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Income Tax Appellate Tribunal, DELHI BENCH : E : NEW DELHI
Before: SHRI R.K. PANDA & SHRI K. NARASIMHA CHARY
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.
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 Rs.23,750/- and claiming current year loss of Rs.2,78,22,376/-.
The AO, during the course of assessment proceedings noted that the assessee company has claimed the expenses of Rs.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 company and only it has earned some interest on fixed deposits. He, therefore, asked the assessee to explain as to why these expenses should not be treated as preoperative expenses and capitalized as per the provisions of the Act.
The assessee, in a detailed reply, submitted that it has already set up its business to carry out the business of procuring and soliciting general insurance business in terms of the guidelines laid down by the IRDA. Since the assessee had already applied for licence and had put in place necessary infrastructure facilities, it demonstrates that the assessee’s business was set up on 01.12.2010 and the assessee was ready to discharge the function as insurance broker immediately on grant of formal licence to operate from IRDA. The fact that the licence to operate as insurance broker was granted only in February, 2012 was of little consequence for the purpose of determining the date of setting up of business as the same only resulted in actual commencement of business that was already set up and ready to commence the business operations. However, the AO was not satisfied with the arguments advanced by the assessee. He noted that before obtaining approval from IRDA, the assessee company could not commence its insurance business and not in a position to issue any insurance policy which is assessee’s core activity as per Memorandum of Association of the company. He further noted that the assessee company has got the licence from IRDA in the month of February, 2012 and no policy was issued by them during the period relevant for the A.Y. 2012-13 and, accordingly, no income was booked by them. No income has been booked by the assessee during the year shows that the business of the assessee has not been commenced during the year. The AO held that the expenses incurred by the assessee cannot be allowed as business expenses. He, therefore, capitalized the amount of Rs.2,78,22,376/- being preoperative expenses.
In appeal, the ld.CIT(A), distinguishing the various decisions relied on by the assessee before him and following certain other decisions, upheld the action of the AO.
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:- “
1. That the Commissioner of Income Tax (Appeals) [“CIT(A)”] erred on facts and circumstances of the case and in law in upholding 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 Rs. 23,750/- as against loss of Rs. 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 Rs.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 allowed set-off of business loss against income from other sources in accordance with provisions of Chapter VI of the Act. The appellant craves leave to add, alter, amend or vary the aforesaid grounds of appeal at or before the time of hearing.”
The ld. Counsel for the assessee filed the following chart giving the sequence of events:-
Date Particulars Relevant Page No. of PB 24.11.2010 Date of Incorporation 29.11.2010 Mr. Surendra Srivastava appointed as the Chief Executive 31A Officer (“CEO”) and Principle Officer 29.11.2010 Agreement entered into with Maruti Suzuki India Ltd 32-35 (“MSIL”) for deputation of employees from MSIL to the appellant and providing them Pursuant to the deputation, the employees had undergone 100 hours of mandatory broker training 29.11.2010 1st Board of Directors Meeting held 36-48 01.12.2010 Application made for grant of Direct Broking Licence 30 toInsurance Regulatory & Development Authority (“IRDA”) 31.03.2011 Second Board of Directors meeting held 49-52 01.06.2011 Operating lease agreements entered into with MSIL for 53-82 acquiring office spaces at various locations across the country 02.02.2012 licence as Direct Broker awarded by IRDA 31 31.05.2012 First sale invoice raised for policy sold in April, 2012 83
He submitted that the assessee applied for grant of insurance broker licence, vide application dated 01.12.2010 and was awarded licence as a direct broker of IRDA in February, 2012. He submitted that the licence is not necessary for the setting up of the business and the assessee was already having all infrastructure facilities and was in ready position to commence its business. Accordingly, the order of the Tribunal allowing the claim of expenses was upheld and the appeal filed by the Revenue was dismissed. Relying 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 5 soon as the activity which is essential in accordance with the carrying on of business is started, the business is said to be set up. It was held that when substantially large number of employees after recruitment were kept on pay roll, the assessee paid for Provident Fund, ESI, etc., indicates that business of the assessee was set up. Accordingly, the deduction claimed was held to be allowable. He also relied on the following decisions:- 1. CIT v. ESPN Software: 301 ITR 368 (Del.) 2. CIT vs. Hughes Escort Communications: 311 ITR 253 (Del.) 3. Western India Vegetable Products Ltd. v. CIT: 26 ITR 151 (Bom.) 4. Daimler India Commercial Vehicles (P.) Ltd vs. DCIT: 416 ITR 343 (Mad) 5. CIT vs. Franco Tosi Ingegneria: 241 ITR 268 (Mad.) 6. Religare Macquarie Wealth Management Ltd v. ACIT: 2396/Del/2013 (Del. Trib.) 7. DCIT v. Gujarat Nre Coke Limited: 115 TTJ 822 (Kol Trib.) 8. DCIT v. PPFAS Asset Management (P.) Ltd.: 176 ITD 541 (Mum. Trib.)
He accordingly submitted that since the business of the assessee has already been set up, therefore, the expenditure incurred by the assessee should be allowed as a revenue expenditure and the grounds raised by the assessee should be allowed.
The ld. DR, on the other hand, heavily relied on the order of the CIT(A). He submitted that the ld.CIT(A) has categorically held that for claiming business expenditure the primary condition is carrying on of business during the relevant previous year. The question as to when the business can be said to have been set up is a question of facts and circumstances of each case and considering the nature and type of every business, no universal test or formula applicable to all types of business can be laid down. While doing so, he has relied on various decisions. Referring to the decision of the Hon’ble Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills Ltd., 63 ITR 478 (SC) he submitted that the Hon’ble Supreme Court in the said decision has held that only when the unit had been put into such a shape that it could start functioning as a business or manufacturing organization that it can be said that the unit had been set up. Since, in the instant case, the licence was not issued by IRDA at the time when the said expenses were incurred, therefore, merely because infrastructure facilities were set up by the assessee in December, 2010, it cannot be said that the insurance business of the 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 7 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 to the appellant only in February, 2012. Therefore, it may not be correct to hold that the appellant was in a position to deliver the goods. Obtaining of mandatory approvals from the relevant competent authorities is essential and only after receiving the same, the appellant could have commenced business activities. There is no dispute over the fact that the appellant obtained the approval from IRDA only in February, 2012 and that no income was booked by them during the year. Therefore the simple fact of having applied for the License does not give the benefit of the business having been set up. The issue of commencement of business has been decided by the Hon'ble Supreme Court in its landmark judgment in the case of CWT Vs Ramaraju Surgical Cotton Mills Ltd. {1967} 63 ITR 478 (SC). The Hon'ble Supreme Court has given situation when a business can be said to have been set up or commenced. The Hon'ble Supreme Court has pointed out that a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put to such a shape that it can start functioning as a business or manufacturing organization that can be said that the unit has set up. The Hon'ble High Court of Kerala in S.P.V. Bank Ltd. Vs CIT (1980) 126 ITR 773 (Kerala) has held that in order to sustain a claim or deduction by way of business expenditure the expenditure must have been laid out or expended for the purpose of business which was in existence in the year of account, the profits of which are under assessment. If during the relevant period there was no business the question of allowability of expanses would not arise.”
He submitted that the ld.CIT(A) in a detailed and exhaustive order has given the reasons for disallowing the expenditure as business expenditure, therefore, the same should be upheld and the grounds raised
by the assessee should be dismissed. He also relied on the decision of the Delhi Bench of the Tribunal in the case of BHP Minerals International Exploration Inc. vs. DCIT,
16. SOT 525.
We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO capitalised the expenditure of Rs.2,78,22,376/- 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 IRDA on 1st December, 2010 which was ultimately granted to him in February, 2012, therefore, the business of the assessee has been set up and, therefore, the expenses incurred during the year must be held as business expenditure. It is the submission of the ld. DR that a unit 9 cannot be said to have been set up unless it is ready to discharge the function for which it is being set up.
We find some force in the above argument of the ld. DR. Admittedly, the assessee, in the instant case has applied for licence to IRDA, vide application dated 01.12.2010 and was awarded licence as a direct broker of IRDA only in February, 2012. Before the licence was awarded by IRDA, the assessee under no circumstances could have discharged the function for which it is being set up. We find the Hon’ble Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills Ltd. (supra) has held that a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit had been put into such a shape that it could start functioning as a business or a manufacturing organization that it can be said that the unit had been set up. The relevant observation of the Hon’ble Supreme Court reads as under:-
“It has been urged before us by learned counsel for the Commissioner that the main provision of clause (xxi) should be interpreted in conjunction with the second proviso so as to give a harmonious construction to both parts of the provision with which we are concerned. Relying on this principle, he urged that we should hold that a new and separate unit is set up only when the company commences operations for the establishment of such unit. He relied on the principle stated by Maxwell in his book 'On Inter- pretation of Statutes' 11th Edn. at P. 155 that there is no rule that the first or enacting part is to be construed without reference to the proviso. "The proper course is to apply the broad general rule of construction, which is that a section or enactment must be construed as a whole, each portion throwing light, if need be, on the rest." "The true principle undoubtedly is that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together is to prevail." The view taken by the High Court was challenged on the ground that 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 committed any error. A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing Organisation that it can be said that the unit has been set up. The expression used in the proviso, under which the period for which the exemption is available is to be deter- mined, is not the same as used in the principal clause. In the proviso, the period of five successive years of exemption has to commence with the assessment year next following the date on which the company commences operations for the establishment of the unit. Operations for the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word "set up" in the principal clause, in our opinion, is equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause. This is also the meaning that the Bombay High Court derived in the case of Western India Vegetable Products Ltd.(,) where that Court was concerned with the interpretation of the expression "set up" as used in section 2(l1) of the Income- tax Act. That Court held: "It seems to us that the expression 'settling up' means, as is defined in the Oxford English Dictionary, 'to place on foot" or 'to establish', and is contradistinction to 'commence.' The distinction is this that when a business is established and is ready to commence business, then it can be said of that business that it is set up. But before it is ready to commence business it is not set tip." This view was expressed when that Court was considering the difference between the meaning of the expression "setting up a business" and " commencing of a business." In the case before us, the proviso does not even refer to commencement of the unit.. The criterion for determining the period of exemption is based on the commencement of the operations for the establishment 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.
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.