Trail run cost after commencement of production

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Querist : Anonymous

Querist : Anonymous (Querist)

21 January 2010 My querry is relating capitalisation of cost inccured after the date which is declared as date of commercial production.

But the concerned company is saying even they declared date of production as 1-4-2009, they actually started producing commercially feasible quantity from 1-10-2009 only, and they are capitalising cost upto 1-10-2009.

Is it the right treatment?
Will it be allowable in tax consideration?

Querist : Anonymous

Querist : Anonymous (Querist)

23 March 2010 can any one answer the above question quickly?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great question! Here's a detailed explanation regarding **capitalization of costs incurred after the declared date of commercial production**, often called "trail run" or "trial production" costs:

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### Context:

* **Commercial production date**: The date when the company officially starts production intended for sale.
* **Trail run/trial production**: Sometimes, after the declared commercial production date, the company may still be running test batches or ramping up to full commercial scale.

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### Capitalization of costs after declared commercial production:

1. **Accounting treatment**:

* Generally, **all expenses incurred after the commercial production date should be treated as revenue expenses**, i.e., charged to the Profit & Loss account.
* Capitalization is allowed **only up to the date of commercial production** because the asset is considered ready for use.

2. **Exceptions**:

* If commercial production was declared but **actual commercial-scale production started later due to operational delays or ramp-up**, some companies capitalize costs during the trial production phase as part of fixed assets (like Work-in-Progress).
* However, this is **not common practice and often questioned by auditors and tax authorities**.

3. **Tax treatment**:

* Income Tax Department generally **does not allow capitalization of expenses incurred after the commercial production date**.
* Such costs are considered revenue expenditure and are allowed as deduction in the year they are incurred.

4. **Your case**:

* Company declared 1-4-2009 as commercial production date but started commercially feasible production from 1-10-2009.
* Capitalizing costs up to 1-10-2009 **may not be acceptable for tax purposes**, unless supported by strong justification and consistent accounting policy.

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### Recommendations:

* Follow **consistent accounting policy** approved by auditors.
* For tax purposes, expenses incurred after commercial production date should be expensed, **unless a convincing rationale and documentary evidence exist**.
* Consult with tax experts or auditors for specific guidance based on the company’s facts.

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