Preliminary expenses
This query is : Resolved
28 June 2017
What is the treatment of preliminary expenses as per Income Tax act, companies act and Accounting standard 26????
29 June 2017
pl see the deliberation in https://www.caclubindia.com/experts/treatment-of-preliminary-expenses-651710.asp
29 June 2017
Sir,
After seeing that discussion i still have doubts regarding IT return.
Say company has 1 lakh PAID UP capital.
As Per sec 35D, is preliminary expanse limited to 5 % of 1 lakh??
Is audit report in form 3AE required to be filed??
After seeing that discussion i still have doubts regarding IT return.
Say company has 1 lakh PAID UP capital.
As Per sec 35D, is preliminary expanse limited to 5 % of 1 lakh??
Is audit report in form 3AE required to be filed??
10 August 2024
The treatment of preliminary expenses involves multiple aspects under the Income Tax Act, Companies Act, and Accounting Standard 26 (AS 26). Here's a detailed explanation of the treatment of preliminary expenses as per each of these:
### **1. Companies Act**
Under the **Companies Act, 2013**, the treatment of preliminary expenses is as follows:
- **Accounting Treatment:**
- Preliminary expenses are not to be capitalized. According to Schedule III (the revised format under the Companies Act, 2013), preliminary expenses must be written off in the year they are incurred. They should be treated as revenue expenses and not capitalized or carried forward.
- **Disclosure:**
- There is no specific line item for preliminary expenses in the financial statements. Instead, these should be included as part of the general expenses and disclosed in the Profit and Loss Account for the year in which they are incurred.
### **2. Income Tax Act**
Under **Section 35D** of the Income Tax Act, 1961:
- **Capitalization and Deduction:**
- Preliminary expenses can be amortized and claimed as a deduction under Section 35D if they are incurred in connection with the setting up of a business or providing new facilities. The total amount of preliminary expenses is allowed to be amortized over a period of five years, starting from the year in which the business begins operations.
- **Limit:**
- There is no specific limit of 5% of the paid-up capital mentioned under Section 35D. The section provides for amortization over five years, but the total preliminary expenses are not restricted to a percentage of the paid-up capital.
- **Audit Report in Form 3AE:**
- The form 3AE is required to be filed for companies claiming amortization of preliminary expenses under Section 35D. This form is used to report the preliminary expenses and their amortization.
### **3. Accounting Standard 26 (AS 26)**
**AS 26 – Intangible Assets** addresses the treatment of intangible assets, including preliminary expenses:
- **Accounting Treatment:**
- According to AS 26, preliminary expenses are classified as non-recurring expenses and are not to be capitalized. They should be written off in the financial statements as they do not meet the criteria for recognition as intangible assets.
- **Amortization:**
- Since preliminary expenses are not capitalized under AS 26, there is no question of amortizing them as an intangible asset. Instead, they are treated as revenue expenses and are expensed out in the period they are incurred.
### **Summary and IT Return Implications**
1. **Companies Act:** Preliminary expenses must be written off in the year incurred and not capitalized. They should be included in the Profit and Loss Account.
2. **Income Tax Act:** Preliminary expenses can be amortized over five years under Section 35D. There is no 5% limit based on paid-up capital. You must file Form 3AE to report these expenses.
3. **Accounting Standard 26:** Preliminary expenses should be written off in the period incurred and not capitalized as an intangible asset.
**IT Return Filing:**
- **Form 3AE:** Required to be filed to claim the deduction for preliminary expenses amortized under Section 35D of the Income Tax Act.
- Ensure you follow the guidelines for amortization and include these expenses correctly in your tax return to comply with the Income Tax Act provisions.
In summary, preliminary expenses must be handled with due consideration of accounting standards and tax regulations. They are written off as expenses under accounting standards and can be amortized over five years under tax laws, with the necessary reporting in Form 3AE.
### **1. Companies Act**
Under the **Companies Act, 2013**, the treatment of preliminary expenses is as follows:
- **Accounting Treatment:**
- Preliminary expenses are not to be capitalized. According to Schedule III (the revised format under the Companies Act, 2013), preliminary expenses must be written off in the year they are incurred. They should be treated as revenue expenses and not capitalized or carried forward.
- **Disclosure:**
- There is no specific line item for preliminary expenses in the financial statements. Instead, these should be included as part of the general expenses and disclosed in the Profit and Loss Account for the year in which they are incurred.
### **2. Income Tax Act**
Under **Section 35D** of the Income Tax Act, 1961:
- **Capitalization and Deduction:**
- Preliminary expenses can be amortized and claimed as a deduction under Section 35D if they are incurred in connection with the setting up of a business or providing new facilities. The total amount of preliminary expenses is allowed to be amortized over a period of five years, starting from the year in which the business begins operations.
- **Limit:**
- There is no specific limit of 5% of the paid-up capital mentioned under Section 35D. The section provides for amortization over five years, but the total preliminary expenses are not restricted to a percentage of the paid-up capital.
- **Audit Report in Form 3AE:**
- The form 3AE is required to be filed for companies claiming amortization of preliminary expenses under Section 35D. This form is used to report the preliminary expenses and their amortization.
### **3. Accounting Standard 26 (AS 26)**
**AS 26 – Intangible Assets** addresses the treatment of intangible assets, including preliminary expenses:
- **Accounting Treatment:**
- According to AS 26, preliminary expenses are classified as non-recurring expenses and are not to be capitalized. They should be written off in the financial statements as they do not meet the criteria for recognition as intangible assets.
- **Amortization:**
- Since preliminary expenses are not capitalized under AS 26, there is no question of amortizing them as an intangible asset. Instead, they are treated as revenue expenses and are expensed out in the period they are incurred.
### **Summary and IT Return Implications**
1. **Companies Act:** Preliminary expenses must be written off in the year incurred and not capitalized. They should be included in the Profit and Loss Account.
2. **Income Tax Act:** Preliminary expenses can be amortized over five years under Section 35D. There is no 5% limit based on paid-up capital. You must file Form 3AE to report these expenses.
3. **Accounting Standard 26:** Preliminary expenses should be written off in the period incurred and not capitalized as an intangible asset.
**IT Return Filing:**
- **Form 3AE:** Required to be filed to claim the deduction for preliminary expenses amortized under Section 35D of the Income Tax Act.
- Ensure you follow the guidelines for amortization and include these expenses correctly in your tax return to comply with the Income Tax Act provisions.
In summary, preliminary expenses must be handled with due consideration of accounting standards and tax regulations. They are written off as expenses under accounting standards and can be amortized over five years under tax laws, with the necessary reporting in Form 3AE.
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