Amortization of preliminary expenses

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

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

Who is an eligible assessee for the purpose of this section?

An eligible assessee for the purpose of section 35D includes Indian Companies or a person other than a company who is a resident of India.

What is the purpose for which preliminary expenses should be incurred?

As discussed above, preliminary expenses should be incurred for the purpose of:

• Commencing a new business
• Extending an existing business- setting up a new undertaking

What are the preliminary expenses that are eligible to be amortized?

Expenditure that is incurred in connection with the following:

• Preparation of feasibility reports, project reports, market survey reports, engineering service reports
• Legal charges for drafting necessary agreements for the purpose of carrying out business
• Legal charges for drafting Memorandum of Association and Articles of Association
• Charges for printing the above documents
• Charges 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 as may be prescribed and not deductible under any other section.

What is the extent of deduction allowed?

The deduction allowed shall be lower of actual expense incurred or:

• 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 shall be allowed as a deduction equally over a period of 5 years.

Related article:

• Preliminary Expenditure Incurred for Setting Up Business