7. Sec. 35D : Amortisatin Of Certain Preliminary Expenses

(i) Eligible assessee. Indian company or a person (other than company) resident in India.

(ii) Timing and purposes of expenditure. The deduction is in respect of the expenditure incurred after 31st March 1970 and expenditure may be of the type which was incurred

(a) before the commencement of the business, or

(b) after the commencement of the business, or in connection with the extension of its industrial undertaking or in connection with its setting up a new undertaking.

(iii) Eligible expenditure. The following expenses shall be eligible for deduction under Section 35D (2).

(a) Expenditure in connection with

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services related to the busineth f the assessee;

(b) Legal charges for drafting any agreement between the assessee and any other person for• any purpose relating to the setting up or conduct of the business of the assessee.

(c) The following expenses in case of company assessees

(i) legal charges for drafting the Memorandum and Articles of Association of the company;

(ii) expenses incurred on the printing of Memorandum and Articles of Association;

(iii) by way of fees for registering the company under Companies Act, 1956;

(iv) in connection with the Issue, for public subscription of shares, and debentures of the company, being underwriting commission, brokerage and charges of drafting, for typing, printing and advertisement of the prospectus.

(d) Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.

(iv) Maximum amount eligible for deduction. It shall not exceed 5% of the ‘Cost of project’ or in case of company assessee at the option of the company, 5% of ‘Capital employed’.

(v) Amount of deduction. The expenditure shall be divided into FIVE instalments and the assessee shall be allowed a deduction of an amount equal to one instalment (1/5) for each of the five successive previous 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. assessment year 2009-10 the benefit of deduction regarding preliminary expenses has been extended to service sector also.

Important point :

Meaning of Cost of Project

(i) For a new business. Cost of the project means the actual cost of the fixed assets, being land, building, plant, machinery, furniture, fitting and railway sidings (including expenditure on development of land and buildings) which are shown in the books as on the last day of the previous year in which the business commences.

(ii) For an existing business. Cost of the project means the actual cost of the fixed assets, being land, buildings, plant, machinery, furniture, fittings, railway siding (including expenditure on development of land and buildings) which are shown in the books of the assessee as on the last day of the previous year in which the extension of the undertaking is completed or the new unit commences production or operation, as the case may be in so far as such fixed assets have been acquired, developed in connection with the extension of the undertaking or the setting up of the new unit.

Meaning of capital employed

(i) For a new business. Capital employed means the aggregate of issued share capital, debentures and long term borrowings as on the last day of the previous year in which the business commences.

(ii) For an existing business. Capital employed means the aggregate of issued share capital, debentures and long term borrowing as on the last day of the previous year in which the extension of the undertaking is completed or the new unit commences production or operation.

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