Determining the Date of Set-Up for Allowability of Expenses Under Section 37

 Introduction

The date a business is "set up" is crucial for determining whether expenses incurred are deductible under Section 37 of the Income-tax Act, 1961. According to Section 3 of the Act, the "previous year" starts from the date a business is set up. However, the Act does not explicitly define what constitutes a "set-up" of business.

Key Court Judgements Clarifying "Date of Set-Up"

Several court rulings have provided clarity on when a business is considered "set up" for the purpose of claiming expenses under Section 37:

1. CIT v. Sarabhai Management Corporation Ltd. (1991) 192 ITR 151 (SC)
   The Supreme Court ruled that a business is deemed "set up" once it is established and ready to begin operations, even if actual activities have not yet started.

2. Whirlpool of India Ltd. v. JCIT (2007) 289 ITR 171 (Del HC)
   The Delhi High Court held that a business is "set up" when it has the necessary infrastructure in place, such as office space, licenses, and approvals, and is capable of offering goods or services.

3. Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom HC)
   The Bombay High Court differentiated between "setting up" and "commencement." A business is "set up" once it is ready to begin functioning, even if commercial production or sales have not yet started.

Key Takeaways

1. "Set-Up" vs "Commencement": The term "set-up" refers to the point when the business is ready to start operations, irrespective of whether commercial activities have commenced.

2. Expense Allowability: Expenses incurred before the "set-up" date are not allowable under Section 37 of the Income-tax Act.

3. Business Nature Consideration: The criteria for determining a "set-up" date may vary depending on the type of business, such as manufacturing, services, or trading.

Understanding the precise point at which a business is "set up" ensures compliance with tax laws and the accurate treatment of expenses under Section 37.