Anil (1638 Points)
05 June 2008Preliminary expenses are written off over a certain period of years u/s 35 D of Income Tax Act. I would like to know :
1)Does Companies Act prescribe any period for writing off of preliminary expenses?
2)Does any Accounting Standard prescribe any period for writing off of preliminary expenses?
3)If preliminary expenses are writing off in full in the first year of operations does auditor has to qualify his report?
Kindly SUBSTANTIATE your answer and answer pointwise.
Thanks
Jayant Tathe
(165 Points)
Replied 05 June 2008
According to Income Tax Act Section 35D - regarding Preliminary Expenses -
1) After the commencement of his business in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation.
Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted.
(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :- (a) Expenditure in connection with - (i) Preparation of feasibility report;
(ii) Preparation of project report;
(iii) Conducting market survey or any other survey necessary for the business of the assessee;
(iv) Engineering services relating to the business of the assessee :
(b) Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;
(c) Where the assessee is a company, also expenditure - (i) By way of legal charges for drafting the Memorandum and Articles of Association of the company;
(ii) On printing of the Memorandum and Articles of Association;
(iii) By way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956);
(iv) In connection with the issue, for public subscripttion, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
(d) Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.
((b) Where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1).
Explanation : In this sub-section, - (a) "Cost of the project" means - (i) In a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences;
(ii) In a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the assessee;
(b) "Capital employed in the business of the company" means - (i) In a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences;
(ii) In a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed, or, as the case may be, the new industrial unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the industrial undertaking or setting up of the new industrial unit of the company;
(c) "Long-term borrowings" means - (i) Any moneys borrowed by the company from the Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which is for the time being approved by the Central Government for the purposes of clause (viii) of sub-section (1) of section 36 or any banking institution (not being a financial institution referred to above), or
(ii) Any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years.
(4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed 570 .
(5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of amalgamation, - (i) No deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and
(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.
(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger, -
(i) No deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and
(ii) The provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.
(6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year.
Ravi Baheti
(Credit Analyst)
(29 Points)
Replied 05 June 2008
As per the guide lines issued by ICAI all the expenses whether preliminary or othrewise have to be written of in the year in which it occurs...........as the concept of deffered expenditure has been scraped..........dont get confused is with pre-paid expenditure.........
Anil
(1638 Points)
Replied 05 June 2008
Dear Mr.Ravi Baheti,
Thanks for your response. Please let me know the name of the guidance note issued by ICAI which says that all preliminary expenses have to be written off in the year in which it occurs. Also let me know when was this guideline issued.
Thanks
Anish M.S
(Internal Auditor)
(116 Points)
Replied 15 January 2010
Accounting Standard on preliminary expenses: AS 26 dealing with intangible assets covers preliminary expenses as well. The period over which these preliminary expenses are to be amortised is best left to the judgment of the directors of the company. AS 26 suggests writing off intangible assets over a period of 10 years, though a different period is permissible if it is justified in the opinion of the management. It is a common practice to write off these preliminary expenses in a period of five years, though there is no legal provision to this effect. A company can as well write off its preliminary expenses in the same year as it incurs.
Preliminary expenses under the Income-Tax Act: The I-T Act provides for amortisation of preliminary expenses. Section 35 D specifies the expenditure to be included in preliminary expenditure, which under the I-T Act is allowable for all types of assesses. Conceptually, this is different from preliminary expenses under company law.
Auditor and preliminary expenses: When the chartered accountant engaged by the company for its incorporation is also the first auditor, the auditor should be cautious about the restrictions of Section 226(3). He would be disqualified to be the auditor of the company if he accepts shares in consideration of his professional services.
Audit and Assurance Standard 26, on letters of engagement, suggests separate letters of engagement for separate assignments.
Therefore, the auditor should issue separate letters of engagements for incorporation of the company and or its audit. After all, his engagement for incorporation is by the promoters and his appointment as an auditor is by the company.
Rahul
(Qualified Assistant)
(35 Points)
Replied 17 February 2010
AS PER PARA 55 OF AS 26 ALL THE PRE OPERATIVE & PRE INCORPORATION EXPENSES SHOULD BE WRITTEN OFF IN THE YEAR IT IS INCURRED.
SCHEDULE 6 DOES NOT SPECIFY ANY TREATMENT OF PRE INCORPORATION OR PRE OPERATIVE EXPENSES.
HOWEVER THE SAME IS TO BE AMORTISED OVER A PERIOD OF 5 YEARS U/S 35D OF THE IT ACT.
IF THE EXPENSES ARE WRITTEN OFF IN THE BOOKS OF ACCOUNTS THEN THERE IS NO NEED OF QUALIFYING THE REPORT PROVIDED THE IMPLICATION OF AS 22 HAS BEEN TAKEN INTO ACCOUNT.
AS26 WHICH COVERS INTANGIBLES DOES NOT INCLUDES PRELIMINARY EXPENSES AS THEY HAVE BEEN SPECIFICALLY STATED SEPERATELY IN PARA 55
Ankush
(Student)
(28 Points)
Replied 26 June 2010
Please reply if any body knows about Treatment of preoperative expenses done by real estate builders and developers ......
How they can show there expenses in the books before recognition of income........
if they are not earning profit ,they can show there expenses as loss in the ITR
or just capitalize them as preoperative expense and write off at the time of revenue recognition as per AS 9.
AMIT
(Audit Assistant)
(102 Points)
Replied 24 November 2010
Pls guide me the accounting entry for pre incorporation expenses and its written off.
Sunshine
(Helping All)
(10575 Points)
Replied 25 November 2010
as per AS26, preliminary exp should be w/o in the year it occurs....and as per sec 35D of IT act,in 5 yrs........IN IT act the max amount will be higher of 5% of project cost or capital employed for indian companies and 5 % of project cost for other assessees....foreign co. wont get any deduction
Rajnish Kumar
(accountant)
(22 Points)
Replied 18 April 2011
i'm confused about the treatment of preliminary expenses written off.
please sugest me that how much % of preliminary expenses written off acording to Companies Act or Income Tax Act.
what expenses will be treated as preliminary in the case of real estate or construction company.
with regard and thanks
Rajnish Kumar
SARIKA GAWDE
(CHIEF ACCOUNTANT)
(21 Points)
Replied 01 June 2013
Dear All
I have a query related to expenses incurred by promoters before incorporation of company :
A promoter of Private Limited company has incured an expenses of Rs.4,00,000 for furniture, etc before incorporation of company.
I would like to know whether this is an allowable expense and what will be an accounting tratment for the same.
Kindly guide me.
Regards
Sarika
CAclubindia
