Section 35D-Amortization of Certain Preliminary Expenses

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The Income Tax Act, of 1961 is the main statute of Income Tax in India. It provides for levy, administration, collection, and recovery of Income Tax.

For a business, the beginning stage is the most important and critical stage in its life cycle. In this beginning stage, there are various expenses that are incurred by the businesses.

Amortization of preliminary expenses that occurred prior to the commencement of business, extending an existing business, setting up a new unit, etc. is eligible to be amortized under section 35D of the Income Tax Act, 1961.

Under Section 35D, an eligible assessee includes Indian Companies or a person other than a company who is a resident of India.

As per this Section, preliminary expenses should be incurred for the purpose of:

1. Starting a new business

2. Extending an existing business- setting up a new undertaking

Following preliminary expenses that are eligible to be amortized:

• Making of feasibility reports, project reports, market survey reports, engineering service reports

• Legal cost for drafting necessary agreements for the purpose of carrying out business

• Legal cost for drafting Memorandum of Association and Articles of Association

• Cost for printing the above documents

• Cost incurred for registering the company with the ROC

• Underwriting commission, brokerage, and charges paid in connection with the issue of shares and debentures or issue of the prospectus

• Any other expenses may be prescribed and not deductible under any other section.

To what extent the deduction allowed should be lower of the actual expense incurred?

5% of the cost of a project (cost of project= cost of fixed assets as on the last day of the previous year)

5% of capital employed- applicable to a company (capital employed= paid up capital+ debentures +long term borrowings as on the last day of the previous year)

The amount so calculated above will be allowed as a deduction equally over a period of 5 years.