The inception stage of any business organization is very important for laying down a strong foundation of any business. In this stage, there are many expenses that are incurred for the smooth start of a business. As per section 35D of the Income Tax Act, 1961, preliminary expenses incurred prior to the commencement of business, extending an existing business, setting up a new unit etc. are eligible to be amortized. In this article, we have discussed the provisions of section 35D.
(i) Eligible assessee
Indian company or a person (other than company) resident in India.
(ii) Timing and purposes of expenditure
The deduction is in respect of the expenditure incurred after 31st March 1970 and expenditure may be of the type which was incurred:
(a) before the commencement of the business, or
(b) after the commencement of the business, or in connection with the extension of its industrial undertaking or in connection with its setting up a new undertaking.
(iii) Eligible expenditure
The following expenses shall be eligible for deduction under Section 35D (2) -
- Expenditure in connection with preparation of feasibility report
- Preparation of project report
- Conducting market survey or any other survey necessary for the business assessee
- Engineering services related to the business of the assessee.
- Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee.
- Legal charges for drafting the Memorandum and Articles of Association of the company;
- Expenses incurred on the printing of Memorandum and Articles of Association;
- Expenditure by way of fees for registering the company under Companies Act, 1956;
- Any expenditure in connection with the Issue, for public subscription of shares, and debentures of the company, being underwriting commission, brokerage and charges of drafting.
- Charges for typing, printing and advertisement of the prospectus.
- Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.
(iv) Maximum amount eligible for deduction
It shall not exceed 5% of the 'Cost of project'(cost of project= cost of fixed assets as on the last day of the previous year) or
In case of company assessee at the option of the company, 5% of 'Capital employed'(capital employed= paid up capital + debentures + long term borrowings as on the last day of the previous year)
(v) Amount of deduction
The expenditure shall be divided into FIVE instalments and the assessee shall be allowed a deduction of an amount equal to one instalment (1/5) for each of the five successive previous years beginning with the previous year in which business commences or extension work is completed or the new unit (whether industrial or service) commences production as the case may be.
It shall be noted that w.e.f. assessment year 2009-10 the benefit of deduction regarding preliminary expenses has been extended to service sector also. In event of merger or a demerger, the merged company of a resultant company will be allowed to amortize the remaining amount of preliminary expenses over the remaining years.
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