Facts of the Case

  • The assessee company was incorporated on 27.07.1995 as a financial enterprise.
  • The first Board Meeting was held on 12.08.1995, wherein directors, executives, and auditors were appointed.
  • Orders for purchase of computers and peripherals were placed on 04.09.1995.
  • During September and October 1995, key managerial personnel including branch managers, regional managers, finance managers, company secretary, and other employees were appointed.
  • Recruitment expenses were incurred through consultants and paid through associated companies.
  • Salaries and administrative expenses were paid through group companies before the assessee opened its own bank account.
  • The assessee opened its bank account on 01.02.1996.
  • For Assessment Year 1996-97, the assessee claimed expenditure on the basis that its business had been set up from 01.11.1995.
  • The Assessing Officer disallowed expenditure incurred before 01.02.1996 amounting to ₹12,92,557, holding that the business was set up only when the bank account was opened.
  • The CIT(A) affirmed the disallowance.
  • The ITAT reversed the findings and allowed the expenditure, holding that the business had been set up on 01.11.1995.
  • Aggrieved by the ITAT order, the Revenue preferred an appeal before the Delhi High Court.

 

Issues Involved

  1. Whether "setting up of business" is synonymous with "commencement of business" under the Income Tax Act, 1961?
  2. Whether the assessee's business could be considered as having been set up before opening of its bank account on 01.02.1996?
  3. Whether expenditure incurred after the business was set up but before commencement of actual business operations is allowable as deduction?

 

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the assessee's business could not be regarded as set up before 01.02.1996.
  • It was contended that opening of the bank account was a necessary indicator for commencement of business activities.
  • Since the bank account was opened only on 01.02.1996, expenditure incurred prior thereto could not be allowed.
  • Reliance was placed on Commissioner of Wealth Tax v. Ramaraju Surgical Cotton Mills Ltd. to contend that actual business operations were necessary before a business could be considered set up.

 

Respondent’s Arguments (Assessee)

  • The assessee submitted that the expression "setting up of business" is distinct from "commencement of business".
  • It was argued that substantial preparatory and operational activities had already been completed by 01.11.1995.
  • Offices had been established, employees recruited, managerial personnel appointed, computers installed, and salaries paid.
  • The company was fully ready and capable of carrying on its business activities from 01.11.1995.
  • Therefore, all expenditure incurred after such setting up was allowable as business expenditure.

 

Court Findings

The Delhi High Court upheld the order of the ITAT and dismissed the Revenue's appeal.

The Court observed that:

  • The expression "setting up of business" is materially different from "commencement of business".
  • A business may be regarded as set up even though actual business operations have not commenced.
  • The determination of the date of setting up depends upon the facts of each case and the nature of the business involved.
  • In the case of a financial services company, the business is set up when the organizational structure, infrastructure, staff, management, and operational readiness are established.
  • Opening of a bank account is not the sole criterion for determining whether a business has been set up.
  • The evidence demonstrated that by 01.11.1995 the assessee had:
    • Appointed branch and regional managers;
    • Installed computers and infrastructure;
    • Established offices;
    • Recruited staff;
    • Incurred operational expenses;
    • Become fully ready to commence business activities.

Accordingly, the Court held that the assessee's business had been set up on 01.11.1995 and expenditure incurred thereafter was allowable.

 

Important Clarification by the Court

The Court clarified that:

"Setting up of business" and "commencement of business" are not synonymous expressions.

Once the business is established and ready to commence operations, it is regarded as having been set up, irrespective of whether actual commercial transactions have commenced.

The Court further held that opening of a bank account is not a mandatory condition for determining the date of setting up of a business.

Sections Involved

  • Section 3, Income Tax Act, 1961
  • Section 260A, Income Tax Act, 1961

 

Court Order

  • The appeal filed by the Revenue was dismissed.
  • The order of the Income Tax Appellate Tribunal was upheld.
  • The expenditure incurred after 01.11.1995 was held allowable as business expenditure.
  • No substantial question of law arose for consideration under Section 260A of the Income Tax Act, 1961.


Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:3338-DB/VJM19082009ITA10732008.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared.