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Income tax Impact on new company

CA. Vipin Gupta (Accounts Officer) (146 Points)

11 February 2010

We are a New Private Limited Company

We are doing feasibility study for a large power project which is still going on....

At the end of 31^st March 2010 (first financial year of company) feasibility will not end

In the meantime we have incurred office expenses, expenses on payment of Consultants (who is doing feasibility).

We also earned some interest income on our balance in bank and FD’s

What is the treatment of these Expenses and Income under Income tax Act.

Please Suggest

Thanks in advance

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8 Replies

Amir (Learner) (4016 Points)
Replied 11 February 2010

Dear Vipin,

First tell me about revenue, How the same has been recognised in the Books?....

Whether the entire amount is payable on completion of study?.........

Whether ur company has completed any feasiable study or not??

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CA. Vipin Gupta (Accounts Officer) (146 Points)
Replied 11 February 2010

Dear Aamir

amount payable to consultant is on progressive basis

and our company is not doing any feasibility our consultant is doing feasibility on our behalf for which we are paying consultancy charges to them.

amount recognising in the books is obviously as an expense and as an income respectively

CA Saurabh Shukla (Accounts Executive) (223 Points)
Replied 11 February 2010

you should show your int. income in head " Income from Other Sources."

and office exp. should show in head "PGBP" and claim set off against income from other source and bal. carry forward for 8 yrs.

For exp. of feasibility refer sec 35 D.

Amir (Learner) (4016 Points)
Replied 11 February 2010

Dear Vipin,

Since u have recognized revenue (which I believe as per the AS-9) then there is no problem u can claim expenses against that income...

Interest earned will be taxable as Income from other sources..

But all expenses incurred prior to the begning of commercial activities cannot be claimed except as specified u/s 35D..

The date of commencement of Commercial activities in ur can be said as the date on which the consultants have started the feasiable study on ur behalf..

Chintan Shah (-) (534 Points)
Replied 12 February 2010

Aamir, how cum the date on which the consultant started feasibility study be said to be date of commencement of commercial activities or business. Unless and untill the company starts producing/ selling its product which in this case is power. Plz do explain... thx in advance

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CA. Vipin Gupta (Accounts Officer) (146 Points)
Replied 12 February 2010

thanks saurabh

it is very clearly written in section 35D that any expenses on feasibility study can be clainmed over a period of five years commening from the date of commencement of business.

Now problem is (chintanshah rightly said) what is the date of commencement of business as it is no where defined in section 35D.

one problem is what about office expenses which we incurred during feasibility. whether that is also covered under feasibility expenses.

please give u r opinion

Amir (Learner) (4016 Points)
Replied 12 February 2010

Originally posted by : CHINTANSHAH
	Aamir, how cum the date on which the consultant started feasibility study be said to be date of commencement of commercial activities or business. Unless and untill the company starts producing/ selling its product which in this case is power. Plz do explain... thx in advance

Dear Chintanshah,

Brother, in the prsent case the business is of providing services.

Secondly, the company is not carrying on generating electricity, it's the customer/client of the company carrying on business of generation of electricity...

Now, if u say that until the customer starts it's power project, the company cannot be said to have started it's commercial activities then tell me one thing brother how come the company has recognised it's revenue...

Unlike in case of construction contracts where we have a separate standard we don't have any such thing for the present case therefore AS-9 can only be applied & it simply speks about two things -

1) Completed service contracts

2) Proportainate completion method

Now the first one is not applicable in this case otherwise company couldnot have recognised revenue..

Thatmeans the company is following proportionate completion method - where the total contract consist of divisible services & on completion of each such service company has to recognize revenue...

Now you tell me brother, what else can be said as "the date of commencement of commercial activities"...