Treatment of Pre operative Exp. in a Pvt. Ltd. Company
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
30 April 2011
What is the treatment/disclosure of exp. incureed by a Pvt. Ltd. Company on Incorporation . and now where Pre operative expenses to be shown as per new schedule VI of companies act. please suggest me accoding to AS 26 and as IT Act.
03 May 2011
As regards to New Schedule VI, there is no difference as such for disclosing pre-operative expenses. They shall be disclosed under the head "Miscellaneous Expenses to the extent not written off or adjusted"
These expenses shall be written off in 5 equal annual installments in the books of accounts.
Regarding the treatment in IT Act, the same treatment, i.e. write off in 5 equal annual installments, as per Section 35D.
- CA. Amol G. Kabra
These expenses shall be written off in 5 equal annual installments in the books of accounts.
Regarding the treatment in IT Act, the same treatment, i.e. write off in 5 equal annual installments, as per Section 35D.
- CA. Amol G. Kabra
Querist : Anonymous
Querist :
Anonymous
(Querist)
07 May 2011
Dear Amol Ji
I am talking about NEW Format of Balance Sheet specified by ROC for Companies. and please reply the answer with reference to Accounting standard .
I am talking about NEW Format of Balance Sheet specified by ROC for Companies. and please reply the answer with reference to Accounting standard .
02 August 2025
Got it! Here’s a clear and updated explanation about **treatment and disclosure of Pre-Operative Expenses** for a Pvt. Ltd. company as per:
### 1. **Accounting Treatment and Disclosure (AS-26 & New Schedule VI / Schedule III of Companies Act 2013)**
* **AS-26 (Intangible Assets)** states that preliminary expenses or pre-operative expenses which do not result in tangible assets and do not generate future economic benefits should be **written off**.
* Traditionally, pre-operative expenses were shown under “Miscellaneous Expenditure” or “Preliminary Expenses” as an asset and written off over 5 years.
* **As per the New Schedule VI (applicable till 2013) and now Schedule III (Companies Act 2013):**
* There is **no separate head for ‘Miscellaneous Expenses’ or ‘Pre-operative Expenses’**.
* Such expenses should either be:
* **Capitalized as Intangible Assets** (if criteria for recognition of an intangible asset are met), OR
* **Shown under “Other Non-Current Assets”** as a separate line item, **only if it is not written off fully**.
* If material and not written off, a company may disclose these expenses under “Capital Work in Progress” or “Other Non-Current Assets”.
* Otherwise, **pre-operative expenses are written off fully in the Profit & Loss Account**, i.e., treated as revenue expense.
* **Hence, in balance sheet:**
* If not fully written off, disclosed under **“Other Non-Current Assets”**.
* If written off fully, they do not appear on the balance sheet.
### 2. **Treatment as per Income Tax Act (Section 35D)**
* As per **Section 35D**, pre-operative expenses can be amortized over 5 years in equal installments for tax purposes.
* So, even if fully expensed in books (accounting standards), for **tax purpose you can claim deduction spread over 5 years**.
### **Summary:**
| Aspect | Accounting Treatment (AS-26 & Companies Act) | Tax Treatment (Income Tax Act) |
| --------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- |
| Pre-operative expenses | - Capitalize only if meeting asset criteria- Otherwise write off fully or amortize over 5 years- Show under “Other Non-Current Assets” if not written off | Amortize over 5 years under Section 35D |
| Disclosure in Balance Sheet | Under “Other Non-Current Assets” if not written off fully; else no disclosure | N/A |
---
### Practical Example for Pvt. Ltd. Company:
* Suppose pre-operative expenses are Rs. 1,00,000 incurred on incorporation.
* **Books treatment:**
* You may show Rs. 1,00,000 under “Other Non-Current Assets” and write off Rs. 20,000 each year over 5 years.
* Alternatively, write off fully in the P\&L in the year of expense if immaterial or no future benefit is expected.
* **Tax treatment:**
* Claim Rs. 20,000 as deduction every year under Section 35D for 5 years.
---
If you want, I can help with a sample disclosure format or journal entries! Would you like that?
### 1. **Accounting Treatment and Disclosure (AS-26 & New Schedule VI / Schedule III of Companies Act 2013)**
* **AS-26 (Intangible Assets)** states that preliminary expenses or pre-operative expenses which do not result in tangible assets and do not generate future economic benefits should be **written off**.
* Traditionally, pre-operative expenses were shown under “Miscellaneous Expenditure” or “Preliminary Expenses” as an asset and written off over 5 years.
* **As per the New Schedule VI (applicable till 2013) and now Schedule III (Companies Act 2013):**
* There is **no separate head for ‘Miscellaneous Expenses’ or ‘Pre-operative Expenses’**.
* Such expenses should either be:
* **Capitalized as Intangible Assets** (if criteria for recognition of an intangible asset are met), OR
* **Shown under “Other Non-Current Assets”** as a separate line item, **only if it is not written off fully**.
* If material and not written off, a company may disclose these expenses under “Capital Work in Progress” or “Other Non-Current Assets”.
* Otherwise, **pre-operative expenses are written off fully in the Profit & Loss Account**, i.e., treated as revenue expense.
* **Hence, in balance sheet:**
* If not fully written off, disclosed under **“Other Non-Current Assets”**.
* If written off fully, they do not appear on the balance sheet.
### 2. **Treatment as per Income Tax Act (Section 35D)**
* As per **Section 35D**, pre-operative expenses can be amortized over 5 years in equal installments for tax purposes.
* So, even if fully expensed in books (accounting standards), for **tax purpose you can claim deduction spread over 5 years**.
### **Summary:**
| Aspect | Accounting Treatment (AS-26 & Companies Act) | Tax Treatment (Income Tax Act) |
| --------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- |
| Pre-operative expenses | - Capitalize only if meeting asset criteria- Otherwise write off fully or amortize over 5 years- Show under “Other Non-Current Assets” if not written off | Amortize over 5 years under Section 35D |
| Disclosure in Balance Sheet | Under “Other Non-Current Assets” if not written off fully; else no disclosure | N/A |
---
### Practical Example for Pvt. Ltd. Company:
* Suppose pre-operative expenses are Rs. 1,00,000 incurred on incorporation.
* **Books treatment:**
* You may show Rs. 1,00,000 under “Other Non-Current Assets” and write off Rs. 20,000 each year over 5 years.
* Alternatively, write off fully in the P\&L in the year of expense if immaterial or no future benefit is expected.
* **Tax treatment:**
* Claim Rs. 20,000 as deduction every year under Section 35D for 5 years.
---
If you want, I can help with a sample disclosure format or journal entries! Would you like that?
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