Tax authority allows deduction for expenses incurred after business was "set up" before formal commencement under Section 3

HC upheld ITAT's view allowing pre-1.02.1996 expenses where the taxpayer had "set up" the business earlier. The AO and CIT(A) had disallowed deductions on the ground that business commenced only when a bank account opened on 1.02.1996, but ITAT found "setting up" under Section 3 differs from commencement and permits deduction for expenses incurred after setting up. HC held the question is fact-specific, refused to treat it as a substantial question of law, and dismissed the revenue's appeal.

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Issues:
1. Disallowance of expenses prior to 1.02.1996 by the Assessing Officer.
2. Determining when the assessee can be said to have set up its business.

Issue 1: Disallowance of Expenses Prior to 1.02.1996
The appeal was against the ITAT's order dated 2.11.2007, which deleted the disallowance of expenses prior to 1.02.1996 made by the Assessing Officer. The Assessing Officer disallowed expenses claimed by the assessee before 1.02.1996, as he believed the business was set up only when the bank account was opened on 1.2.1996. The CIT(A) confirmed this view. The ITAT held that the expression "setting up of the business" is different from the commencement of business as per Section 3 of the Income Tax Act. The court referred to the case of CIT Vs. Hughes Escorts Communications Ltd., 311 ITR 253, where it was established that a business is set up even if it has not commenced, and expenses incurred after setting up should be allowed as a deduction.

Issue 2: Determining When the Business Was Set Up
The key issue was to determine when the assessee's business was set up. The court analyzed the nature of the business and the facts of the case. Referring to the case of Hughes Escorts Communications Ltd., it was established that the business is set up when the company is ready to commence operations, not necessarily when the bank account is opened. The court noted that different considerations apply based on the type of business undertaken. In this case, a financial company was involved, and evidence showed that the company was ready to commence business by November 1995. The company had appointed directors and staff, purchased computers, and incurred various expenses before the bank account was opened on 1.2.1996. The court rejected the Revenue's reliance on a different case, stating that the facts of the present case aligned more with the decision in Hughes Escorts Communications Ltd.

In conclusion, the court dismissed the appeal, stating that no substantial question of law arose. The judgment emphasized that the business was set up before the bank account was opened, based on the facts and nature of the business. The decision highlighted the distinction between setting up a business and commencing business operations, ultimately allowing the expenses incurred before 1.02.1996 as a deduction.

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