{"id":28955,"date":"2025-03-16T13:52:54","date_gmt":"2025-03-16T08:22:54","guid":{"rendered":"https:\/\/carajput.com\/blog\/?p=28955"},"modified":"2025-03-27T16:16:54","modified_gmt":"2025-03-27T10:46:54","slug":"date-of-set-up-for-determining-allowability-of-exp-u-s-37","status":"publish","type":"post","link":"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/","title":{"rendered":"\u201cdate of set-up&#8221; for determining allowability of Exp. u\/s 37"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_88 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Page Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6abffa6e537e0\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #000000;color:#000000\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #000000;color:#000000\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6abffa6e537e0\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#Concept_of_%E2%80%9Cdate_of_set-up%E2%80%9D_for_determining_the_allowability_of_expenses_us_37_of_the_Income-tax_Act_1961\" >Concept of &#8220;date of set-up&#8221; for determining the allowability of expenses u\/s 37 of the Income-tax Act, 1961,<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#Distinction_Between_%E2%80%9CSet-Up%E2%80%9D_and_%E2%80%9CCommencement%E2%80%9D\" >Distinction Between &#8220;Set-Up&#8221; and &#8220;Commencement&#8221;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#Understand_the_Business_Model-_Importance_of_Due_Diligence_in_Determining_%E2%80%9CSet-Up%E2%80%9D_Date\" >Understand the Business Model- Importance of Due Diligence in Determining &#8220;Set-Up&#8221; Date<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#Possible_Issues_in_Assessment\" >Possible Issues in Assessment:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#Practical_Implications_for_Taxpayers\" >Practical Implications for Taxpayers<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/#In_Summary\" >In Summary:<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-27082\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-scaled.jpg\" alt=\"Income Tax Scrutiny\" width=\"962\" height=\"642\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-scaled.jpg 2560w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-300x200.jpg 300w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-1024x683.jpg 1024w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-768x512.jpg 768w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-1536x1024.jpg 1536w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-2048x1365.jpg 2048w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2024\/07\/pexels-fauxels-3184418-800x533.jpg 800w\" sizes=\"auto, (max-width: 962px) 100vw, 962px\" \/><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"Concept_of_%E2%80%9Cdate_of_set-up%E2%80%9D_for_determining_the_allowability_of_expenses_us_37_of_the_Income-tax_Act_1961\"><\/span><strong><span style=\"color: #000080;\">Concept of &#8220;date of set-up&#8221; for determining the allowability of expenses u\/s 37 of the Income-tax Act, 1961,<\/span> <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The date of set-up of business is crucial for determining whether expenses incurred are allowable under Section 37. Section 3 of the Income-tax Act, 1961 defines Previous previous year as starting from date the business is \u201cset up.\u201d However, term \u201cset-up of business\u201d is not explicitly defined in of the Income-tax Act, 1961, Due diligence is critical in determining the &#8220;set-up&#8221; date under the Income-tax Act, as it directly impacts the allowability of expenses u\/s 37. A well-documented approach ensures that expenses incurred in the initial phase of business are correctly classified, reducing the risk of disallowance during tax assessments. A meticulous approach to determining the set-up date ensures smooth tax compliance and avoids disputes over expense deductions. Steps for Due Diligence in Determining the &#8220;Set-Up&#8221; Date are Clarifying here Practical Implications:<\/p>\n<ol>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Distinction_Between_%E2%80%9CSet-Up%E2%80%9D_and_%E2%80%9CCommencement%E2%80%9D\"><\/span><span style=\"color: #000080;\"><strong>Distinction Between &#8220;Set-Up&#8221; and &#8220;Commencement&#8221;<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Set-up: Business is established and ready to commence operations.<\/li>\n<li>Commencement: Actual business activities (such as sales, production) begin.<\/li>\n<li>Expenses before the set-up date are not allowable u\/s 37 of the Income-tax Act, 1961, except those covered under Section 35D (preliminary expenses).<\/li>\n<\/ul>\n<\/li>\n<li>\n<h3><span class=\"ez-toc-section\" id=\"Understand_the_Business_Model-_Importance_of_Due_Diligence_in_Determining_%E2%80%9CSet-Up%E2%80%9D_Date\"><\/span><span style=\"color: #000080;\"><strong>Understand the Business Model- Importance of Due Diligence in Determining &#8220;Set-Up&#8221; Date<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>The definition of &#8220;set-up&#8221; varies across industries. The document emphasizes a careful analysis of:<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<ol>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Business model (trading, manufacturing, services).<\/li>\n<li>Chronological events (licenses, hiring, agreements, setup of premises).<\/li>\n<li>Judicial precedents that align with the taxpayer&#8217;s industry.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<ol>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>For a manufacturing unit, installation of machinery and trial runs may be key indicators. Example: If a manufacturing company sets up machinery but hasn&#8217;t started production, expenses incurred post-installation, but pre-production would be allowable.<\/li>\n<li>For a service business, obtaining regulatory approvals and hiring key personnel could signify readiness. For a service business, expenses Post obtaining necessary licenses and hiring key personnel might be allowed.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<ol>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Indicators of Business Set-Up: Office space, licenses, regulatory approvals, hiring of key staff, installation of equipment, business agreements in place.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Indicators of Commencement: First sale, first invoice issued, production starting<strong>.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Possible_Issues_in_Assessment\"><\/span><span style=\"color: #000080;\"><strong>Possible Issues in Assessment:<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p style=\"padding-left: 40px;\">Few Court latest Judgements has given light on date of set up of business for purpose of allowability of expenses U\/S 37:<\/p>\n<ol>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Revenue may argue that expenses are pre-setup if key elements (e.g., licenses for a financial services company) are missing. And documentation is crucial to substantiate the date of setup.<\/li>\n<li>Reliance on case laws (e.g., Sarabhai Management Corporation Ltd. (SC), Whirlpool of India (Del HC)) to justify the set-up date in case of scrutiny.<\/li>\n<li>Western India Vegetable Products Ltd. (Bom HC, 1954): Business is &#8220;set up&#8221; when ready to function, not when commercial operations start.<\/li>\n<li>Sarabhai Management Corp. Ltd. (SC, 1991): Leasing business was considered set up when the company was ready to offer properties on lease.<\/li>\n<li>Whirlpool of India Ltd. (Del HC, 2007): Necessary infrastructure, licenses, and approvals must be in place for a business to be considered &#8220;set up&#8221;.<\/li>\n<li>Hughes Escorts (DHC, 2009): Setting up of telecom business was based on the date of receiving customer orders and installing infrastructure.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<h3><span class=\"ez-toc-section\" id=\"Practical_Implications_for_Taxpayers\"><\/span><span style=\"color: #000080;\"><strong>Practical Implications for Taxpayers<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Claiming deductions: Expenses post set-up but pre-commencement are allowable.<\/li>\n<li>Defending claims: Proper documentation (contracts, licenses, office setup) is key to substantiating the set-up date.<\/li>\n<li>Maintain a timeline of events like company incorporation, office setup, acquisition of licenses, agreements with vendors\/customers, hiring employees, and infrastructure readiness.<\/li>\n<li><span style=\"color: #000080;\"><strong>Maintain Proper Documentation<\/strong><\/span>\n<ul>\n<li>Lease agreements for office\/factory space.<\/li>\n<li>Licenses\/registrations (GST, trade license, sector-specific approvals).<\/li>\n<li>Purchase invoices for key equipment.<\/li>\n<li>Employment contracts for key personnel.<\/li>\n<li><span style=\"color: #000080;\"><strong>Reconcile with Accounting and Tax Records<\/strong><\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>The first expenses claimed under Section 37 should align with when the business is deemed set up.<\/li>\n<li>Expenses before the set-up date should be capitalized or treated under pre-operative expenses.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"In_Summary\"><\/span><span style=\"color: #000080;\"><strong>In Summary: <\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Concept of Set up is different from commencement. A business is \u201cset up\u201d when it is ready to begin operations, even if commercial activities haven\u2019t started. Expenses before the \u201cset-up\u201d date are not allowable u\/s 37 of the Income-tax Act, 1961. The definition of \u201cset-up\u201d depends on the nature of the business (manufacturing, services, etc.).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Concept of &#8220;date of set-up&#8221; for determining the allowability of expenses u\/s 37 of the Income-tax Act, 1961, The date of set-up of business is crucial for determining whether expenses incurred are allowable under Section 37. Section 3 of the Income-tax Act, 1961 defines Previous previous year as starting from date the business is \u201cset &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[10228],"class_list":["post-28955","post","type-post","status-publish","format-standard","hentry","category-income-tax","tag-exp-u-s-37"],"aioseo_notices":[],"aioseo_head":"\n\t\t<!-- All in One SEO 5.0.2 - aioseo.com -->\n\t<meta name=\"description\" content=\"Expenses post set-up but pre-commencement are allowable, business is deemed set up, date of set-up, set up when ready to function, commercial operations start\" \/>\n\t<meta name=\"robots\" content=\"max-image-preview:large\" \/>\n\t<meta name=\"author\" content=\"Rajput Jain &amp; Associates\"\/>\n\t<meta name=\"keywords\" content=\"exp. u\/s 37,income tax\" \/>\n\t<link rel=\"canonical\" href=\"https:\/\/carajput.com\/blog\/date-of-set-up-for-determining-allowability-of-exp-u-s-37\/\" \/>\n\t<meta name=\"generator\" content=\"All in One SEO (AIOSEO) 5.0.2\" \/>\n\t\t<meta property=\"og:locale\" content=\"en_US\" \/>\n\t\t<meta property=\"og:site_name\" content=\"Rajput Jain &amp; 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