What is the treatment if preliminary expenses and preoperative expenses under accounting and income tax? ?
So far as I know, under accounting, both are treated as miscellaneous expenditure till operations are started and once operations are started, preliminary expenses are written off in p/l accounts 1/5 that each year
And preoperative expenses are allocated to fixed assets irrespective of whether or not these preoperative expenses are related to those fixed assets and depreciation is charged on that.
Am I correct? ?
Please suggest.
Preliminary Expenses are expenses that are incurred before incorporation of entity.
While Preoperative expenses are those which are incurred after incoprporation and before commencement of commercial production.
Regarding Accounting treatment of
1. Prilimary Expenses
As you rightly said it is treated as deferred Expenditure and written off in P & L in 5 years.
2. Preoperative Expenses
There may be three cases
a. Expenses prior to commencement of commercial Production.
Administrative and General Overhead expenses incurred on start up and commissioning of project including expense on test run, experimental production etc are generally capitalised as contruction cost of assets.
b. Expenses incurred after commercial Production started
These are treated as revenue expenditure and charged to P&L.
Howevere sometimes interveal between date of project ready for commercial production and actual commercial production is too long. During such event these expenses can either be charged to P&L or treated as Deferred revenue expense and amortised over a period not exceeding 3 to 5 years
Note
From the moment the plant is completed and commissioned and is ready for commercial production, all expenditures of revenue nature must be charged to the profit and loss account.It is for this reason that it is so important to determine the “cut-off date” based on the date when the plant is ready for commercial production, with a great degree of precision.”
Once the cut-off date is correctly determined, the expenditure of revenue nature incurred after the cut-off date should be charged to the relevant profit and loss account.
Expenses incurred after the cut-off date for commencement of commercial production cannot be capitalised since such expenditure does not add to the value or utility of the fixed assets; it is incurred merely to ensure that the plant is running smoothly after commencement of commercial production.
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