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Allowability of expenses incurred before generating revernue

Deepak Goyal (Company Secretary) (31 Points)

14 January 2010

Whether the expneses incurred before the commencement of business are allowed as revenue expenditure under Income Tax Act?

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22 Replies

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 14 January 2010

sec 37 allows all expenditure related to biz other than a few...it hasnt statd the exp before commencement as an exception..so i guess if its related to biz its deductable US 37

CA Radhika Arde (Chartered Accountant) (67 Points)
Replied 14 January 2010

see the section 35D.....Amortisation of preliminary Expenses.............you can get deduction sbject to ceiling prescribed in sec 35D............

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 14 January 2010

But sir 35D it covers only some expences na...And the ques asks about revenue expences...so its better u make the nature of expense clear Deepak sir

CA Radhika Arde (Chartered Accountant) (67 Points)
Replied 14 January 2010

wat type of expenditure is it???????

Deepak Goyal (Company Secretary) (31 Points)
Replied 14 January 2010

Thanks for your interest.

The expenses are generally rent, staff salaries, transportation cost, electricity bills, telephone bills etc incurred during the period when no corresponding income was generated

Thanks

Amir (Learner) (4016 Points)
Replied 14 January 2010

Dear Deepak,

Harish is rite in saying that expenses of the nature specified u/s 35 D can be claimed..But that too in 5 equal annual installments...

Let me tell u that expenses incurred prior to commencement of Business CANNOT BE CLAIMED u/s 37....

Further, a technical name of such expenses is "Pre Incorporation Expenses" or Pre Operative Expenses".i:e expenses incurred prior to start of commercial activities..

Pre operative Expenses even if revenue in nature HA TO BE CAPITALIZED......BY ALLOCATING OVER THE COST OF FIXED ASSETS.....& DEPRECIATION WILL BE ALLOWED ON SUCH EXPENSES BEING INCLUDED IN THE COST OF FIXED ASSETS...

Sunil Liladhar Kotak (Manager (F & A)) (2025 Points)
Replied 14 January 2010

amir is very much right

Deepak Goyal (Company Secretary) (31 Points)
Replied 14 January 2010

But the methodology applied in such cases is as follows:-

- where such expenditure results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law;

- in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses the same would be allowable over the period to which these relate proportionately, applying the matching principle.

In other cases where the same does not result in the creation of any capital asset or.where the same is not allocable over defined future time periods there .can be-no case for amortising the same under the Act over the expected period over which the benefit is likely to arise there from since in such cases the expenditure is essentially revenue in nature

Amir (Learner) (4016 Points)
Replied 14 January 2010

Dear Deepak,

I know the case mentione below is not exactly same which we are discussing beacuse we r discussing about new business but still the principle emerging from the following case may resolve ur doubt........

Pre-operative expenses on new line of business are capital expenditure - Where the trader adds to the existing business another new line of business, the pre-operative expenditure for such expansion has to be treated as capital expenditure - Ashoke Marketing Ltd. v. CIT

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 14 January 2010

Tanx Amir sir

so even if we pay some some rent or so in advance before biz starts it cant be claimed as a normal biz exp ?? Will it be capitalized sir?

Amir (Learner) (4016 Points)
Replied 14 January 2010

Dear hareesh,

Thankx, but I would b more comfortable if u Call me Amir.............

Ya Bother, even rent for a period prior to the start of commercial activities has to be capitalised...

But caution should be exercised in case of Advance rent.

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 14 January 2010

So if its for a period prior to commencement its to be capitalized..and what should be done if its paid as advance before commencement of biz Amir Bhaiyya....

Bharat Khurana (Student) (153 Points)
Replied 15 January 2010

expenses incurred before commencement of expenditure are allowed to the extent of 20% of the expenditure in five assessment years commencing from the assessment year relevant to the previous year in which business is commenced. However deduction shall be admissible of the expenses specified u/s 35D of the Income tax act, 1962.

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 15 January 2010

Dear Bharath ,

But the expenses listed in the ques are outside the purview of sec 35D..u can see that if u have read the latter post of Deepak sir....tats why we were discussing its treatment..and its IT act 1961 nt 62 friend..