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Section 35D – Amortisation of Certain Preliminary Expenses

Last Update Date : April 29, 2019
Estimated Read Time: 5 min

section 35D

Expenditures in businesses are something we cannot avoid. If you want to gain something out of a business, you will have to spend a certain amount of money for various things. However, these expenditures don’t have a loss altogether for the Income Tax Department of India has put in place some sections where you can claim deductions for certain expenditures incurred by us.

In this guide, we will discuss section 35D that deals with an amortisation of certain preliminary expenses.

What is Section 35D?

Section 35D of Income Tax Act provides for Amortisation of preliminary expenses. As per Section 35D, any capital expenditure did before the commencement of operation of specified business then such expenditure is allowable as a deduction under the income tax in 5 equal annual instalments subject to the fulfilment of different conditions given under the Income Tax Act.

Eligibility for Claiming Section 35D Deduction

Section 35D deduction can be claimed by

  • an Indian Company or
  • by a person other than a company who is resident in India.

Time and Purpose of the Preliminary Expenditure

Before commencement of businessTo start a business
After commencement of businessFor expansion of existing business or setting up a new undertaking

Expenses Deductible under Section 35D

The following expenses are qualified for deduction under Section 35D

  • Expenditure incurred in connection with
  1. Preparation of a feasibility report.
  2. Preparation of a project report.
  3. Conducting a market survey or any other survey necessary for the business of the assessee.
  4. 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.
  • Where the assessee is a company, expenditure
  1. By way of legal charges for drafting the MOA / AOA or printing of MOA / AOA.
  2. Incorporation fee.
  3. For the 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.
  4. Other expenses as notified by the Government from time to time.

Maximum Amount Eligible for Deduction

5% of the cost of the project or 5% of capital employed in case of the company assessee.

How to Calculate Deduction Amount

Meaning of qualifying amount:

For Indian Company1.      5% of the cost of the project or 5% of capital employed, whichever is higher

2.       The actual amount of expenditure

Qualifying amount = Lower of (1) or (2)

Another Resident assessee1.      5% of the cost of project or

2.      The actual amount of expenditure

Qualifying amount = Lower of (1) or (2)

The qualifying amount shall be deducted in five equal instalments, and each instalment can be claimed as deduction u/s 35D by the assessee for five consecutive years beginning with the previous year in which business commences, or extension work is completed or the new unit (whether industrial or service) commences production as the case may be.

W.e.f. the assessment year 2009-10, the benefit of deduction regarding preliminary expenses has been extended to service sector also.

Cost of Project

The actual cost of a fixed asset which is lying in the balance sheet as on the last day of the previous year in which business is commenced or extension work is completed, or the new unit (whether industrial or service) commences production as the case may be.

Note: we have to calculate it by doing reverse calculation because in balance sheet WDV is mentioned and not the gross value.
Calculation= WDV*100/100-dep. Rate (as per books, not income tax Act)

Capital Employed

Issued share capital (Not paid-up capital)
Add: Debentures
Add: long term borrowings if repayment period is more than 7 years
Capital Employed*

*In the calculation of capital employed, amount of share capital, debentures and long-term borrowings is to be taken as per the balance sheet as on the last day of a previous year of commencement of business or new unit or completion of extension work as the case may be.

In case of Amalgamation or Demerger

In cases of amalgamation, the amalgamating company would not be entitled to the allowance towards amortisation of preliminary expenses in the year in which the amalgamation takes places. But the amalgamated company would be entitled to the allowance for the remaining period over which the allowance under this section is available.

The total period over which the amortisation is allowable should not exceed five years in the case of both the amalgamating company and the amalgamated company. The allowance under this section would not be denied, in cases of amalgamation, to the amalgamated company merely because the expenditure has not been incurred by the amalgamated company.

Similarly, in case of demerger where an undertaking of an Indian company which is entitled to the deduction under this section is transferred before the expiry of the said period of 5 years, to another company in a scheme of demerger, no deduction shall be admissible to the demerged company in the year in which the demerger takes place. The resulting company would be entitled to claim a deduction for the balance period under this section.

In other words, the deduction for the balance period will be available to resulting company as it would have been available to the demerged company if the demerger had not taken place. In cases where preliminary expenses qualify for amortization under Section 35D and the allowance claimed by the assessee in this regard is allowed in any assessment year, these expenses would not qualify for any allowance or deduction in respect of any other assessment year or even in the same year under any other provision of the Income-tax Act, 1961.

How H&R Block can help you?

Saving taxes and filing business tax return accurately becomes very easy when you have professional help. This is where we come into the picture. We have a team of in-house business tax experts who can file your tax return accurately while giving you maximum tax benefits.

Not sure how to file your Business Tax Return? Let H&R Block help you file your taxes.
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CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.

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