Section 35D — Amortisation of Preliminary Expenses for Companies

Section 35D of the Income Tax Act allows companies and certain assessees to amortise "preliminary expenses" — one-time costs incurred before the commencement of business or in connection with extension of undertaking/new industrial unit — over 5 years. Without this provision, such pre-business costs would simply be disallowed. Here is the complete guide.

Who Can Claim Section 35D?

• An Indian company
• A non-corporate resident assessee (individual, firm) who has set up a new industrial undertaking

Eligible Preliminary Expenses Under Section 35D(2)

• Company registration expenses: Fees paid to ROC, stamp duty, legal fees for incorporation
• Pre-incorporation expenses: Costs of drafting memorandum and articles of association, feasibility reports
• Prospectus and share issue costs: Legal, printing, advertisement and distribution costs for prospectus (for IPO/public issue)
• Market survey, feasibility study, project report costs: Conducted before commencement of business
• Engineering procurement costs: Before commencement of operations
• Costs for extension of existing undertaking: In connection with a new plant, new unit — extension expenses

Limit on Amortisation

• Eligible amount: Lower of: (a) actual preliminary expenses or (b) 5% of cost of the project, OR (in the case of an Indian company) 5% of capital employed — whichever is higher between the two 5% calculations
• Annual deduction: 1/5th (20%) of eligible amount per year for 5 consecutive years starting from the year of commencement
• "Cost of project" means cost of fixed assets (land, building, plant, machinery)
• "Capital employed" means long-term debt + paid-up share capital + free reserves at end of relevant previous year

Deduction in ITR

• Show in Schedule BP (business and profession income) — amortised amount each year
• Keep detailed records: all invoices, professional fee receipts, ROC receipts, feasibility study reports
• CA certificate is advisable for large preliminary expense claims

Expenses NOT Eligible

• Stamp duty on purchase of land/property (capital expenditure — no Section 35D)
• Salaries during pre-operative period (if revenue in nature — claimed separately)
• Interest during construction (typically capitalised under AS-10)

Conclusion

Section 35D provides a 5-year amortisation benefit for preliminary expenses — making it important for new companies to properly document and claim incorporation and pre-business costs. SPOTON provides corporate tax advisory and ITR filing including Section 35D deduction planning for companies in Kerala. Contact us for expert corporate tax compliance services.