Section 35D of Income Tax Act 1961

Section 35D of the Income Tax Act, 1961 deals with the Amortization of Expenditure incurred in respect of Preliminary Expenses.

Preliminary Expenses: These are those expenses which are incurred for setting up of new business i.e., before commencement,  or for extension of existing undertaking or in connection with setting up of a new unit.

These expenses includes:

1. Preparation of a feasibility report, project report, engineering service report or any survey conducted necessary for business.
2. Legal charges for drafting of MOA / AOA or printing of MOA / AOA.
3. Company Incorporation fee.
4. For issue, for public subscription , of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
5. Other expenses as notified by the Government from time to time.

However, these expenses will be allowed for deduction upto maximum of below:

Lower of the:

a) Actual expenditure incurred or

b) 5% of cost of a project or 5% of cost of capital employed of a company whichever is more.

Let’s say: ABC ltd. incurred Rs. 7000 as pre-incorporation expenses and it’s paid up capital is Rs. 1,00,000 . And it’s actual cost of a fixed assets lying in the balance sheet as on last day of previous year in which business commence is Rs. 150000.

Maximum deduction allowed as per section 35D:

Lower of the:

a) 7000 or

b) (5% * 150000= 7500) or (5%*100000= 5000)

Whichever is more for condition b) and i.e. Rs. 7500

Hence, maximum amount that can be claimed on account of preliminary expenses is rupees 7000 only.

How to claim deduction of preliminary expenses:

Deduction for preliminary expenses is allowed to be claimed in 5 equal installments i.e. in 5 subsequent financial year.

Eligible assessee who can claim these deduction:

a) Indian Companies and

b) Other Resident

(CA. Aman Jain is Proprietor- Aman J and associates (Chartered Accountants)- 8802203234)