Section 35D of income tax act -certain preliminary expenses incurred by Indian company before commencement of business shall qualify for amortization.
1.What is section 35D of income tax act?
Section 35D of income tax act introduced to claim deduction of preliminary expenses. Preliminary expenses are expenses which the promotors of the company incur at the time of establishing the company.
However the benefit of of amortization is also available if preliminary expenses are incurred after the commencement of business.
2.What are the eligibility for claiming section 35D of income tax act ?
Certain preliminary expenses incurred by Indian company or a resident non-corporate assessee before commencement of business shall qualify for amortization.
Following are the criteria for claiming deduction of preliminary expenses under section 35D of IT Act:
- Expenditure incurred before commencement of business.
- Expenditure incurred after commencement of business in connection with the extension of existing undertaking or in connecting with setting up new unit.
Which expenses are deductible under section 35D ?
Following expenses are qualified for deduction u/s 35D of income tax act:
1. If assessee is a company then expenses of
- Legal charges for drafting MOA/AOA or printing of MOA/AOA.
- Incorporation/Registration fees
- For issue of shares or debentures of a company underwriting commission, brokerage and charges for drafting, typing and advertisement of the prospectus.
- Other expenses as may be notified.
2. Legal charges paid for any agreement between assessee and any other person relating to setting up or conduct of the business.
3. Expenditure incurred for
- Preparation of feasibility or project report.
- Engineering services relating to the business of the assesee.
- Conducting a market survey or any other survey for the business of assessee.
3.How much deduction is available in section 35D?
The maximum deduction under section 35D of IT Act cannot exceed 5% of the cost of the project . Further, the ceiling limit of 5% of the cost of project applies to all assessee. However, an Indian company is given option to elect an alternative limit of 5% of capital employed.
The amount available as deduction as per limit is allowed in 5 equal annual installments. And beginning from the previous year of commencement of business or the previous year in which the expansion of an industrial undertaking is completed or the new industrial unit starts production or operation.
