As some of us are aware of the provisions of the Income Tax Act in regard to allowability of business expenditure. Business expenditure is allowed under Section 37 of the Income Tax. But let us examine an interesting case which has been decided by the High Court against the Revenue. The respective parties were Commissioner of Income Tax and Whirlpool of India Ltd. The facts of the case, to put it very briefly, ran like this. The assessee Company was formed and incorporated on July 27, 1995 as a financial outfit and its first Board Meeting was held in August in that year. Subsequently the Company placed orders for purchase of computers and peripherals and went on appointing key personnel , the assessee made payments of salary through two other companies. It opened formally opened a bank account in the name of the Company on February 1,1996 and all the expenses were disbursed through this bank account.

The entire problem began when the assessee Company filed its return for the year ended 31^st March, 1996, which showed a taxable income of rupees 94,41,990. During the assessment proceedings the assessing officer took exception to the assessee's claim of business expenditure prior to the date of opening of the bank account by taking cognizance of the fact that the business was set up on 1^st February viz., the date of opening of the bank account and disallowed the business expenditure of a substantial amount. The assessee preferred an appeal before the Commissioner(Appeal) who upheld the view of the assessing officer and thereafter the assessee challenged the order before Income Tax Appellate Tribunal and won its case.

The Tribunal held that the expression “setting up of the business in the previous year” as per the provisions of the Income Tax Act, was different from the commencement of business and in the case of a company engaged in the business of rendering financial services, it was possible to say that the business was set up when the directors were appointed, staff such regional and branch managers were appointed and their salaries were paid, computers were acquired and the company was ready to commence business.

The revenue depart challenged the order of the Tribunal and went to the High Court to lose its case and the judges agreed to the views of the Tribunal and dismissed the appeal. The judgment should be regarded to be very important as it made it absolutely clear that the question as to when the business was set up depends on the fact of each case and the nature of business and straitjacket rules could be laid down to decide the timing of the setting of a business.