Article explains Category of the person eligible for claiming deduction under section 35D, The extent of deduction allowable under section 35D, List of preliminary expenditure allowable as a deduction under section 35D and Some noteworthy points related to deduction under section 35D.

Amortization of preliminary expenditure is allowed as deduction under section 35D of the Income Tax Act. The entire provisions governing deduction available under section 35D is briefly explained in the present article.

Category of the person eligible for claiming deduction under section 35D

An assessee falling under any of the following categories is eligible to claim deduction under section 35D

1. An Indian Company; or

2. A person, other than the company, resident in India.

The extent of deduction allowable under section 35D

Lower of the following amount will be available as the total amount of deduction under section 35D

Amount Meaning of the specific term
Aggregate actual expenditure
5% of the cost of the project Cost of the project means the actual cost of fixed assets (i.e. land, building, leaseholds, machinery, plant, fittings, furniture and railway sidings) as on the last day of the previous year of commencement of business or extension of undertaking or setting up of the new unit.
5% of the capital employed Capital employed means the total amount of issued share capital; debentures and long-term borrowings as on the last day of the previous year of commencement of business or extension of undertaking or setting up of the new unit.

The total amount of deduction, as calculated above, will be available as a deduction in five equal instalments. The instalments will begin from the previous year in which business is commencement or extension of the undertaking is completed or new unit commences production/ operation.

List of preliminary expenditure allowable as a deduction under section 35D

Amortization of preliminary expenditure is available towards eligible expenditure which is incurred-

  • Before commencement of the business; or
  • After commencement of the business, towards an extension of the undertaking or setting up of a new unit.

Provisions of section 35D(2) cover the list of eligible preliminary expenditure which is allowable as a deduction under section 35D of the Income Tax Act. The said list is summarized hereunder-

1. Expenditure for preparation of the feasibility report and project report.

2. Expenses incurred for conducting market or other surveys which is necessary for the business of the assessee.

.3. Expenditure for acquiring engineering services relating to the assessee’s business.

4. Legal expenses for-

  • Drafting of Memorandum of Association and Article of Association of the company.
  • Drafting agreement, between the assessee and any other person, for the purpose of setting up or conduct of the business.

5. Expenditure for the printing of Memorandum and Article of Association of the company.

6. Expenses for drafting, printing, typing and advertisement of the prospectus of the company.

7. Registration fees paid for registering the company under the Companies Act, 1956.

8. Expenditure towards the issue of shares/ debenture for public subscription.

9. Any other prescribed expenditure which is not deductible under any other provisions of the Act.

Some noteworthy points related to deduction under section 35D

  • For claiming the deduction under section 35D, the assessee (other than a company or co-operative society) should-
    • Get the accounts audited, for the year/ years during which the preliminary expenditure is incurred, by the practising chartered accountant, and
    • Furnish audit report in Form No. 3AE in the first year of claiming the deduction.
  • In case of amalgamation or demerger of the company, prior to completion of five year-
    • Deduction under section 35D will not be available to the amalgamating company/ demerged company in the previous year in which amalgamation/ demerger takes place.
    • Further, provisions of section 35D will apply to the amalgamated/ demerged company and accordingly deduction will also be available to the amalgamated/ demerged company.
  • The expenditure claimed/ allowed as a deduction under section 35D will not qualify for any other deduction under other provisions of the Act.

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