Treatment of preliminary expense
This query is : Resolved
12 February 2015
My client get a notice form IT Department U/s 139(9). And they issue is that they are demanding to route the preliminary expense from P&L Ac and then add it back in BP Column under section 28 to 44DA. ?
What is the solution of this ?????????????
What is the solution of this ?????????????
12 February 2015
you need to rectify this defect and refile it within 15 days of receiving this notice.
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12 February 2015
First check whether preliminary expenses w/off in full or as per IT act allowed. If it is full the excess portion has to be add back while filing return. Please confirm and rectify if needed.
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13 February 2015
that company is incorporated last year and haven't started its businees yet and this is its first return so what should i do to rectify the return? If do rectify the return as per there solution then it will going to change my balance sheet and profit and loss account, which is not possible to change now.
Is there any other solution for this problem?
Is there any other solution for this problem?
02 August 2025
Thanks for sharing the detailed context. Here’s a practical way to address the issue with **preliminary expenses and the IT notice under Section 139(9)**:
---
### Key points in your case:
* Company incorporated last year, **business not started yet**.
* Preliminary expenses written off fully in P\&L as per accounting.
* IT department demands **add back of preliminary expenses** while computing business profit (BP) under Sections 28 to 44DA.
* You are worried about changing balance sheet and P\&L as books are finalized.
---
### What’s going on legally?
* **Preliminary expenses (or expenses incurred before starting business) are capital in nature**.
* As per **Income Tax Act, these expenses cannot be fully claimed as deduction in the first year** (when business is not started).
* They must be **added back in the Profit & Loss (P\&L) for tax purposes** and then **amortized over 5 years under Section 35D**.
* The IT department is asking to comply with this tax treatment, not the accounting treatment.
---
### How to handle the return:
1. **For accounting (Books of Account):**
* You can keep the full write-off of preliminary expenses in P\&L as per accounting standards (AS-26, Schedule III etc.).
* *No need to revise your books or P\&L* if finalized.
2. **For tax return (Income Tax Return - ITR):**
* In the computation of taxable income (P\&L), **add back the preliminary expenses amount which was written off fully**.
* Then, **claim deduction of 1/5th of preliminary expenses under Section 35D** for this year.
* This add-back and amortization is only for tax purposes and will not affect your financial statements.
3. **How to rectify the return?**
* Prepare a **revised return** within the stipulated time (usually 15-30 days after notice)
* Show the add-back of preliminary expenses in the **book profit column** (under Section 28 to 44DA computation).
* Show amortization (1/5th) as deduction in the return.
* No need to change accounting P\&L or balance sheet figures. This is only a **tax adjustment in computation**.
---
### Summary:
| Aspect | Accounting Treatment | Tax Treatment (in ITR) |
| ------------------- | ------------------------------------- | ---------------------------------------------------- |
| Preliminary Expense | Write off fully in P\&L | Add back fully to income; claim amortization (1/5th) |
| Books / Financials | No change required after finalization | Adjust taxable income in return, file revised return |
---
### Additional tips:
* Maintain **detailed working papers** explaining this difference in accounting and tax treatment.
* Attach **revised computation sheet** with the return showing the add-back and amortization.
* Inform your client about this tax-specific treatment to avoid confusion.
---
If you want, I can help you draft the revised computation and the note explaining this adjustment. Would you like me to do that?
---
### Key points in your case:
* Company incorporated last year, **business not started yet**.
* Preliminary expenses written off fully in P\&L as per accounting.
* IT department demands **add back of preliminary expenses** while computing business profit (BP) under Sections 28 to 44DA.
* You are worried about changing balance sheet and P\&L as books are finalized.
---
### What’s going on legally?
* **Preliminary expenses (or expenses incurred before starting business) are capital in nature**.
* As per **Income Tax Act, these expenses cannot be fully claimed as deduction in the first year** (when business is not started).
* They must be **added back in the Profit & Loss (P\&L) for tax purposes** and then **amortized over 5 years under Section 35D**.
* The IT department is asking to comply with this tax treatment, not the accounting treatment.
---
### How to handle the return:
1. **For accounting (Books of Account):**
* You can keep the full write-off of preliminary expenses in P\&L as per accounting standards (AS-26, Schedule III etc.).
* *No need to revise your books or P\&L* if finalized.
2. **For tax return (Income Tax Return - ITR):**
* In the computation of taxable income (P\&L), **add back the preliminary expenses amount which was written off fully**.
* Then, **claim deduction of 1/5th of preliminary expenses under Section 35D** for this year.
* This add-back and amortization is only for tax purposes and will not affect your financial statements.
3. **How to rectify the return?**
* Prepare a **revised return** within the stipulated time (usually 15-30 days after notice)
* Show the add-back of preliminary expenses in the **book profit column** (under Section 28 to 44DA computation).
* Show amortization (1/5th) as deduction in the return.
* No need to change accounting P\&L or balance sheet figures. This is only a **tax adjustment in computation**.
---
### Summary:
| Aspect | Accounting Treatment | Tax Treatment (in ITR) |
| ------------------- | ------------------------------------- | ---------------------------------------------------- |
| Preliminary Expense | Write off fully in P\&L | Add back fully to income; claim amortization (1/5th) |
| Books / Financials | No change required after finalization | Adjust taxable income in return, file revised return |
---
### Additional tips:
* Maintain **detailed working papers** explaining this difference in accounting and tax treatment.
* Attach **revised computation sheet** with the return showing the add-back and amortization.
* Inform your client about this tax-specific treatment to avoid confusion.
---
If you want, I can help you draft the revised computation and the note explaining this adjustment. Would you like me to do that?
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