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TMI Blog2021 (4) TMI 875X X X X Extracts X X X X X X X X Extracts X X X X ..... 012-13 and consequently deduction for expenditure incurred was not allowable? B. Whether on the facts and circumstances of the case, 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? 1.1. It is required to be noticed that the said questions of law were framed in the background of the arguments advanced on behalf of the assessee that the findings of the Tribunal were "perverse and contrary to the proviso appended to Section 3 of the Act". Therefore, we would like to frame, at this juncture, the third question of law, so that the controversy involved is, clearly, etched out. C. Whether in the facts and circumstances of the case, the Tribunal's finding that the assessee set up its business on 02.02.2012, that is, when it was granted a license by the Insurance Regulatory Development Authority (IRDA), was perverse? Background Facts: 2. For us to adjudicate upon the aforementioned questions of law, the following facts are required to be noticed: - 2.1. The assessee was incorporated on 24.11.2010. The first meeting of its board of directors was held on 29.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. 2.7. Insofar as the subject AY is concerned, i.e., AY 2012-2013, the same was selected for scrutiny and the assessment order was framed under Section 143(3) of the Act. The order framing the assessment was passed on 31.12.2014. The Assessing Officer [in short 'AO'], while framing the assessment concluded that since the license was issued by IRDA on 02.02.2012, the assessee's business could not have been set up prior to that date, and therefore, the entire business expenditure amounting to Rs. 2,78,22,376/- was required to be disallowed, and capitalized as preoperative expenses. 2.8. Being aggrieved, the assessee preferred an appeal with the Commissioner of Income Tax (Appeals) [in short 'CIT (A)']. The CIT (A) vide order dated 18.10.2016 sustained the order passed by the AO. The assessee carried the matter further and lodged an appeal with the Tribunal. The appeal preferred by the assessee with the Tribunal met the same fate. The Tribunal sustained the view taken by both CIT (A) as well as the AO. 2.9. It is in this backdrop that the assessee preferred the instant appeal. Submissions on behalf of the assessee: 3. Mr. Ajay Vohra, learned senior counsel, who appears for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arry on insurance work; it could not have carried on the said business unless it had been issued a license by the IRDA. Furthermore, in support of his submission, Mr. Bhatia says that under Regulations 8 and 17 of 2002 Regulations, IRDA was empowered to reject the application of the assessee for grant of a license. 3.3. In support of his plea, Mr. Bhatia relied upon the judgement rendered by the Supreme Court in the Ramaraju Case and the judgment of the Division Bench of this Court rendered in Marvel Polymers (P.) Ltd. vs. Commissioner of income-tax, [2007] 165 TAXMAN 618 (DELHI) [in short "Marvel Polymers (P.) Ltd. Case"]. Analysis and reasons: 4. We have heard the learned counsel for the parties and perused the record. The facts, noted by us hereinabove, are not in dispute. What comes through, upon a perusal of the record, is as follow: - (i) The assessee was incorporated on 24.11.2010 as the joint venture of the following entities, i.e., MSIL, Track Component Ltd., Sunbeam Auto Pvt. Ltd. and IFB Automotive Pvt Ltd. (ii) The object and purpose for which the assessee was set up, was to conduct the business of soliciting and procuring life and/or general insurance business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, insofar as a newly set up business or profession is concerned, or qua a source of income newly coming into existence, the FY, as per the proviso to Section 3 of the Act, is the period spanning between the date of setting up of the business or profession [or as the case may be, the date on which the source of income newly comes into existence] and the date when the financial year ends. Therefore, if a newly set up business is set up in the financial year, the previous year begins from the date when it is set up and ends with the date on which the financial year ends. 5.2 Thus, the previous year gets tied in with Section 4 of the Act, which is, the charging section. In brief, Section 4, inter alia, provides that income arising in the previous year is chargeable to tax in the relevant AY. Thus, income from business and profession, which is carried out in the previous year, can be brought to tax under Section 28 of the Act. This income, in terms of Section 29 of the Act, is required to be computed in accordance with the provisions contained in Sections 30 to 43D of the Act. The fact that, in the instant case, the assessee took the stand that it had set up its business when it f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reached the High Court that it was able to put forth its case successfully that it had set up its business after 01.04.1957. The Supreme Court, while adjudicating upon the appeal filed by the revenue, applied the dicta obtaining in Western India Vegetable Products Ltd. Case. The Supreme Court did not permit the revenue to argue that although the operations for establishment of the new unit had commenced prior to 01.04.1957, the unit was set up thereafter. The Supreme Court observed that since all along, the case projected by the revenue was that assessee had not set up its unit before 01.04.1957, it would have to be concluded that the unit was set up at the same time when the operation for its establishments commenced. The important point to be noticed is the difference in the language which appears in proviso to Section 3 of the Act [i.e., the Income Tax Act, 1961] and that which obtained in the provisions of the W.T.A. considered in Ramaraju Case. Pertinently, the deduction was available under the W.T.A. to that portion of the net wealth of a company/assessee, [which was established with the object of carrying on industrial undertaking in India] - as was employed by it, in a new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The 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. 8. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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