Pre-operative expense - effect in itr

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Suraj S (Querist)
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27 August 2011 One of my client is a new company incorporated during the F.Y. 2010-2011. It has not started commercial activities. What shud i do to the pre-operative expenses. Can i prepare a P&L A/c ( even though no income is generated for the company during the year ) and file Loss IT Return so that my client could claim the loss next year ? Or shud i accumulate the expenses as pre-operative expenses and disclose it in the Balance Sheet ? But if i accumulate the expenses how will i amortize it next year as most of the expenses are in the nature of administrative expenses ?

Regards,
Suraj

VISHRUT

VISHRUT (Expert)
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27 August 2011 In my opinion and as per various pronouncement of legislative authorities your client is require to show such expenses in profit and loss account and file the return to income tax authority stating such losses for its allowability to set off in future period.

Suraj S

Suraj S (Querist)
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29 August 2011 Sir, Ya i too think its beneficial to file Loss ITR but my question is whether they are right in preparing P&L A/c as there is no income generated during the year ?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 August 2024 For a new company that has been incorporated but has not yet commenced commercial activities, the treatment of pre-operative expenses can be nuanced. Here’s how to handle pre-operative expenses and their impact on the Income Tax Return (ITR):

### **1. Accounting Treatment of Pre-Operative Expenses**

#### **A. **Pre-Operative Expenses Handling:

1. **Accumulation as Pre-Operative Expenses:**
- **Balance Sheet:** In the Balance Sheet, you should show pre-operative expenses as part of the **"Pre-Operative Expenses Account"** under "Miscellaneous Expenditures" or a similar heading.
- **Not P&L Account:** Do not show these expenses in the Profit and Loss (P&L) Account if no commercial activity has commenced. This is because the company hasn’t earned any income, and it’s premature to record such expenses as a loss.

2. **Amortization:** Once the company starts commercial activities, the pre-operative expenses should be transferred to the P&L Account over a period of time, typically in the year when the commercial activities commence. This transfer can be done in the form of amortization or depreciation depending on the nature of the expenses.

### **2. **Effect in Income Tax Return (ITR)**

#### **A. **No Income Year (FY 2010-2011):**

1. **Filing the ITR:**
- **ITR for Loss:** You can file a loss return for the year FY 2010-2011. Although no income has been generated, filing the return is important for carrying forward the losses to future years.
- **Declare Loss:** Even though you cannot claim a tax deduction for pre-operative expenses in this year’s P&L Account, you can still show the loss in the ITR. This loss will be carried forward and can be set off against future income.

2. **Documentation:**
- **Pre-Operative Expenses Account:** Ensure that the pre-operative expenses are well documented and accumulated in the Balance Sheet. This will be important when the company begins operations and the expenses are amortized.

#### **B. **Post-Commencement of Operations:**

1. **Amortization:** When the company starts commercial activities, the accumulated pre-operative expenses can be transferred to the P&L Account and amortized over a period, typically 5 years.

2. **Tax Impact:**
- **Deductibility:** These amortized expenses will be deductible as business expenses from the year the company starts generating income. This reduces taxable income in those years.

### **3. **Relevant Sections and Guidelines**

- **Income Tax Act, 1961:** Sections related to **"Pre-operative Expenses"** and **"Start-Up Expenses"** are not explicitly detailed. However, the general practice is to defer the expense recognition until business operations commence.

- **Accounting Standards:** Follow the accounting principles for **"Pre-operative Expenses"** and their amortization as per the generally accepted accounting principles (GAAP).

### **Summary**

- **In the Current Year (No Income):** Accumulate pre-operative expenses in the Balance Sheet and file the ITR showing a loss.
- **When Business Starts:** Transfer pre-operative expenses to the P&L Account and amortize them over a reasonable period.

This approach ensures proper accounting treatment and compliance with tax regulations, allowing you to carry forward the losses effectively and manage expenses once business activities begin.