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.
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.
As discussed above, preliminary expenses should be incurred for the purpose of:
Expenditure that is incurred in connection with the following:
The deduction allowed shall be lower of actual expense incurred or:
Income Tax Act mandates the preliminary expenses to be amortized equally over a period of 5 years. But the accounting treatment prefers amortization wholly within the same year. This leads to a timing issue in taxation where the taxpayer is offering more income to tax and will pay less tax in future (since 1/5th of deduction is allowed over 5 years). Therefore, there will be the creation of a Direct Tax Asset (DTA) for the preliminary expenses to be amortized and the taxpayer should keep this in mind.
In the event of a merger or a demerger, the merged company of a resultant company will be allowed to amortize the remaining amount of preliminary expenses over the remaining years.
In the inception stage of a business, expenses can be amortized under section 35D of the Income Tax Act, 1961. Eligible assessee includes Indian companies or Indian residents. Preliminary expenses should be incurred for commencing, extending, or setting up business. Eligible expenses include project reports, legal charges, registration fees, and underwriting commissions. Deduction is 5% of project cost or capital employed, to be amortized over 5 years. AS 22 prefers one-time amortization, leading to timing issues in taxation.