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2011 (7) TMI 579 - AT - Income TaxDisallowance of expenses - business had not been commenced during the year under consideration - Held that - The assessee s application to Stock Exchange for registration was allowed on provisional basis on and from December 6 2004. Thereafter the assessee also made applications before SEBI as well as National Securities Clearing Corporation Ltd. by paying necessary fees and complying with all the requirements. There may be interval between the setting up of the business and the actual commencement of the business but all the expenses incurred during the interval of setting up of the business and the commencement of the business are also permissible for deduction. Thus having regard to the nature of the assessee s business of acting as a trading member and clearing member of the wholesale debt market it can be said that assessee s business was set up as soon as the assessee got registration by the National Stock Exchange for trading membership of capital market and futures options segments inasmuch as the assessee s business was ready to commence on the day when the assessee got provisional registration from the National Stock Exchange. Therefore the expenses incurred on or after 6-12-2004 are permissible for deduction as business expenses and in order to allow these expenses as admissible deduction it is not necessary that the assessee should have earned some income out of such activity or all the three stages should have been completed. It is enough that the first stage of the business had started in order to claim the business expenses as admissible deduction - direct the AO to quantify the amount of expenses and allow after examining and verifying the genuineness of the expenses and their admissibility under the provisions of Income-tax Act - partly in favour of assessee.
Issues Involved:
1. Disallowance of expenses claimed by the assessee on the ground that the business had not commenced during the year under consideration. Issue-wise Detailed Analysis: 1. Disallowance of Expenses Claimed by the Assessee: The assessee appealed against the order dated 22-12-2010 by the Commissioner of Income-tax (Appeals) concerning the assessment made by the Assessing Officer (AO) under section 143(3) of the Income-tax Act, 1961 for the assessment year 2005-06. The only issue in this appeal was the disallowance of the assessee's claim of expenses amounting to Rs. 2,15,145 by the AO on the ground that the business had not commenced during the year under consideration. The assessee filed its return declaring a total loss of Rs. 35,289. The AO noted that the assessee had earned interest income from FDRs and had not carried out any business activities during the year, as evidenced by the profit and loss account. The AO concluded that the expenses claimed could not be allowed under section 37(1) of the Income-tax Act, 1961, as no business activity had been carried out. The AO initiated penalty proceedings under section 271(1)(c) separately. The assessee contended that it was incorporated with the main objective of acting as a trading and clearing member of the wholesale debt market, capital market, and futures and options segment of any stock exchange. The assessee argued that the business had commenced during the year as it had applied for trading and clearing membership with the National Stock Exchange (NSE) and had made necessary deposits and payments. The CIT(A) upheld the AO's decision, stating that the actual trading activities could only start after the SEBI registration was granted on 18-5-2005. The CIT(A) rejected the contention that the business commenced on the date of incorporation, relying on decisions from Tetron Commercial Ltd. v. CIT, CIT v. Saurashtra Cement & Chemical Industries Ltd., and Sarabhai Management Corpn. Ltd. v. CIT. In further appeal, the assessee argued that the business was set up on 6-9-2004, the date of incorporation, and that the first business activity commenced when it applied for NSE registration on 12-10-2004. The assessee cited various judicial decisions to support its claim. The Tribunal examined the facts and relevant judicial precedents, including the cases of Saurashtra Cement & Chemical Industries Ltd., Sarabhai Management Corpn. Ltd., CIT v. Whirlpool of India Ltd., and CIT v. Hughes Escorts Communications. The Tribunal noted that a business can be said to be set up when it is ready to commence, even if actual commencement has not yet occurred. The Tribunal emphasized that the expenses incurred after the business is set up are allowable as deductions. The Tribunal concluded that the assessee's business was set up on 6-12-2004 when it received provisional registration from the NSE. Therefore, the expenses incurred on or after 6-12-2004 were permissible as business expenses. The Tribunal directed the AO to quantify the admissible expenses incurred by the assessee on or after 6-12-2004 and allow the same after verifying their genuineness and admissibility under the Income-tax Act. In conclusion, the appeal of the assessee was partly allowed, and the AO was directed to reassess the expenses in light of the Tribunal's decision.
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