Preliminary Expenses refer to

the expenses incurred

before the starting  of business.

or

Extension/Setting up of new unit of existing business. 

 

Section 35D Expenditure on Preliminary Expenses  - Deductions

 

Example for Non Companies

Suppose Preliminary Expenses and Cost of Project is as follows

S.No Particulars Case 1 Case 2 Case 3
A Total Preliminary Exp 100 100 100
B Cost of project 4000 600 Not Yet  Completed

What is Deduction Available

View Answer

Example for  Companies

Suppose Preliminary expenses ,Cost of Project and Capital Employed is as follows

S.No Particulars Case 1 Case 2 Case 3
A Total Preliminary Exp 100 800 100
B Cost of project 4000 2000 Not Yet  Completed
Capital Employed 6000 1500 2000


What is deduction available

View Answer

 

 

Here

Cost of Project means

Cost of Fixed Assets as on last day of Financial Year when business commenced

(In case of Extension,.Cost of new fixed assets acquired or developed to be taken for Computation)

 

Capital employed means −

Share capital

+ Reserves

+ Long term borrowings

( here long term borrowings means those covered under Section36(1)(viii)

 

DETAILED PROVISIONS

 

Expenses Covered in Section 35D

1.Expenditure on preparing feasibility report,project report,market survey report,engineering service related to business.

    (This expenses may be incurred by the assessee himself or by consultancy approved by board)

 

  2.Legal charge for drafting agreement between assessee and some other person .

   (This agreement Should be related to setting up/Conduct of business .)

 

  3 In case of companies legal charge have to be paid regarding

  • Drafting of Memorandum & Articles of Association
  • Printing of Memorandum & Articles of Association
  • Fees for registering company (ROC Fees)
  • In case of public limited companies fees regarding Printing of prospectus of issue of shares /debentures or payment of Underwriting Commission.

 

4.  Other expense as may be prescribed .

 

Maximum Deduction Under Section 35 D

Expenditure incurred should not exceed

Type of Assessee Maximum Deduction
For  Non Companies 5% of Cost of Project
   
For Companies 5% of Cost of Project
or
5% of Capital Employed
whichever is more beneficial to assessee(i.e. Whichever is higher)

The deduction is available in 5 years equally starting with the year business Commenced/ extension Complete

  

 


Compulsory Audit Requirement

Non companies also have to get their account audited by CA and get Audit report in Form 3B.

(For Companies:-There is anyways Compulsory Audit Requirement under Companies Act)

 

Questions

Q1

Proft and Loss of Ajay & Co,a proprietorship  
SALES 800000
Less  
EXPENSES 500000
PROFIT 300000
   
Suppose Expenses Include  
Preminary Expenses  100000

Company's Fixed Assets on starting and end of year were 10 lacs and 12 lacs

-a-

  Maximum 35D Deduction  
A Preliminary Expenses 100000
  `  
B 5% of Cost of Project 60000
  (5%*1200000)  
     
C whichever is less 60000
     
  This 60000 deduction is available in 5 years  
D Deduction every year=60000/5 12000

 

Computation of PGBP Income  
Profit as per P& L A/c 300000
Add  
Expense Disallowed  
Preliminary expenses charged to P & L 100000
   
Less  
Expense Allowed  
1/5 of Preliminary expenses 12000
   
PGBP INCOME 388000

 -ea-

Q2

Calculate Deduction in case of Company

Proft and Loss of Ajay Ltd,a Company  
SALES 800000
Less  
EXPENSES 500000
PROFIT

300000

 

Suppose Expenses Include  
Preminary Expenses  100000

Company's Fixed Assets on starting and end of year were 10 lacs and 12 lacs

Capital Employed during year was 14 lacs

View Answer

 

  1. Income Tax
  2. PGBP Income
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