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Preliminary Expenses are those expenses that are incurred before starting up an establishment for business or extending a running business or starting up a new unit.
Eligible Deduction/Expenditure
Under Income Tax Act, Preliminary Expenditure is considered an expenditure of a capital nature and allowed as a deduction during Five Equal Years, provided the assessee is a:
COMPANY: A Company must be an Indian Company.
Others(Individual, AOP, etc):- Others (eg- Individual, AOP, Firm, etc.) must be a resident in India being an ordinary resident or not an ordinary resident.
Preliminary Expenditure
Deductions of preliminary expenditure shall be allowed not on the basis of Actual Expenditure incurred but on the basis of a list of expenses mentioned under the Income Tax Act.
List of Preliminary Expenditure Allowed
Following are the list of Preliminary expenditure allowed, In Case of
A Company:
- Drafting expenses of MOA and AOA
- Printing expenses of MOA and AOA
- Fees for registering a Company
- Expenses Incurred for the issue of shares and debentures.
Other than Company (Individual, AOP, FIRM, etc.)
- Preparation of Feasibility Report
- Preparation of Project Report
- Conducting Marketing or any other survey relating to the business of the assessee
- Engineering Services relating to the business of the assessee
- Drafting legal charges for any agreement between the assessee and any other person relating to the conduct or setting up of the business of the assessee
- Other expenses notified by Government from time to time
In case of other than the company, provided expenses under points (i) to (iv) must be incurred by either the assessee himself or any concern/Agency Which is approved by CBDT, and such expenditure must be incurred before the commencement of business and after commencement of business only for the extension of business or establishment of new unit purpose expenditure are allowed as deduction under PGBP.
Quantum of Deduction
If an assessee is a company, then the maximum deduction will be lower of the following two:
|Amount of eligible expenditure Or 5% of the cost of the project or 5% of capital employed, whichever is higher.
If an assessee is a resident, Individual, Firm, etc., then the maximum deduction will be lower of the following two: Amount of eligible expenditure Or 5% of the cost of the project
Period of Deduction
In case of new business:
The period of 5 years would start from the previous year in which the business commences.
In the case of existing business:
The period of 5 years would start from the previous year in which the extension of the undertaking is completed or the new undertaking commences operation.
Written by – Abhishek Kumar
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