In this article, you will develop a vivid idea regarding the company and non-company preliminary expenses. Also, you will get to see how a business can reap the maximum benefits of Section 35D of the Indian Income Tax Act.
Income Tax law’s Section 35D comes up with the payment reduction policies of specific preliminary expenses borne by an Indian enterprise or a residential individual who is about to start a venture, set up a new industrial department or looking to expand a commercial quest.
The deduction is given against the gains secured by the Indian corporate entity in ten uniform instalments over a decade starting from the preceding year that witnessed the inception of the business. This deduction applies only to a limited set of costs defined under particular heads on 31st March 1970. One of the few sections among the qualifying costs mentioned under this principle includes the rehearsal of the project summary and conducting market research necessary to analyze the course of business. Another such example prevails surrounding engineering duties required to maintain the commercial processes of an assessee.
Definition of Preliminary Expenses
Preliminary expenses are the costs incurred by a corporate entity before formally registering or starting the venture. Also, the costs attracted while organizing newer units of an established business fall under the category of preliminary expenses.
For non-companies, the total preliminary amount is a cumulative figure of expenses shown in the feasibility report, market enquiry reports, and legal fees associated with agreement issuance. However, when we consider corporate entities, the charges stipulated on the prospectus and MOA are also taken into account. In both cases, an audit is mandatory from CA.
Preliminary Expenses Under Section 35D
The corporate entity applying for deduction must prove satisfactory competence and eligibility to shell out consultancy services associating elements highlighted in the IT Act’s Section 35D(2)(a). The concerned committee evaluates the firm’s overall success in previous consultancy activities before granting permission. Authorisation is provided to Indian consultancy trusts that are operated primarily in India. On the other hand, when an overseas concern seeks approval, the Board permits the range of services that are specifically not attainable through native concerns. All applicants who wish to reap the benefits must have a minimum of one year of professional exposure in the consultancy field. They must have charged a minimum of ₹10,000 from a single client in any operational annual cycle.
Lastly, approval under this head is extended only to selected consultancy hubs that confirm income tax legislation compliance by producing the certificate issued by the Income Tax Division.
Eligibility for Claiming Section 35D Deduction
The deduction provided under Section 35D is accessible to either an Indian Company or an individual who is a resident in India. The eligible expenses for which a deduction under Section 35D can be claimed include:
- Expenditure incurred before the initiation of business.
- Expenditure incurred after the commencement of business, related to the expansion of an existing undertaking or the establishment of a new unit.
Maximum Amount Eligible for Deduction
The deduction permissible under Section 35D is capped at a maximum of 5% of the project’s cost. For companies, this deduction cannot surpass 5% of the project’s cost or the capital employed in the company’s business.
The deductible amount, subject to the specified limit, will be permitted as a deduction in five equal annual instalments. These instalments are counted from the previous year of business commencement, completion of the industrial undertaking extension, or the initiation of production or operation in the new industrial unit.
How an Indian Company Is Able to Claim a Deduction Under Section 35D
By now it is clear that to avail of the benefits of Section 35D, a company needs to be registered in India or the proprietor/entrepreneur needs to be an Indian by birth. In the following sections we have presented the major expenses that are covered under Section 35D for significant deductions:
- Costs attracted before the official registration of businesses
- Costs experienced after the commercial outset have been designed for a projected expansion i.e., setting up of a new industrial unit
Non-taxable Preliminary Expenses under Section 35D
In the following portion of the article, you will learn about the expenses that are officially approved for exemption under Section 35D.
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Disbursements that have taken place to support:
- Composition of a company’s feasibility report
- Assembling a project report
- Engineering services are required to maintain the commercial aspects proposed by an assessee
- Standardizing market research along with other supplementary surveys that are necessary to run a business
- Legal fee for drawing an affidavit between the applicant and any other entity who is involved in establishing and maintaining the commercial venture on behalf of the taxable corporate agent.
- Under circumstances when an individual represents a corporate organisation then the below-mentioned expenses fall under the deduction eligible category:
- Incorporation charges
- Legal fee for inducing and printing the Memorandum of Association
- Charges associated with brokerage, printing, typing and drafting of the prospectus, also the advertisement campaign fees
- Additional costs that emerge now and then depending on Government directives
Certifiable Charges under Section 35D(2)(a)
The net deductible amount as per the provisions of Section 35D cannot cross the margin of 5% of the entire project budget. In simple terms when we are dealing with the costs attracted by a company it is important to note that under no means the deductible amount can exceed 5% of the gross capital invested by the promoters.
The decided sum that is fit for exemption is entitled to a deduction in five yearly instalments – equal in amounts. While calculating the sum we consider evaluating the profit and loss events that have taken place in the preceding annual business cycle whenever there is an extension of existing industrial endeavours.
Mandatory Audit of Business Accounts
The deduction policies are not entertained under specific heads when the company or cooperative institution’s accounts are audited by designated Chartered Accountants to look for particular expenses that are under question and while the process is executed in the prescribed structure any discrepancy is noticed in the previously submitted reports. Form 3B is drawn by the Chartered Accountant to report such business accounts. Form 3B summarizes the monthly returns but the regularity is subjected to changes in the case of QRMP taxpayers.
FAQ’s
What is Section 35D of Income Tax Act?
Section 35D of the Income Tax Act allows for the amortisation of preliminary expenses. According to Section 35D, any capital expenditure incurred prior to the commencement of operations of a specified business is allowable as a deduction under the Income Tax Act in five equal annual installments, subject to the fulfilment of various conditions specified in the Income Tax Act.
What is Section 250 of Income Tax Act notice?
The Appellate Assistant Commissioner may set a date and location for the hearing of the appeal under Section 250 of the IT Act. In this regard, he or she must serve a legal notice on the appellant and the IT Officer whose order the appeal is filed.
What is Section 35AD of Income Tax Act?
Section 35AD provides a tax credit for investment in certain businesses by allowing a deduction from company income, 100% of capital expenditures made during the previous year.
What is Section 35E of Income Tax Act?
Section 35E of the Income Tax Act allows a deduction for eligible expenditures incurred in prospecting for, extracting, or producing certain minerals or groups of associated minerals.
What is section 35DDA?
Section 35DDA allows for a one-fifth deduction on the payment of any sum to an employee in connection with his voluntary retirement in accordance with the scheme for such retirement.
Conclusion
The maximum permissible deduction allowed under Section 35D is 5% of the overall preliminary expenses involved in project completion both for companies and the assessees. The deduction is extended to the recipient uniformly over a period of five years. Non-companies procure their mandatory audit reports by contacting a certified chartered accountant who draws Form 3B. Companies fulfil their audit requirements by abiding by the policies highlighted in the Companies Act: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf. Vakilsearch brings you the fundamental analysis of tax-related issues that otherwise seem overwhelming to masses who belong from a non-commercial background. Learning the policies will in turn help you grow your business and procure higher profit. To read more about such subjects browse through our related articles.
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