of the assessee was not set up during the previous year relevant to AY 2012-13, thus disallowing the deduction for the expenditure incurred. The assessee argued that the Tribunal's findings were perverse and contrary to the proviso appended to Section 3 of the Income Tax Act, 1961. The High Court examined the facts and noted that the assessee was incorporated on 24.11.2010, held its first board meeting on 29.11.2010, and took several steps towards setting up its business, including appointing key personnel, opening a bank account, and filing an application for a broker’s license with IRDA on 01.12.2010. The Court found that the business was indeed set up during the relevant period, and the expenses incurred should be allowed as deductions.

Issue 2: Tribunal's Error in Holding Business Set Up Only in February 2012
The Tribunal held that the business was set up only in February 2012 when the IRDA granted the license. The High Court disagreed, emphasizing that there is a distinction between the setting up and the commencement of business. The Court noted that the assessee had taken all necessary steps to set up the business well before the license was granted, including executing lease agreements and establishing offices in 29 locations. The Court concluded that the business was set up when the assessee was ready to commence operations, not when the license was granted.

Issue 3: Tribunal’s Finding on Business Setup Date Being Perversely
The Tribunal's finding that the business was set up on 02.02.2012 was challenged as perverse. The High Court found that the Tribunal failed to appreciate the difference between being ready to commence business and the actual commencement of business. The Court highlighted that the assessee had acquired the necessary infrastructure and was ready to commence business by 01.06.2011, but the delay in obtaining the license was beyond the assessee's control. The Court held that the expenses incurred during this period should not be capitalized but allowed as business expenditure.

Conclusion:
The High Court concluded that the authorities below had misdirected themselves on facts. The questions of law were answered in favor of the assessee and against the revenue. The impugned order passed by the Tribunal was set aside, and the appeal was allowed, recognizing the expenses incurred as business expenditure.

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