Amortisation of Pre-operative Expenses in case of (P) Ltd Co
This query is : Resolved
21 October 2008
A promoter of a private ltd. co. has been incurring pre-operative expenses like travelling [inland & foreign], Lodging & boarding, development exps., and other business promotion for inviting foreign client service orders. Th Company got incorporated on 21st Apr.'07. The period of pre-operative expenses is from Nov.'06 till 20th Apr'07 and the expenditure is to the tune of Rs.3.5 Lakhs.
a) How these will be dealt in as per Income tax Act?
Interpretation in regard with
Preliminary Exps. - Exps. connected with the formation of Company
Pre-operative Expenses - Exps. incurred after company formation but before commencement of business.
Only Public Ltd. has to obtain cert. of comm. of business and so may be incurring exps. after formation till commencement.
b) Will it be concluded that only Public Ltd. Co can be said to incur pre-operative exps. as Private ltd. Co. are allowed to commence their business on the day they get incorporated?
c) How can these pre-operative expenditure will be accounted in Private Ltd. Co. Books as per Companies Act?
d)Do Sec.35D allows pre-operative exps. also in addition to preliminary exps. for amortisation?
Sec. 35D(2)(d) postulates "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". e) Shall we claim pre-operative exps. under this sub-clause?
a) How these will be dealt in as per Income tax Act?
Interpretation in regard with
Preliminary Exps. - Exps. connected with the formation of Company
Pre-operative Expenses - Exps. incurred after company formation but before commencement of business.
Only Public Ltd. has to obtain cert. of comm. of business and so may be incurring exps. after formation till commencement.
b) Will it be concluded that only Public Ltd. Co can be said to incur pre-operative exps. as Private ltd. Co. are allowed to commence their business on the day they get incorporated?
c) How can these pre-operative expenditure will be accounted in Private Ltd. Co. Books as per Companies Act?
d)Do Sec.35D allows pre-operative exps. also in addition to preliminary exps. for amortisation?
Sec. 35D(2)(d) postulates "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". e) Shall we claim pre-operative exps. under this sub-clause?
22 October 2008
a)Preliminary expenses will be dealt with as in Section 35D; Pre-operative which can be allocated to fixed assets will be capitalised with fixed assets created.
b)&c)Even if the pvt ltd companies are allowed to commence business the same day of incorporation, it depends upon the practical possibility. They may require gestation period to commence businees and expenditure incurred during that period could be preoperative expenditure.
d)Other than the expenditure which can be apportioned to the acquisition of fixed assets the restb of the expenditure can be grouped for the purposes of section 35D.
b)&c)Even if the pvt ltd companies are allowed to commence business the same day of incorporation, it depends upon the practical possibility. They may require gestation period to commence businees and expenditure incurred during that period could be preoperative expenditure.
d)Other than the expenditure which can be apportioned to the acquisition of fixed assets the restb of the expenditure can be grouped for the purposes of section 35D.
22 October 2008
My view is also the same as given above.
22 October 2008
Thanks for the resolving the issue. But i verified one case law, wherein i got contrary view. Please knidly go through the following link :
http://www.taxmann.net/Datafolder/flash/flashcas0207_5.htm
Thanks again.
http://www.taxmann.net/Datafolder/flash/flashcas0207_5.htm
Thanks again.
22 October 2008
The case law does not pertain to preliminary expenses but expenditure incurred before a source of income coming to existence. Which is as ststed below:
RATIO DECIDENDI
If there is a new source of income newly coming into existence, the date of coming into existence of the new source of income will be material to allow the claim for deduction of revenue expenses; till the time of the coming into existence of a new source of income, all expenses whether revenue or capital connected with setting up of such business, would be capital expenditure and not allowable as deduction.
The opinion stated by me also is that it is not revenue but to be capitalised. Please explain why you are saying it is contrary to the view expressed!
RATIO DECIDENDI
If there is a new source of income newly coming into existence, the date of coming into existence of the new source of income will be material to allow the claim for deduction of revenue expenses; till the time of the coming into existence of a new source of income, all expenses whether revenue or capital connected with setting up of such business, would be capital expenditure and not allowable as deduction.
The opinion stated by me also is that it is not revenue but to be capitalised. Please explain why you are saying it is contrary to the view expressed!
22 October 2008
Please excuse me sir, if i have put it in the wrong sense. My view from the case law is that, any pre-operative exps. of revenue nature incurred before source of Income coming in to existence, will not be allowed as deductions from income earned from such source after coming in to existence.
Earlier in my query the exps. which i have stated are all related to operational activity & day-to-day affairs and none of the exps. are related to construction of any fixed asset, which calls for capitalisation. So those are all possessing revenue character.
Again those exps. can't be grouped in to preliminary exps. since they don't come under the meaning given for "Preliminary Exps." U/s. 35D.
Finally it can only be conluded as "Revenue Pre-operative Exps." only as the expenditure incurred before source of income comes in to existence or business set-up date.
These pre-operative exps. are not allowed as deductible expenditure either U/s.37 or U/s.35D.
For more clarity, I'm giving herewith links in regard with same subject
Commissioner of Income Tax v. L.G. Electronic (India) Limited [2005] 149 TAXMAN 166 (Del)
I kindly appeal you to go through the above case law also and provide me your valuable opinion, whether pre-operative exps. can be grouped U/s. 35D or can be claimed U/s.37 or should be ignored while computing taxable income.
mail : satk19@yahoo.co.in
Earlier in my query the exps. which i have stated are all related to operational activity & day-to-day affairs and none of the exps. are related to construction of any fixed asset, which calls for capitalisation. So those are all possessing revenue character.
Again those exps. can't be grouped in to preliminary exps. since they don't come under the meaning given for "Preliminary Exps." U/s. 35D.
Finally it can only be conluded as "Revenue Pre-operative Exps." only as the expenditure incurred before source of income comes in to existence or business set-up date.
These pre-operative exps. are not allowed as deductible expenditure either U/s.37 or U/s.35D.
For more clarity, I'm giving herewith links in regard with same subject
Commissioner of Income Tax v. L.G. Electronic (India) Limited [2005] 149 TAXMAN 166 (Del)
I kindly appeal you to go through the above case law also and provide me your valuable opinion, whether pre-operative exps. can be grouped U/s. 35D or can be claimed U/s.37 or should be ignored while computing taxable income.
mail : satk19@yahoo.co.in
24 October 2008
sir,
To claim deduction U/s 37, the expense should be incurred in the relevant previous year.
If we go through S. 3, it is clear that the previous year begins only on the date of commencement of business.
Hence, any expense incurred before commencement of business cannot be considered as incurred during the previous year.
when the expense does not pertain to the previous year under consideration, there is no question of invoking S. 37.
From ur mail, it is known that these preoperative expenses are not capable of being fitted U/s 35D.
Hence, there is no question of availing deduction under this section also.
But these pre production expenses, though of revenue nature can be allocated to the various capital assets for eligibility of depreciation allowance.
Kindly refer, CIT Vs Lucas TVS Ltd-110 ITR 346 (Mad).
If am wrong, please correct me.
waiting for ur reply.
R. Soumyanarayanan
To claim deduction U/s 37, the expense should be incurred in the relevant previous year.
If we go through S. 3, it is clear that the previous year begins only on the date of commencement of business.
Hence, any expense incurred before commencement of business cannot be considered as incurred during the previous year.
when the expense does not pertain to the previous year under consideration, there is no question of invoking S. 37.
From ur mail, it is known that these preoperative expenses are not capable of being fitted U/s 35D.
Hence, there is no question of availing deduction under this section also.
But these pre production expenses, though of revenue nature can be allocated to the various capital assets for eligibility of depreciation allowance.
Kindly refer, CIT Vs Lucas TVS Ltd-110 ITR 346 (Mad).
If am wrong, please correct me.
waiting for ur reply.
R. Soumyanarayanan
07 October 2015
One private Ltd company booked all pre - commeneced expenses in the first year financial statment ( which are purely revenue in nature and incurred after the date of incorporation ). While filing income tax return for the first year , it showed carry forward business loss ( exactly equal to total pre - commencement revenure expense )without any sales revenue in this first year tax return and also showed bank interest income of X amount as income from other source . The company paid income tax on this interest as per tax law without offsetting this bank interest against the business loss. While passing assessment order u/s 143(3) of inocme tax Act , the Assessing officer disallowed total carry forward loss by simplying saying the assessee did not earn any sales revenue during the year ,and hence claiming expenses under section 30-37 of income tax without generating and booking ales revenue is not admissible one . Now assesse wants to go for appeal as to re- claim its carry forward expense. since the total pre operative expense was already booked while closing books of accounts in the first year and also shown as business loss eligible for carry forward in the income tax return of first year , Now we are not able to reverse these claimed pre operative expenses and take back as balance sheet item again. Please suggest best possible grounds either to retain assessee right of carry forward of business loss which was disallowed by A.O at 143(3) stage or taking back all booked preoperative expenses in the subsequnet year financial statement as relevant expenses
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