Eligible Assessee:
As per the Provision of Section 35D of income tax, it is applicable to All Resident Assessee( Indian Company or by a person other than a company who is resident in India).
The expenses The expenses that can be claimed as a deduction under Section 35D must pertain to:
- Expenditure incurred before the commencement of business.
- Expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connecting with setting up a new unit.
Expenses Deductible under Section 35D:
The following expenses are qualified for deduction under Section 35D:
- Preparation of a feasibility report.
- Preparation of a project report.
- Conducting a market survey or any other survey necessary for the business of the assessee.
- Engineering services relating to the business of the assessee.
- Legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee
Incase of Company the following expenditure is preliminary expenses
- By way of legal charges for drafting the MOA / AOA or printing of MOA / AOA.
- Incorporation fee.
- For issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
- Other expenses as notified by the Government from time to time.
Quantum of Deduction under the section 35D:
In case of Company
Lower of the below expenses is allowed
Particulars | Amount |
Actual Preliminary Expenses (Or) | XXX |
5% of Cost of Project/ Capital Employed | XXX |
Note: In the above case, Cost of Project or Capital Employed whichever is higher will take for computation.
For Other Resident Assessee
Lower of the below expenses is allowed
Particulars | Amount |
Actual Preliminary Expenses | XXX |
5% Cost of Project | XXX |
Some Key Points Regarding the Deduction of Preliminary Expenses:
- Under this section 35D, the deduction is allowed in 5 equal instalments.
- COP= Cost of project means amount invested in fixed asset of new project or extension or setup new unit as per books as on last day of previous year.
- CE = Capital employed [share capital + debentures + long term borrowing for new project or extension or setup new unit as per books as on last day of Previous year]]
- Reserve and surplus (including security premium) shall not be part of Capital Employed.
- Audit is mandatory for the year in which such expenses incurred except for company and co-operative society & audit report should be submit upto date given u/s 44AB.
Example-1
Onlinesolves.Ltd is company engaged in software services. The company incurred preliminary expenses of Rs: 42,00,000. The cost of project was Rs: 400 Lakhs and capital employed in business was Rs: 700 lakhs. What is the eligible of deduction of preliminary expenses of 35D?
Answer:
As per the provision of section 35D of income tax, deduction of preliminary expenses is allowable lower of the following
Particulars | Amount |
Actual Preliminary Expenses (Or) | XXX |
5% of Cost of Project/ Capital Employed | XXX |
Note- Cost of project or Capital employed whichever is higher will applicable for computation of preliminary expenses. So, in the case of capital employed is taken for computation of preliminary expenses.
Computation of Preliminary Expenses
Particulars | Amount |
a) Actual Preliminary Expenses | 42,00,000 |
b) 5% of Capital Employed(5% x 700 lakhs) | 35,00,000 |
c) Eligible Amount of preliminary Expenses[ Lower of a) or b)] | 35,00,000 |
So, Amount of deduction eligible = 35,00,000/5= 7,00,000
Example-2
Onlinesolves.Ltd is company engaged in software services. The company incurred preliminary expenses of Rs: 42,00,000. The cost of project was Rs: 400 Lakhs and capital employed in business was Rs: 700 lakhs which includes the Securities premium is Rs:5,00,000.
What is the eligible of deduction of preliminary expenses of 35D?
Answer:
As per the provision of section 35D of income tax, deduction of preliminary expenses is allowable lower of the following
Particulars | Amount |
Actual Preliminary Expenses (Or) | XXX |
5% of Cost of Project/ Capital Employed | XXX |
Note- Cost of project or Capital employed whichever is higher will applicable for computation of preliminary expenses. So, in the case of capital employed is taken for computation of preliminary expenses and securities premium is need to exclude from capital employed.
Computation of Preliminary Expenses
Particulars | Amount |
a) Actual Preliminary Expenses | 42,00,000 |
b) 5% of Capital Employed [5% x(700lakhs- 5lakhs)] | 34,75,000 |
c) Eligible Preliminary Expenses[ Lower of a) and b)] | 34,75,000 |
So, Amount of deduction eligible = 34,75,000/5= 6,95,000
