Definition of Preliminary Expenses

• Preliminary expenses are costs incurred before the commencement of business or incorporation.
  
• These include expenses related to company formation, feasibility reports, legal charges, and project reports.
  
• Such expenses are capital in nature but are allowed as deductions under specific provisions.
  
• They are not immediately and fully deductible in the year of incurrence.
  
• The deduction is regulated by section 35D of the Income-tax Act, 1961.
  

Eligibility Under Section 35D

• Deduction is available to Indian companies and resident non-corporate taxpayers.
  
• Expenses must be incurred before commencement of business or in connection with expansion.
  
• Deduction is allowed only for expenses specified in section 35D(2).
  
• The amount must not exceed 5 percent of the cost of project or capital employed.
  
• The assessee must be engaged in industrial or commercial activities.
  

Allowable Expenses

• Drafting and printing of Memorandum and Articles of Association.
  
• Registration fees paid to Registrar of Companies.
  
• Legal charges for drafting agreements or company formation.
  
• Preparation of project reports and feasibility studies.
  
• Expenses in connection with public issue of shares or debentures.
  

Deduction Method and Period

• The total eligible preliminary expenses are amortized over 5 years.
  
• One-fifth of the amount is allowed as a deduction every year for 5 consecutive years.
  
• The first deduction is claimed in the year of commencement of business.
  
• No deduction is allowed for expenses not covered under section 35D.
  
• If the business is discontinued, remaining deduction is not allowed.
  

Compliance and Documentation

• Maintain records of invoices, agreements, and payment proofs.
  
• Chartered accountant’s certification may be required to support the claim.
  
• Details of preliminary expenses and claimed amount must be reported in the return.
  
• Ensure compliance with limits specified in the Income-tax Rules.
  
• Incorrect claims may lead to disallowance and penal consequences.