Tax treatment of pre incorporation / pre operative expenses

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Dear Friends,

One of my companies was incorporated on 05/12/2013. The main activity of business is trading in Cars. The business activity commenced in the year 2014-2015. 

At the time of drawing up the balance sheet and profit and loss account for the year ended 31/03/2014, I have the following queries:

1. Whether Depreciation as per Companies Act be applicable as Depreciation should be charged under the companies act when the asset is ready to use ? The assets acquired by the company are Furniture, Vehicle and Laptop. 

2. Since assets have not been put to use, there is no question of depreciation as per IT act. Whether AS 22 will come into picture ? 

3. The company has incurred expenditure like printing & stationery, rent, electricty etc to the the tune of Rs. 9.5 lakhs. What is the treatment of the same ? Whether they should be treated as pre opertaive expenses or preliminary expenses under section 35D ?

4. If the above mentioned expenses are to be treated as pre operative expenses, what is the treatment of the same ? 

I have a conflict with one of my colleagues. According to him all the expenses incurred should be treated as pre operative expenses and capitalised in the current year. After the commencement of the business the same shall be allocated to the respective heads of assets/expenditure.

My opinion is that admin expenses cant be capitalised. A profit and loss account has to be drawn and the loss has to be carried forward for future years. Now that the due date for filing ROI is already long expired, the loss cannot be carried forward. 

I hope my query gets resolved.

Thanks in advance.

Replies (2)

Can anybody please give a clarity on this ?

A reply in brief would also be helpful !!

In my opinion, Depreciation should be charged under companies act and should not be charged under Income tax Act. 

(Opinion of the Company Law Board: Since according to accepted accounting principles, depreciation also arises out of efflux of time, it would be necessary for the purpose of section 205 to provide for depreciation even in respect of assets which are not in use during any financial year, if it purposes to declare to pay dividend)

The preoperative expenses should be debited to P&l a/c under companies act. they should be added back in tax computation and allowed from the next year in parts 1/5th.

Pl share with us if you have any other info about this.

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