Preliminary exp
This query is : Resolved
30 July 2011
hi
i wanted to know about expenditure incurred during extension of the company .
whether it can be treated as preliminary exp or not?
as per income tax act (section 35d) preliminary exp applicable even for extension
how its dealt in accounting std or in company law ?
plz do reply....
i wanted to know about expenditure incurred during extension of the company .
whether it can be treated as preliminary exp or not?
as per income tax act (section 35d) preliminary exp applicable even for extension
how its dealt in accounting std or in company law ?
plz do reply....
30 July 2011
May be expensed out for accounting as well as for taxation purposes.
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31 July 2011
What do you mean by extension . Please clarify this so that proper reply can be given in this matter.
10 August 2024
When dealing with expenses incurred during the extension of a company, it's important to differentiate between preliminary expenses and other types of expenses. Here's a detailed breakdown of how these expenditures are treated under accounting standards, company law, and tax regulations:
### **1. **Preliminary Expenses:**
**Definition:**
Preliminary expenses are the costs incurred in the process of setting up a company, including expenses related to incorporation, registration, and other activities necessary to establish the company.
**Treatment under Company Law and Accounting Standards:**
- **Accounting Standards (AS 26 / Ind AS 38):** According to Indian Accounting Standards, preliminary expenses should generally be written off as and when incurred. They are not capitalized but rather expensed in the profit and loss account of the year in which they are incurred.
- **Companies Act, 2013:** The Companies Act, 2013 does not provide specific guidance on preliminary expenses but aligns with the accounting standards where such expenses are typically written off.
### **2. **Expenses Related to Extension or Expansion of Business:**
**Definition:**
Expenses related to the extension or expansion of a company are incurred to enhance or extend the company’s business operations. These might include costs related to setting up new branches, acquiring new assets, or other costs associated with business growth.
**Treatment under Company Law and Accounting Standards:**
- **Capitalization:** Expenses related to the extension or expansion of the business should generally be capitalized as part of the cost of assets acquired or constructed. This is because these expenditures result in the acquisition or enhancement of assets that will benefit the company for a long period.
- **Accounting Standards (AS 10 / Ind AS 16):** According to accounting standards, such costs are usually added to the cost of fixed assets or capitalized as part of the cost of construction. They are not considered preliminary expenses.
### **3. **Treatment under Income Tax Act (Section 35D):**
**Section 35D - Preliminary Expenses:**
- **Eligibility:** Section 35D of the Income Tax Act allows for the amortization of preliminary expenses incurred during the setting up of a business. This includes costs related to incorporation, registration, and any other costs directly associated with the setting up of the company.
**Extension/Expansion Costs:**
- **Section 35D Not Applicable:** Expenses incurred for the extension or expansion of the company do not fall under the scope of Section 35D. Instead, these are typically capitalized and depreciated/amortized over the useful life of the asset as per the accounting standards.
### **4. **Summary:**
**Preliminary Expenses:**
- These are costs incurred during the setting up of a company and should be written off in the year they are incurred, as per accounting standards and company law.
**Extension/Expansion Costs:**
- Costs related to the extension or expansion of the company should be capitalized and included in the cost of assets. They are not treated as preliminary expenses.
**Income Tax Implications:**
- **Preliminary Expenses:** Can be amortized under Section 35D.
- **Extension/Expansion Costs:** Should be capitalized and depreciated/amortized as per applicable accounting standards and tax regulations.
### **Recommendations:**
- **Accounting Treatment:** For extension or expansion costs, ensure they are capitalized appropriately and included in the cost of the relevant asset.
- **Tax Treatment:** Understand that preliminary expenses related to setting up the company are eligible for amortization under Section 35D, whereas extension/expansion costs are capitalized.
- **Documentation:** Maintain detailed records and documentation to substantiate the nature and treatment of these expenses for both accounting and tax purposes.
By distinguishing between preliminary expenses and those related to extension or expansion, and following the respective treatments as per accounting standards and tax laws, you ensure accurate financial reporting and compliance.
### **1. **Preliminary Expenses:**
**Definition:**
Preliminary expenses are the costs incurred in the process of setting up a company, including expenses related to incorporation, registration, and other activities necessary to establish the company.
**Treatment under Company Law and Accounting Standards:**
- **Accounting Standards (AS 26 / Ind AS 38):** According to Indian Accounting Standards, preliminary expenses should generally be written off as and when incurred. They are not capitalized but rather expensed in the profit and loss account of the year in which they are incurred.
- **Companies Act, 2013:** The Companies Act, 2013 does not provide specific guidance on preliminary expenses but aligns with the accounting standards where such expenses are typically written off.
### **2. **Expenses Related to Extension or Expansion of Business:**
**Definition:**
Expenses related to the extension or expansion of a company are incurred to enhance or extend the company’s business operations. These might include costs related to setting up new branches, acquiring new assets, or other costs associated with business growth.
**Treatment under Company Law and Accounting Standards:**
- **Capitalization:** Expenses related to the extension or expansion of the business should generally be capitalized as part of the cost of assets acquired or constructed. This is because these expenditures result in the acquisition or enhancement of assets that will benefit the company for a long period.
- **Accounting Standards (AS 10 / Ind AS 16):** According to accounting standards, such costs are usually added to the cost of fixed assets or capitalized as part of the cost of construction. They are not considered preliminary expenses.
### **3. **Treatment under Income Tax Act (Section 35D):**
**Section 35D - Preliminary Expenses:**
- **Eligibility:** Section 35D of the Income Tax Act allows for the amortization of preliminary expenses incurred during the setting up of a business. This includes costs related to incorporation, registration, and any other costs directly associated with the setting up of the company.
**Extension/Expansion Costs:**
- **Section 35D Not Applicable:** Expenses incurred for the extension or expansion of the company do not fall under the scope of Section 35D. Instead, these are typically capitalized and depreciated/amortized over the useful life of the asset as per the accounting standards.
### **4. **Summary:**
**Preliminary Expenses:**
- These are costs incurred during the setting up of a company and should be written off in the year they are incurred, as per accounting standards and company law.
**Extension/Expansion Costs:**
- Costs related to the extension or expansion of the company should be capitalized and included in the cost of assets. They are not treated as preliminary expenses.
**Income Tax Implications:**
- **Preliminary Expenses:** Can be amortized under Section 35D.
- **Extension/Expansion Costs:** Should be capitalized and depreciated/amortized as per applicable accounting standards and tax regulations.
### **Recommendations:**
- **Accounting Treatment:** For extension or expansion costs, ensure they are capitalized appropriately and included in the cost of the relevant asset.
- **Tax Treatment:** Understand that preliminary expenses related to setting up the company are eligible for amortization under Section 35D, whereas extension/expansion costs are capitalized.
- **Documentation:** Maintain detailed records and documentation to substantiate the nature and treatment of these expenses for both accounting and tax purposes.
By distinguishing between preliminary expenses and those related to extension or expansion, and following the respective treatments as per accounting standards and tax laws, you ensure accurate financial reporting and compliance.
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