The Delhi High Court in the relief to Maruti Insurance allowed the deduction on business expenditure.
The assessee, Maruti Insurance was incorporated on November 24, 2010. The first meeting of its board of directors was held when certain decisions were taken including, according to the assessee, setting-up of its business; appointment of the Chief Executive Officer and the Principal Officer; approval of the draft application for obtaining a broker’s license in the prescribed form under Regulation 6 of IRDA (Insurance Brokers) Regulations, 2002 (this application had to be filed for obtaining the license); a decision as to the registered office of the assessee; and a decision concerning the opening of a current account with HDFC bank.
The assessee claims that, on November 29, 2010 itself, an agreement was executed between the assessee and Maruti Suzuki India Limited (MSIL). Via this agreement, the persons, who were employees of MSIL, were sent on deputation to the assessee, and to meet its objective, were made to undergo a minimum of 100 hours of mandatory training as insurance brokers.
These steps were a precursor to the application preferred by the assessee with IRDA for issuance of a direct-broker license. The application was lodged with the IRDA on December 1, 2010.
While this application was being processed, presumably, by IRDA, the assessee took certain other steps in furtherance of its business. Accordingly, the assessee executed operating lease agreements for conducting insurance business from various locations across the country. Against these leases, the assessee is said to have paid rent as well.
The assessee was, finally, issued a direct broker’s license by IRDA on February 2, 2012.
The assessee preferred an appeal with the Commissioner of Income Tax (Appeals). The CIT (A) vide order 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.
The coram of Justices Rajiv Shakdher and Talwant Singh noted that the finding recorded by the Tribunal that the assessee set up its business only on 02.02.2012 was perverse and erroneous in law. The 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 Court while allowing the appeal found that 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.
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