The central legal point established in the judgment is that readiness to commence business does not equate to the actual commencement of business, and expenses incurred during the readiness phase cannot be capitalized.

JUDGMENT

Rajiv Shakdher, J. - The present appeal under Section 260A of the Income Tax Act, 1961 [in short "the Act?] is directed against the order dated 10.02.2020, passed by the Income Tax Appellate Tribunal [in short "Tribunal?], in ITA No. 6442/Del/2016. The appeal concerns the assessment year [in short "AY?] 2012-2013. The appeal was admitted on 08.02.2021 when the following questions of law were framed by the Court: -

A. Whether on the facts and circumstances of the case, the Tribunal erred in holding that the business of the Appellant was not set up during the previous year relevant to [the] assessment year 2012-13 and consequently deduction for expenditure incurred was not allowable?

B. Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that the business of the Appellant was set up only in February 2012 on grant of license by the Insurance Regulatory Development Authority?

1.1. It is required to be noticed that the said questions of law were framed in the background of the arguments advanced on behalf of the assessee that the findings of the Tribunal were "perverse and contrary to the proviso appended to Section 3 of the Act". Therefore, we would like to frame, at this juncture, the third question of law, so that the controversy involved is, clearly, etched out.

C. Whether in the facts and circumstances of the case, the Tribunal's finding that the assessee set up its business on 02.02.2012, that is, when it was granted a license by the Insurance Regulatory Development Authority (IRDA), was perverse?

Background Facts:

2. For us to adjudicate upon the aforementioned questions of law, the following facts are required to be noticed: -

2.1. The assessee was incorporated on 24.11.2010. The first meeting of its board of directors was held on 29.11.2010 when certain decisions were taken including, according to the assessee, setting-up of its business; appointment of the Chief Executive Officer and the Principal Officer; approval of the draft application for obtaining a broker?s license in the prescribed form under Regulation 6 of IRDA (Insurance Brokers) Regulations, 2002 [in short "2002 Regulations?] (this application had to be filed for obtaining the license); a decision as to the registered office of the assessee; and a decision concerning the opening of a current account with HDFC bank at Surya Kiran Building, 19, K.G. Marg, New Delhi - 110001.

2.2. The assessee claims that, on 29.11.2010 itself, an agreement was executed between the assessee and Maruti Suzuki India Limited (MSIL). Via this agreement, the persons, who were employees of MSIL, were sent on deputation to the assessee, and to meet its objective, were made to undergo a minimum of 100 hours of mandatory training as insurance brokers.

2.3. These steps were a precursor to the application preferred by the assessee with IRDA for issuance of a direct-broker license. The application was lodged with the IRDA on 01.12.2010.

2.4. While this application was being processed, presumably, by IRDA, the assessee took certain other steps in furtherance of its business. Accordingly, on 01.06.2011, the assessee executed operating lease agreements for conducting insurance business from various locations across the country. Against these leases, the assessee is said to have paid rent as well. According to the assessee, it set up 29 offices in 29 different locations across the country for carrying on its insurance business.

2.5. The assessee was, finally, issued a direct broker's license by IRDA on 02.02.2012.

2.6. In the interregnum, the assessee filed its return of income for the preceding AY, i.e., 2011-2012. This return was filed on 30.09.2011. Via this return, the assessee declared a business loss amounting to Rs.57,582/-. Likewise, insofar as the subject AY is concerned, i.e., AY 2012-2013, the return of income was filed on 29.09.2012. In this AY, the assessee claimed the impugned deduction, i.e., business expenses amounting to Rs.2,77,99,046/-. The a