Business expenses before the commencement of business is eligible for deduction.

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Business expenses before the commencement of business is eligible for deduction. 

 

 

There is an important judgment in Maruti Insurance Broking Pvt Ltd (ITA 17/2021)
By Delhi HC  on expenses incurred before the issuance of business license:

Short facts of the case were as under :

1. The assessee company was incorporated in 2010 to conduct insurance broking business. However the insurance broking license as per Regulation 6 of IRDA regulations was issued on 02/02/2012.
2. The assessee had undertaken expenses in the course of business such as employee related expenses, lease expenses for opening offices at various locations, etc before the grant of license. These were a precursor to the application for obtaining the license.
3. The AO disallowed the expenses incurred before the issuance of broking license and held that broking business commenced only on 02/02/2012.

The Hon Delhi HC held as under:

1. A business does not conform to, metaphorically speaking, the “cold start” doctrine.
2. There is, in most cases, a hiatus between the time a person or entity is ready to do business and when business is conducted.
3. During this period, expenses are genuinely incurred towards keeping the business primed up.
4. Business expenses before the grant of license are thus allowed for deduction.

Conclusions :

Business expenses before the commencement of business is eligible for deduction.

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