Preliminary Expenses
This query is : Resolved
Ameya S. Oke
(Querist)
04 June 2009
The Preliminary expenses of a newly incorporated company offering its services abroad India stand above Rs.1200000. Can this amount be written off entirely in the first year itself?
Sumit gupta
(Expert)
04 June 2009
SEC 37 AND SEC35D DEALS WITH IT.
Will Section 35D apply in the case of finance and service units? This issue arose in the LIC Housing Finance Ltd case. The company made a public issue of equity shares and incurred a total expenditure of Rs 7,08,51,925 against the public issue of Rs 113.50 crore. It claimed one-tenth of this expenditure under Section 35D.
The Income-Tax Appellate Tribunal (ITAT) rejected the claim on the ground that Section 35D referred to an industrial unit which commenced production or operation. It implies that the industrial undertaking or the unit must be engaged in some manufacturing, producing or processing activity. The only business of the company was that of providing housing finance. This was not covered under Section 35D. The Tribunal was considering the LIC Housing Finance Ltd case in respect of the assessment year 1995-96.
Till recently, amortisation of preliminary expenditure was allowed under Section 35D only for industrial undertakings. It was not applicable to companies engaged in providing finance or other services.
Responding to repeated calls from industry and business, Section 35D was amended by the Finance Act, 2008 w.e.f. April 1, 2009, that is, from the assessment year 2009-10, the benefit of amortisation is available even for service organisations.
The words ‘industrial undertaking’ were omitted and the word ‘undertaking’ was inserted in Section 35D. The benefit of amortisation of specified post-commencement preliminary expenses will henceforth be available to all sectors of industry. The amendment could have been made retrospective.
Will Section 35D apply in the case of finance and service units? This issue arose in the LIC Housing Finance Ltd case. The company made a public issue of equity shares and incurred a total expenditure of Rs 7,08,51,925 against the public issue of Rs 113.50 crore. It claimed one-tenth of this expenditure under Section 35D.
The Income-Tax Appellate Tribunal (ITAT) rejected the claim on the ground that Section 35D referred to an industrial unit which commenced production or operation. It implies that the industrial undertaking or the unit must be engaged in some manufacturing, producing or processing activity. The only business of the company was that of providing housing finance. This was not covered under Section 35D. The Tribunal was considering the LIC Housing Finance Ltd case in respect of the assessment year 1995-96.
Till recently, amortisation of preliminary expenditure was allowed under Section 35D only for industrial undertakings. It was not applicable to companies engaged in providing finance or other services.
Responding to repeated calls from industry and business, Section 35D was amended by the Finance Act, 2008 w.e.f. April 1, 2009, that is, from the assessment year 2009-10, the benefit of amortisation is available even for service organisations.
The words ‘industrial undertaking’ were omitted and the word ‘undertaking’ was inserted in Section 35D. The benefit of amortisation of specified post-commencement preliminary expenses will henceforth be available to all sectors of industry. The amendment could have been made retrospective.
CA Nitin Wadhwani
(Expert)
04 June 2009
As per Accounting Principles, there is no such as concept as Preliminary expenses after AS-26 becoming mandatory.
As per Income Tax Act, you will follow Sec.35D and amortize it over a period of 5 years.
As per Income Tax Act, you will follow Sec.35D and amortize it over a period of 5 years.
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