Amortization of preliminary expenditure is allowed as deduction under the Income Tax Act- section 35D. Section 35D of Income Tax Act provides for Amortization of preliminary expenses. According to the Section 35D, any capital expenditure did before the commencement of operation of specified business then such expenditure is allowable as a deduction under the income tax in five equal annual instalments subject to the fulfilment of different conditions given under the Income Tax Act.
Person’s Category who are Eligible for Claiming Deduction under Section 35D
An assessee who are falling under any of the these categories is eligible to claim deduction under section 35D–
- An Indian Company; or
- A person, other than the company, resident in India.
List Of Preliminary Expenditure Allowable As A Deduction Under Section 35D–
Amortization of preliminary expenditure is available towards eligible expenses which is raised-
- Before commencement of the business; or
- After commencement of the business, towards an extension of setting up of a new unit.
Provisions of section 35D (2) cover the list of eligible preliminary expenditure which is allowable as a deduction under the Income Tax Act- section 35D. The said list is summarised below-
1. Expenditure for preparation of the feasibility report & project report.
2. Expenses incurred for conducting market or other surveys which is mandatory for the assessee’s business.
3. Expenses for acquiring engineering services related with assessee’s business.
4. Legal expenses for-
- Drafting of Memorandum of Association and Article of Association of the company.
- Drafting agreement, between the assessee and any other person, for the purpose of setting up or conduct of the business.
5. Expenditure for the printing of Memorandum of Association (MoA) and Article of Association (AoA) of the company.
6. Expenses for printing, typing, drafting and advertisement of the prospectus of the company.
7. Registration fees paid for registering the company under the Companies Act, 1956.
8. Expenditure towards the issue of shares/ debenture for public subscription.
9. Any other prescribed expenses which is not deductible under any other provisions of the Act.
Some Important Points Related To Deduction under Section 35D
- For claiming the deduction under section 35D, the assessee (other than a company or co-operative society) should-
- Get the accounts audited, for the year/ years during which the preliminary expenditure is incurred, by the practising CA, and
- Furnish audit report in Form No. 3AE in the 1st year of claiming the deduction.
- In case of amalgamation or demerger of the company, prior to completion of 5 year-
- Deduction under section 35D will not be available to the amalgamating company/ demerged company in the previous year in which amalgamation/ demerger takes place.
- Further, provisions of section 35D will apply to the amalgamated/ demerged company and accordingly deduction will also be available to the amalgamated/ demerged company.
The expenses claimed or allowed as a deduction under section 35D will not qualify for any other deduction under other provisions of the Act.