Deduction of expenses from non-operating income

This query is : Resolved

Milan Agrawal (Querist)
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20 August 2014 Dear All,

Greetings.

A public limited company did not commenced its operation and hence all the expenses related to the project as well as general office and administrative expenses are booked preoperative expenditure. Now, in F.Y. 2013-14, the company invested its surplus funds in FD from where it generated Interest Income of Rs. 3 lakhs.

My query is, can we deduct the general office and administrative expenses against the Interest Income viz. office electricity expenses, printing stationery, telephone, office staff salary, postage telegram etc etc.??

Regards,
CA Milan Agrawal

Vivek Hebbar

Vivek Hebbar (Expert)
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20 August 2014 There have been opinions provided by the EAC (Expert Advisory Committee) at different points of time on this issue. You will get the answer on the ICAI website.

Milan Agrawal

Milan Agrawal (Querist)
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25 August 2014 I could not find the specific reply to my query. If someone can enlighten, it would be of great help.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 In the scenario you've described, where a public limited company has not commenced its operations and has incurred general office and administrative expenses, and subsequently earned interest income from fixed deposits, here's how the treatment typically works under Indian tax laws:

### Deduction of Expenses against Interest Income

1. **Nature of Expenses**: The general office and administrative expenses you mentioned (like office electricity expenses, printing stationery, telephone, office staff salary, postage telegram, etc.) are typically considered as operating expenses incurred for the purpose of running the business.

2. **Income Tax Treatment**:
- **Preoperative Expenses**: Since the company has not commenced its operations, the expenses incurred are usually treated as preoperative or preliminary expenses. These expenses are typically capitalized and amortized over a period of time once the business starts generating revenue.
- **Interest Income**: The interest income earned from fixed deposits is categorized as non-operating income.

3. **Adjustment of Expenses against Income**:
- **Allowed Deductions**: As per Income Tax principles, expenses directly related to earning income can be deducted from that income. Since the interest income is non-operating, you cannot directly offset operational expenses against it.
- **Capitalization of Preoperative Expenses**: Preoperative expenses are usually not deductible against non-operating income like interest income. They are capitalized and deducted over future years when the business begins its operations.

4. **Taxation Perspective**:
- **Settlement in Future**: Once the company starts its operations and generates operating income, the preoperative expenses can be capitalized and amortized over a period of time, reducing taxable profits in future years.
- **Current Year Treatment**: For the current year (F.Y. 2013-14 in your case), since there is no operational income to offset against these expenses, they typically remain as capitalized assets on the balance sheet rather than being expensed against interest income.

### Conclusion

In summary, general office and administrative expenses incurred by a company before commencement of operations are considered preoperative expenses. These expenses cannot be directly deducted against non-operating income like interest income. Instead, they are capitalized and amortized over future periods when the company starts its operations and earns revenue.

For precise tax planning and compliance, it's advisable to consult with a qualified tax professional or chartered accountant who can assess your specific situation, apply relevant tax laws correctly, and provide guidance on the proper treatment of expenses and income for your company.