Amortisation of Preliminary Expenses - Taxation | Income Tax for assessment (Inter Level) PDF Download

Amortisation of Preliminary Expenses - Taxation

1. Preliminary expenses are expenses incurred before setting up of the business; or

2. the expenses are incurred in connection with extension (same line of business) of an undertaking or in connection with setting up a new business. (Setting up new factory, opening a new branch)

3. Eligible preliminary expenses are

a. Preparation of feasibility report.

b. Conducting market survey or any other survey necessary for the business.

c. Preparation of project report.

d. Engineering services relating to the business.

e. Legal charges for drafting any agreement relating to the setting up or conduct of the business.

f. Legal charges for drafting and printing of Memorandum of Association (MOA) and Articles of Association (AOA) .

g. Registration fees of a company paid to Registrar of Companies. (Stamp duty)

h. Expenses and legal charges incurred in drafting, printing and advertising of prospectus.

i. Expenditure incurred on issue of shares or debentures like underwriting commission, brokerage, advertisement etc. (Entire public issue expenses).

Note : Salary to employees, rent of premises, interest on borrowed capital are not treated as preliminary expenses hence deduction never allowed. These are treated as dead expenses.

4. An Indian company or a resident non-corporate assessee can claim deduction u/s 35D. Do remember a foreign company is not eligible for deduction under section 35D even if  resident.

5. Deduction is allowed in 5 equal installments over a period of 5 years beginning with the previous year in which the business commences or the previous year in which the extension of the undertaking is completed or the new unit commences production or operation.

6. Aggregate amount of eligible expenditure or 5% of the cost of project whichever is lower is allowed as deduction.

Note: Cost of project includes actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings).

E.g. Eligible expenditure Rs 15,000; Cost of project Rs 2,00,000; 5% of cost of project Rs 10,000; Deduction allowed u/s 35D shall be Rs 2,000 in 5 equal installments from the PY when business commences.

7. In case of Indian company aggregate amount of eligible expenditure shall be limited to 5% of the cost of project or 5% of capital employed whichever is higher.

Note: Capital employed is the aggregate of the issued share capital, debentures and long-term borrowings.

E.g. Eligible expenditure Rs 9,000; Cost of project Rs 80,000; Capital employed Rs 1,00,000. 5% of cost of project Rs 4,000; 5% of capital employed Rs 5,000. Deduction allowed u/s 35D shall be Rs 5,000 in 5 equal installment from the PY when business commences.

8. The assessee shall get his accounts audited by a Chartered Accountant.

P1: X Ltd. is an existing Indian company which sets up a new industrial unit. It incurs the following expenditure in connection with the new unit :

The following further data is given :

Cost of project                                  30,00,000

Capital employed in the new unit     40,00,000

What is the deduction admissible to the company under section 35D?

Presumptive Basis of Taxation for Small Business / Profession and Truck Business

General Conditions Applicable to Both Sections 44AD, 44ADA and 44AE

1. The profit from business which is computed on estimated basis is all comprehensive i.e. all deductions and depreciations which should be allowed under sections 28 to 44D are deemed to be already allowed and no further adjustment is required to be made.

2. Disallowance u/s 40, 40A and 43B has already been deemed to be adjusted.

3. Taxpayer can adjust brought forward losses as per section 70 to 80. However unabsorbed depreciation cannot be adjusted since falling u/s 32(2).

4. Deductions u/s 80C to 80U is available.

5. Profit of small business shall be aggregated with other incomes of the assessee computed in accordance with the normal applicable provisions of the Act.

6. The written down value of any asset used for the purpose of the business shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (Mandatory to claim depreciation).

7. The eligible assessee of small business u/s 44AD is required to pay 100% of advance tax by 15th March  of the financial year immediately prior to the assessment year, The other assessee covered u/s 44ADA and 44AE is to pay advance tax in 4 installments.

8. Where the business is carried on a partnership basis, remuneration to partner and interest to partner is not allowed as deduction u/s 37. However this deduction is available to business covered u/s 44ADA and 44AE. 

Section 44AD. Presumptive Basis of Taxation for Small Business