What is the treatment of preliminary expense for the computation of pre and post incorporation profits ?
3 Replies
Yasaswi Gomes new
(Finance )
(4545 Points)
Replied 17 January 2023
PRELIMINARY EXPENSES ARE CAPITALISED. PRE INCORPORATION PROFITS ARE NOT ACCOUNTED AS FAR AS I AM AWARE. POST INCORPORATION PROFIT BEFORE TAX WILL DECREASE. IF AMORTISATION IS TAX EXEMPT, THEN SOME PART OF THE PROFITS WILL RECOVER IN PAT. IF YOU STILL HOLD PRE INCORPORATION PROFITS, INTRODUCE IT AS CAPITAL OR CASH TO THE BUSINESS.
Laavi Sahu
(3 Points)
Replied 17 January 2023
No I meant how do we write off preliminary expenses and in what proportion?
Yasaswi Gomes new
(Finance )
(4545 Points)
Replied 17 January 2023
As explained above the preliminary expenses can be written off within five years however as per Section 35 of The Income Tax Act 1961, the total preliminary expenses cannot be more than 5 % of the capital employed, which can be amortised in five equal installments, this also means that a company cannot write off preliminary expense more than 1 % of the capital employed in one year.
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