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Pre operative expenses

Tushar Mahendru (Learner) (125 Points)

16 July 2010

Hi,

Pls explain..

1> What is the difference between preliminary expenses and pre-operative expenses?

2> Accounting treatment for preoperative expenses?

3> Tax treatment for pre-operative expenses?

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12 Replies

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 16 July 2010

before the commencement of commercial production all expense are termed as preoperative expenses which are pending allocation to fixed assets and once commercial production starts (supported by a certificate received from technical engineer-indicating date of commercial production ) and they will be capitalised in the ratio of Gross block of Assets

Preliminay expenses are something like a defered revenue expenditure where a whole expenditure incurred is not written off in that year but written off over a period of time say advertisement incurred on launch of a new product. since benefit accrues over a period of time

Tax treatment for preoperative expense since commercial production has not started all expense can be claimed as business expenditure

G.D. SINGLA (MANAGING DIRECTOR) (36 Points)
Replied 16 July 2010

PRELIMINARY EXPENSES ARE THOSE EXP WHICH ARE INCURRED BEFORE THE FORMATION OF THE COMPANY. EXAMPLE COMPANY FORMATION EXPENSES INCLUDING FEES PAID TO PROFESSIONALS . WHEREAS THE PREOPERATIVE EXPENSES ARE THOSE EXPENSES WHICH ARE INCURRED BEFORE START OF COMMERCIAL OPERATIONS BY THE COMPANY.

THE PREOPERATIVE EXPENSES ARE TREATED AS ADEFEERRED REVENUE EXPENDITURE AND AMORTISED OVER A PERIOD OF 5-7 YEARS.

THE TAX TREATMENT IS AS DONE FOR OTHER DEFERRED EXPENDITURE AND THE PROFIT & LOSS A/C IS DEBITED FOR THE APPORTIONED ANNUAL AMOUNT EVERY YEAR.

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sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 17 July 2010

I am wrong in Preliminiary expenses definition as rightly pointed out by Mr G.D.Singla it is an expense incurred before formation of company and written off over a period of time just like deferred revenue expenditure

G RAMAKRISHNAN (CFO) (39 Points)
Replied 24 August 2011

Preoperative expenses incurred before commencement of commercial production.

These expenses are capitalised in ratio of Buildings & Machineries .

When assets are not owned by company / production is not appllicable ( say EPC company ) no preopearatve expense is possible and all are writen off whenever incured.

Initial marketing expenses during product launching etc falls under Deferred Revenue and Preopearative

yashsr (CA) (2285 Points)
Replied 07 June 2012

Case:

3 people(foreigners) want to set-up a pvt ltd company to start a micro-brewery in India. Before setting up the business and before incorporation of the company, they visit India and roam all over India for survey purpose. They incur air travel, road travel, hotels, restaurant expenses etc. Now, can they claim this expenditure once they incorporate the company? If yes, under which section in the Income Tax Act?

And whether these will be called:

1) Preliminary Exps

2) Pre-operative Exps

3) Pre-incorporation Exps

anoop (MBA (Finance), CA-PCC) (93 Points)
Replied 08 June 2012

@ yash: As this is Feasibility study of where to set up the production unit. These expense will fall under preliminary expenses.

yashsr (CA) (2285 Points)
Replied 08 June 2012

Originally posted by : anoop
	@ yash: As this is Feasibility study of where to set up the production unit. These expense will fall under preliminary expenses.

True but the problem is that Sec 35D of the Income Tax deals with Preliminary exps incurred after incorporation but before commencement. In my case, the Company is yet to be incorporated(which will be done in August 2012 but the exps were incurred in May and June 1st week)

anoop (MBA (Finance), CA-PCC) (93 Points)
Replied 08 June 2012

@ yash: hey u cannot claim any deduction under Sec35D for this, as the deduction can be claimed by " an assessee, being an Indian company or a person (other than a company) who is resident in India" in ur case they are not indian resident so sec35D is not applicable.

u can see this link for more details: https://www.vakilno1.com/bareacts/incometaxact/s35d.htm

1 Like

yashsr (CA) (2285 Points)
Replied 08 June 2012

Originally posted by : anoop
	@ yash: hey u cannot claim any deduction under Sec35D for this, as the deduction can be claimed by " an assessee, being an Indian company or a person (other than a company) who is resident in India" in ur case they are not indian resident so sec35D is not applicable. u can see this link for more details: https://www.vakilno1.com/bareacts/incometaxact/s35d.htm

Well even though the directors are foreigners, they're going to set-up an Indian Company(Pvt Ltd Company). Hence this shouldn't be a problem.

anoop (MBA (Finance), CA-PCC) (93 Points)
Replied 08 June 2012

@ yash:

See as per sec35d it can be claimed by an indian co.

They are planning to set up a company., they havent formed a company till yet.

If they would have formed a co. and then have incurred those expenses then it would have been dealt as per sec 35D. but these expense were incurred before the co. has been formed:

yashsr (CA) (2285 Points)
Replied 08 June 2012

Originally posted by : anoop
	@ yash: See as per sec35d it can be claimed by an indian co. They are planning to set up a company., they havent formed a company till yet. If they would have formed a co. and then have incurred those expenses then it would have been dealt as per sec 35D. but these expense were incurred before the co. has been formed:

Thats exaclty what I'm telling. So these are not preliminary exps as per Sec 35D. Is there any other way the Company(once it is formed) can take set-off of these exps from their income in their Income Tax Return??