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TMI Blog2020 (2) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... jasvi Jain, CA, Ms Somya Jain, CA For the Revenue : Ms Rakhi Bimal, Sr. DR ORDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order dated 18th October, 2016 of the CIT(A)-6, Delhi, relating to assessment year 2012-13. 2. Facts of the case, in brief, are that the assessee is a company and is engaged in the business of soliciting motor insurance business. It was incorporated on 24.11.2010 and applied for grant of direct broker licence to IRDA, vide application dated 01.12.2010 and was awarded licence as a direct broker of IRDA in February, 2012. It filed its return of income on 29th September, 2012 declaring an income of ₹ 23,750/- and claiming current year loss of ₹ 2,78,22,376/-. 3. The AO, during the course of assessment proceedings noted that the assessee company has claimed the expenses of ₹ 2,78,22,376/- as business expenses incurred in the course of the business which includes 1/5 of the preoperative expenses capitalized in the previous financial year, i.e., 2010-11. From the details furnished by the assessee, he noted that during relevant previous year, no business activity commenced by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the action of the assessing officer in completing assessment under section 143(3) of the Income Tax Act, 1961 ( the Act ) at total income of ₹ 23,750/- as against loss of ₹ 2,78,22,376/- returned by the appellant. 2. That the CIT(A) erred on facts and circumstances of the case and in law in confirming the action of the assessing officer in disallowing business expenses of ₹ 2,78,22,376/- holding that the same should be capitalized as preoperative expenses. 2.1 That the CIT(A) erred on facts and circumstances of the case and in law in not appreciating that expenses were allowable revenue deduction since business of the appellant was set up on 01.12.2010 when the appellant had put in place necessary infrastructure facilities and was in the state of readiness to commence commercial operations. 2.2 That the CIT(A) erred on facts and circumstances of the case and in law in holding that the appellant s business was not set up during the relevant year, without appreciating that the date of actual grant of license and actual commencement of operations was immaterial. 3. That on the facts and circumstances of the case and in law, the appellant should be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on various decisions, the ld. Counsel submitted that the critical date for allowability of expenses is the date of setting up of business and not the actual commencement of business. He submitted that business is regarded as having been set up when the assessee is in a state to commence business. As soon as an activity, which is an essential activity in accordance with the business is started, the business must be held to be commenced. Referring to the decision of the Hon ble Delhi High Court in the case of CIT vs. Dhoomketu Builders Developers (P) Ltd., 368 ITR 680 (Del), he submitted that the Hon ble High Court in the said decision has held that the acts of applying for participation in tender, borrowing of monies on interest from holding company and deposit of borrowed monies on same day as earnest money clearly established that business had been set up by the assessee in relevant year. Referring to the decision of the Hon ble Delhi High Court in the case of Omniglobe Information Tech India (P) Ltd. vs. CIT, 369 ITR 1 (Del), the ld. Counsel submitted that the Hon ble High Court in the said decision has held that as soon as the activity which is essential in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was set up by that date. He submitted that the various decisions relied on by the ld. Counsel are not applicable to the facts of the present case and are distinguishable. Referring to the decision of the Hon ble Delhi High Court in the case of Dhoomketu Builders Developers (P) Ltd. (supra) relied on by the ld. Counsel for the assessee, he submitted that the Hon ble High Court in the said decision has held that the question as to when a business can be said to have been set up is a question of fact to be ascertained on the facts and circumstances of each case and considering the nature and type of the particular business and no universal test or formula applicable to all types of business can be laid down. He submitted that in the instant case, unless and until the assessee gets the licence from IRDA, it cannot be said that the business of the assessee has been set up. The ld. DR drew the attention of the Bench to para 2.2.2 of the CIT(A) which reads as under:- 3.2.2 A close examination of the facts shows that though the appellant had applied for the grant of Direct Broker License to the insurance Regulatory and Development Authority on 01/12/2010, it was granted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22,376/- being preoperative expenses and rejected the claim of revenue expenditure made by the assessee on the ground that the assessee cannot be said to have commenced its business activity as the assessee has got the licence from IRDA in the month of February, 2012 and policy was issued by them during the period relevant for A.Y. 2012-13 and, accordingly, no income has been booked by them. We find the ld.CIT(A) upheld the action of the AO on the ground that mere application for obtaining licence does not give the benefit of the business having been set up. While holding so, he relied on a host of decisions and came to the conclusion that during the relevant period, the business of the assessee was not set up and, therefore, he upheld the action of the AO. It is the submission of the ld. Counsel for the assessee that business is regarded as having been set up when the assessee is in a state to commence business. According to him, as soon as an activity which is an essential activity in the course of business is started, the business must be held to be commenced. Since, in the instant case, the assessee had all the infrastructural facilities and had also applied for the licence to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the High Court had interpreted the principal clause without giving full effect to the language of the proviso. The High Court held that unless a factory is erected and the plants and machinery installed therein, it cannot be said to have been set up. The resolution of the Board of Directors, the orders placed for purchasing machinery, licence obtained from the Government for constructing the machinery, are merely initial stages towards setting up, however necessary and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory. Thereafter, the High Court referred to a decision of the Bombay High Court in Western India Vegetable Products, Limited v. Commissioner of Income-tax, Bombay City,(') and on its basis, concluded that the proper meaning to be assigned to the expression set up in section 5(1)(xxi) would be ready to commence business. We are unable to agree with the learned counsel for the Commissioner that in arriving at this view, the High Court c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment of the unit. These operations for establishment of the unit cannot be simultaneous with the setting up of the unit, as urged on behalf of the Commissioner, but must precede the actual setting up of the unit. In fact, it is the operations for establishment of a unit which ultimately culminate in the setting up of the unit. 14. Since the undisputed facts in the instant case is that the assessee has applied for grant of Direct Broker Licence to the Insurance Regulatory and Development Authority on 01.12.2010 which was granted to the assessee only in February, 2012, therefore, in view of the decision of the Apex Court cited (supra), we hold that the business of the assessee has been set up only in February, 2012. Accordingly, the order of the CIT(A) holding that the business of the assessee was not set up during the relevant period and, therefore, the entire expenses has to be disallowed as business expenditure is upheld. The various decisions relied on by the ld. Counsel for the assessee are distinguishable and not applicable to the facts of the present case. Accordingly, the grounds raised by the assessee are dismissed. 15. In the result, the appeal filed by the ass ..... 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