Tribunal grants appeal, allows business expenses, emphasizes importance of setting up business over commencement

The Tribunal allowed the appeal, directing the AO to verify and allow the expenses incurred for the business as they found that the appellant had undertaken essential activities necessary for its business upon incorporation, indicating that the business had commenced. The Tribunal emphasized the importance of setting up the business over the commencement of business and highlighted that the expenses were allowable. The order was pronounced on 10/10/2018.

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Issues Involved:
1. Disallowance of expenditure on the ground that the appellant had not started its business activity during the previous year under appeal.
2. Determination of whether the absence of business receipts can be a ground for disallowance of expenses.
3. Consideration of the date of entering into the Investment Management Agreement (IMA) as the start date of business.
4. Classification of certain expenditures as one-time and not allowable as business expenses.

Detailed Analysis:

1. Disallowance of Expenditure:
The appellant argued that the CIT(A) erred in upholding the disallowance of Rs. 8,39,03,909/- by the Assessing Officer (AO) on the grounds that the business activity had not commenced. The appellant contended that under income tax provisions, the setting up of business is relevant over the commencement of business. The appellant, a private limited company, claimed to have started its business from the date of incorporation (30th September 2006).

2. Absence of Business Receipts:
The appellant submitted that the lack of business receipts should not be a ground for disallowing expenses incurred wholly and exclusively for business purposes. The AO observed that the appellant was not engaged in any business activity during the relevant assessment year and disallowed expenses amounting to Rs. 12,71,38,147/-.

3. Date of Investment Management Agreement (IMA):
The appellant argued that the business was set up on 15th December 2006, the date of entering into the IMA, and expenses incurred thereafter should be allowed. The AO did not accept this claim, stating that entering into the IMA did not confer the right to expend without corresponding reimbursement.

4. Classification of Expenditures:
The appellant contended that the CIT(A) erred in classifying certain expenditures such as registration fees, consulting fees, recruitment expenses, and marketing expenditure as one-time and not allowable as business expenses. The appellant argued that these were bona fide business expenditures incurred wholly and exclusively for business purposes.

Tribunal's Findings:

Business Activity and Expenses:
The Tribunal found that the appellant, an Asset Management Company (AMC), had undertaken several activities necessary for its business upon incorporation. These activities included complying with SEBI requirements, finalizing office lease, setting up office infrastructure, hiring key employees, and developing product literature. The Tribunal observed that these activities indicated that the business had commenced, and the expenses incurred were allowable.

Judicial Pronouncements:
The Tribunal referred to various judicial pronouncements, emphasizing the distinction between setting up and commencement of business. It noted that what is relevant under the Income-tax Act is the setting up of the business. The Tribunal held that the business commences with the first essential activity, and actual receipt of an order is not necessary to determine the setting up of the business.

Asset Management Company:
The Tribunal observed that the appellant, being an AMC, had to undertake several preparatory activities to launch mutual fund schemes. These activities included filing new fund offer documents with SEBI, setting up additional branches, and empaneling distributors. The Tribunal concluded that these activities demonstrated that the business had commenced.

Expenses Verification:
The Tribunal directed the AO to verify the expenses incurred wholly and exclusively for the purpose of the business and allow them as per law. The Tribunal held that the AO was not justified in disallowing the expenses on the grounds that the business had not commenced.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to verify and allow the expenses incurred for the business. The Tribunal pronounced the order in the open court on 10/10/2018.

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