Pre-Operative Expenses can’t be allowed as a Business Expense: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) in the case of Maruti Insurance Pvt. Ltd. vs. DCIT held that the expenses which are incurred before the operation of a company are called preoperative expenses and these expenses cannot be allowed as business expenses.

The facts of the case are that the assessee is a company that is engaged in the business of soliciting the motor insurance business. The company was incorporated on November 24, 2010, and applied for the grant of license on December 1, 2010, and got the license in February 2012 by the Insurance Regulatory and Development Authority. Further, the company filed the income tax return wherein the assessee declared its total income and claimed the losses of the current year i.e. 2012. However, the Assessing Officer (AO) held that the expenses incurred by the assessee cannot be allowed as business expenses, which was further upheld by the Commissioner of Income Tax (Appeals).

The issue raised was whether the pre-operative expenses can’t be allowed as a business expense or not?

The Income Tax Appellate Tribunal (ITAT) bench comprising of Judicial Member K. Narashima Chary and Accountant R.K. Panda held that the assessee applied for the license on December 1, 2010, and got the license in February 2012 by the Insurance Regulatory and Development Authority.

Relying the decisions of the Supreme Court, the Income Tax Appellate Tribunal (ITAT) considered that the business was commenced on the date of the grant of the license which was in February 2012 and so the entire expense was disallowed and was held that expenses which are incurred before the operation of a company are called preoperative expenses and these expenses can not be allowed as business expenses.