Amortization of preliminary expenses

Amortization of preliminary expenses means deduction under section 35D is available in case of an Indian company or a resident non-corporate assessee.

A foreign company even if it is resident in India, cannot claim any deduction under section 35D.

TIME AND PURPOSE OF PRELIMINARY EXPENSES – Expenses incurred at the following two stages are qualified for deduction under section 35D —

When expenses are incurred Why expenses are incurred
1. Before commencement of business For setting up any undertaking or business
2. After commencement of business In connection with extension of an industrial undertaking or in connection with setting up a new industrial unit

Note – Deduction under section 35D is not available in respect of expenditure incurred after commencement of business if such expenditure is incurred in connection with extension of (or setting up) a non-industrial undertaking.

QUALIFYING EXPENDITURE -The heads of qualifying expenditure are the following —

  • Expenditure in connection with preparation of feasibility report, preparation of project report, conducting a market survey (or any other survey necessary for the business of the assessee), etc. 
  • Legal charges for drafting any agreement.
  • Legal charges for drafting the memorandum and articles of association.
  • Printing expenses of the memorandum and articles of association.
  • Registration fees of a company under the provisions of the Companies Act.
  • Expenses in connection with the public issue of shares or debentures of a company, underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
  • Any other expenditure, which is prescribed

QUALIFYING EXPENDITURE – MAXIMUM CEILING – The aggregate expenditure cannot exceed the following—

In the case of a corporate assessee In the case of a non-corporate assessee
a. 5 per cent of cost of project; or 5 per cent of cost of project
b. 5 per cent of capital employed, whichever is more

 Cost of project – It means the actual cost (or additional cost incurred after commencement of business in connection with extension or setting up an industrial undertaking) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences.
Capital employed in the business of a company – It means the aggregate of the issued share capital, debentures and long-term borrowings, as on the last day of the previous year in which the business of the company  commences.
AMOUNT OF DEDUCTION – One-fifth (1/5th) of the qualifying expenditure is allowable as deduction in each of the five successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the industrial undertaking is completed or the new industrial unit commences production or operation.

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