INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Business of the assessee was not set up during relevant period -

Assessee company was engaged in soliciting motor insurance business. It was incorporated on 24-11-2010 and applied for grant of direct broker licence to IRDA, vide Application, dt. 1-12-2010 and was awarded licence as a direct broker of IRDA in February, 2012. It claimed claimed Rs. 2 crores as business expenses which included 1/5 of preoperative expenses capitalized in previous financial year, i.e., 2010-11. From details furnished by assessee, AO noticed that during relevant previous year, no business activity was commenced by assessee company and only it had earned some interest on fixed deposits. He, therefore, required assessee to explain as to why these expenses should not be treated as preoperative expenses and capitalized. Assessee submitted that since it had already applied for licence and had put in place necessary infrastructure facilities, it demonstated that assessee's business was set up on 1-12-2010 and assessee was ready to discharge function as insurance broker immediately on grant of formal licence to operate from IRDA.Held: Undisputedly assessee had applied for grant of Direct Broker Licence to Insurance Regulatory and development Authority on 1-12-2010 which was granted to assessee only in February, 2012, therefore, business of assessee had been set up only in February, 2012 and since business of the assessee was not set up during relevant period, entire expenses has to be disallowed as business expenditure.

Followed:CWT v. Ramaraju Surgical Cotton Mills Ltd., (1967) 63 ITR 478 (SC) : 1967 TaxPub(DT) 205 (SC).

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2012-13

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