Treatment of pre operating expenses
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 March 2015
Dear Professionals
I have a query:
A company incorporated 5 yr ago. The Company have two business
1) Exporting CAD Designs to its holding Company (work place :work from home)
2) manufacturing - operation not yet started , only training work is going on (Work place: factory)
Company have expenditure related to :
1) Staff salary(both for delhi office and factory)
2) electricity, water , telephone etc expenses (Factory site only)
My question is:
1) Whether company has to treat factory related expenses as pre operative expenses?
2) What is the treatment of expenditure done at factory site in balance sheet.
Thanks in advance .
I have a query:
A company incorporated 5 yr ago. The Company have two business
1) Exporting CAD Designs to its holding Company (work place :work from home)
2) manufacturing - operation not yet started , only training work is going on (Work place: factory)
Company have expenditure related to :
1) Staff salary(both for delhi office and factory)
2) electricity, water , telephone etc expenses (Factory site only)
My question is:
1) Whether company has to treat factory related expenses as pre operative expenses?
2) What is the treatment of expenditure done at factory site in balance sheet.
Thanks in advance .
21 March 2015
After the issue AS 10, all the expenditure related to acquiring the asset got shifted out from preoperative expenditure and formed part of capital work-in-progress.
Preoperative expenditure was shrunk further with the issue of AS 16, requiring the interest on loans and borrowing costs to be capitalised to the respective asset.
Consequent to the issue of AS 26, the preliminary expenditure is written off totally in the year of incorporation of the company and does not appear in the balance-sheet any more.
The residual portion of preoperative expenditure consisted purely of administrative costs.
AS 26 requires all that expenditure which does not result in future economic benefits be expensed out in the year in which it is incurred.
Preoperative expenditure was shrunk further with the issue of AS 16, requiring the interest on loans and borrowing costs to be capitalised to the respective asset.
Consequent to the issue of AS 26, the preliminary expenditure is written off totally in the year of incorporation of the company and does not appear in the balance-sheet any more.
The residual portion of preoperative expenditure consisted purely of administrative costs.
AS 26 requires all that expenditure which does not result in future economic benefits be expensed out in the year in which it is incurred.
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 March 2015
Thanks for your valuable reply
Here wish to add few questions to clear my doubts
1) Whether all admin expenses related to office will be treated as revenue exp, & charge to p & l?
2) Whether concept of pre operating expenses should not be apply hear, as company is already earning from some other sources of business?i.e CAD designing service.
3) what is treatment of such expenses in Income tax, whether it can be claim as exp u/s 28 to 36 or 37 or written of as per section 35D?
Also if possible for you please guide me about the treatment of Building & factory area constructed and one portion is used for office purpose only? Whether depreciation will be charged , as production not yet started...
Here wish to add few questions to clear my doubts
1) Whether all admin expenses related to office will be treated as revenue exp, & charge to p & l?
2) Whether concept of pre operating expenses should not be apply hear, as company is already earning from some other sources of business?i.e CAD designing service.
3) what is treatment of such expenses in Income tax, whether it can be claim as exp u/s 28 to 36 or 37 or written of as per section 35D?
Also if possible for you please guide me about the treatment of Building & factory area constructed and one portion is used for office purpose only? Whether depreciation will be charged , as production not yet started...
02 August 2025
Great questions! Let's clarify the treatment of **pre-operating expenses** and related points, both accounting-wise and tax-wise, based on your scenario:
---
### 1. **Accounting Treatment of Factory-Related Expenses (Pre-operative Expenses)**
* **Factory site expenses** (electricity, water, telephone, salaries related to factory training) **before commencement of production** are generally considered **pre-operative expenses**.
* According to **AS-10 (Property, Plant and Equipment)** and **AS-16 (Borrowing Costs)**:
* Expenditures directly related to acquiring or constructing the asset (including interest, borrowing costs) should be **capitalized as part of Capital Work-In-Progress (CWIP)**.
* Expenses related to setting up or preparing the factory (e.g., training, electricity for construction) also **capitalize to CWIP**.
* However, **AS-26 (Intangible Assets)** and recent guidance require that expenses **which do not result in future economic benefits should be expensed immediately**.
* In your case:
* Expenses that are part of creating the factory asset (construction, training related to setup) should be **capitalized**.
* General administrative expenses not directly linked to asset creation (like office salaries) should be **charged to Profit & Loss**.
---
### 2. **Answers to Your Specific Questions**
#### Q1: Are all admin expenses related to office treated as revenue expenses and charged to P\&L?
* **Yes**, office administrative expenses are generally treated as **revenue expenses** and should be charged to the **Profit & Loss account**.
#### Q2: Should the concept of pre-operative expenses apply when company has other operational income (e.g. CAD designing)?
* Yes, the fact that the company is earning from other business **does not negate the fact that factory-related expenses before commercial production are pre-operative expenses**.
* Pre-operative expenses are related to the **specific project or business segment** whose operations haven't started.
* So, factory-related pre-operative expenses remain **capitalized or treated as expenses as per accounting standards**, independent of other ongoing business activities.
#### Q3: Treatment of such expenses in Income Tax?
* Expenses **relating to earning taxable income can be claimed under sections 28 to 37** of the Income Tax Act as revenue expenses if they are revenue in nature.
* Pre-operative expenses of capital nature (like setting up factory) **cannot be claimed as revenue expenses**.
* Some pre-operative expenses (like certain preliminary expenses) may be **amortized under Section 35D** over 5 years, but this applies to specific types of expenses (e.g., capital expenditure on know-how, patents, licenses), **not general factory expenses**.
* So:
* Administrative and other revenue expenses can be claimed in the year they arise.
* Capital expenses should be capitalized and depreciation claimed as allowed.
---
### 3. **Treatment of Building & Factory Area Constructed**
* If **the building and factory are constructed but production has not started**, then:
* The cost of the building and related expenses are **capitalized as fixed assets**.
* **Depreciation can be charged from the date the asset is ready for use**, even if production has not started (AS-10 guidance).
* The portion of the building used as office should be capitalized as an asset (building/office) and depreciated similarly.
* You can allocate depreciation proportionally based on the usage (factory vs office).
---
### Summary Table
| Aspect | Accounting Treatment | Tax Treatment |
| ------------------------------ | ------------------------------------------------- | ------------------------------------------------ |
| Factory pre-operative expenses | Capitalize to CWIP (if related to asset creation) | Capital expenditure, depreciate over useful life |
| Office admin expenses | Expense in P\&L | Deductible as revenue expenses |
| Pre-operative expenses concept | Applies to specific project/business | Applies irrespective of other operational income |
| Building & factory asset | Capitalize; Depreciate from ready-for-use date | Depreciate as per Income Tax Rules |
---
If you want, I can help draft the journal entries or suggest depreciation rates as per IT rules. Would that help?
---
### 1. **Accounting Treatment of Factory-Related Expenses (Pre-operative Expenses)**
* **Factory site expenses** (electricity, water, telephone, salaries related to factory training) **before commencement of production** are generally considered **pre-operative expenses**.
* According to **AS-10 (Property, Plant and Equipment)** and **AS-16 (Borrowing Costs)**:
* Expenditures directly related to acquiring or constructing the asset (including interest, borrowing costs) should be **capitalized as part of Capital Work-In-Progress (CWIP)**.
* Expenses related to setting up or preparing the factory (e.g., training, electricity for construction) also **capitalize to CWIP**.
* However, **AS-26 (Intangible Assets)** and recent guidance require that expenses **which do not result in future economic benefits should be expensed immediately**.
* In your case:
* Expenses that are part of creating the factory asset (construction, training related to setup) should be **capitalized**.
* General administrative expenses not directly linked to asset creation (like office salaries) should be **charged to Profit & Loss**.
---
### 2. **Answers to Your Specific Questions**
#### Q1: Are all admin expenses related to office treated as revenue expenses and charged to P\&L?
* **Yes**, office administrative expenses are generally treated as **revenue expenses** and should be charged to the **Profit & Loss account**.
#### Q2: Should the concept of pre-operative expenses apply when company has other operational income (e.g. CAD designing)?
* Yes, the fact that the company is earning from other business **does not negate the fact that factory-related expenses before commercial production are pre-operative expenses**.
* Pre-operative expenses are related to the **specific project or business segment** whose operations haven't started.
* So, factory-related pre-operative expenses remain **capitalized or treated as expenses as per accounting standards**, independent of other ongoing business activities.
#### Q3: Treatment of such expenses in Income Tax?
* Expenses **relating to earning taxable income can be claimed under sections 28 to 37** of the Income Tax Act as revenue expenses if they are revenue in nature.
* Pre-operative expenses of capital nature (like setting up factory) **cannot be claimed as revenue expenses**.
* Some pre-operative expenses (like certain preliminary expenses) may be **amortized under Section 35D** over 5 years, but this applies to specific types of expenses (e.g., capital expenditure on know-how, patents, licenses), **not general factory expenses**.
* So:
* Administrative and other revenue expenses can be claimed in the year they arise.
* Capital expenses should be capitalized and depreciation claimed as allowed.
---
### 3. **Treatment of Building & Factory Area Constructed**
* If **the building and factory are constructed but production has not started**, then:
* The cost of the building and related expenses are **capitalized as fixed assets**.
* **Depreciation can be charged from the date the asset is ready for use**, even if production has not started (AS-10 guidance).
* The portion of the building used as office should be capitalized as an asset (building/office) and depreciated similarly.
* You can allocate depreciation proportionally based on the usage (factory vs office).
---
### Summary Table
| Aspect | Accounting Treatment | Tax Treatment |
| ------------------------------ | ------------------------------------------------- | ------------------------------------------------ |
| Factory pre-operative expenses | Capitalize to CWIP (if related to asset creation) | Capital expenditure, depreciate over useful life |
| Office admin expenses | Expense in P\&L | Deductible as revenue expenses |
| Pre-operative expenses concept | Applies to specific project/business | Applies irrespective of other operational income |
| Building & factory asset | Capitalize; Depreciate from ready-for-use date | Depreciate as per Income Tax Rules |
---
If you want, I can help draft the journal entries or suggest depreciation rates as per IT rules. Would that help?
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