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the expenses incurred
before the starting of business.
or
Extension/Setting up of new unit of existing business.
Example for Non Companies
Suppose Preliminary Expenses and Cost of Project is as follows
| S.No | Particulars | Case 1 | Case 2 | Case 3 |
| A | Total Preliminary Exp | 100 | 100 | 100 |
| B | Cost of project | 4000 | 600 | Not Yet Completed |
What is Deduction Available
View Answer| S.No | Particulars | Case 1 | Case 2 | Case 3 |
| A | Total Preliminary Exp | 100 | 100 | 100 |
| B | Cost of project | 4000 | 600 | Not Yet Completed |
| C | 5% of Cost of Project | 200 | 30 | 0 |
| D | Total Deduction Available (Higher of A and C) | 100 | 30 | 0 |
| E | 1/5 Deduction every year | 20 | 6 | 0 |
Example for Companies
Suppose Preliminary expenses ,Cost of Project and Capital Employed is as follows
| S.No | Particulars | Case 1 | Case 2 | Case 3 |
| A | Total Preliminary Exp | 100 | 800 | 100 |
| B | Cost of project | 4000 | 2000 | Not Yet Completed |
| C | Capital Employed | 6000 | 1500 | 2000 |
What is deduction available
| S.No | Particulars | Case 1 | Case 2 | Case 3 |
| A | Total Preliminary Exp | 100 | 100 | 100 |
| B | Cost of project | 4000 | 600 | Not Yet Completed |
| C | Capital Employed | 6000 | 1500 | 2000 |
| D | Higher of B and C | 6000 | 1500 | n/a |
| E | 5% of D | 300 | 75 | n/a |
| F | Total Deduction Available (Lower of A and E) | 100 | 75 | 0 |
| G | 1/5 Deduction every year | 20 | 15 | 0 |
Here
Cost of Project means
Cost of Fixed Assets as on last day of Financial Year when business commenced
(In case of Extension,.Cost of new fixed assets acquired or developed to be taken for Computation)
Capital employed means −
Share capital
+ Reserves
+ Long term borrowings
( here long term borrowings means those covered under Section36(1)(viii)
DETAILED PROVISIONS
Expenses Covered in Section 35D
1.Expenditure on preparing feasibility report,project report,market survey report,engineering service related to business.
(This expenses may be incurred by the assessee himself or by consultancy approved by board)
2.Legal charge for drafting agreement between assessee and some other person .
(This agreement Should be related to setting up/Conduct of business .)
3 In case of companies legal charge have to be paid regarding
- Drafting of Memorandum & Articles of Association
- Printing of Memorandum & Articles of Association
- Fees for registering company (ROC Fees)
- In case of public limited companies fees regarding Printing of prospectus of issue of shares /debentures or payment of Underwriting Commission.
4. Other expense as may be prescribed .
Maximum Deduction Under Section 35 D
Expenditure incurred should not exceed
| Type of Assessee | Maximum Deduction |
| For Non Companies | 5% of Cost of Project |
| For Companies | 5% of Cost of Project |
| or | |
| 5% of Capital Employed | |
| whichever is more beneficial to assessee(i.e. Whichever is higher) |
The deduction is available in 5 years equally starting with the year business Commenced/ extension Complete
Compulsory Audit Requirement
Non companies also have to get their account audited by CA and get Audit report in Form 3B.
(For Companies:-There is anyways Compulsory Audit Requirement under Companies Act)
Questions
Q1
| Proft and Loss of Ajay & Co,a proprietorship | |
| SALES | 800000 |
| Less | |
| EXPENSES | 500000 |
| PROFIT | 300000 |
| Suppose Expenses Include | |
| Preminary Expenses | 100000 |
Company's Fixed Assets on starting and end of year were 10 lacs and 12 lacs
-a-
| Maximum 35D Deduction | ||
| A | Preliminary Expenses | 100000 |
| ` | ||
| B | 5% of Cost of Project | 60000 |
| (5%*1200000) | ||
| C | whichever is less | 60000 |
| This 60000 deduction is available in 5 years | ||
| D | Deduction every year=60000/5 | 12000 |
| Computation of PGBP Income | |
| Profit as per P& L A/c | 300000 |
| Add | |
| Expense Disallowed | |
| Preliminary expenses charged to P & L | 100000 |
| Less | |
| Expense Allowed | |
| 1/5 of Preliminary expenses | 12000 |
| PGBP INCOME | 388000 |
-ea-
Q2
Calculate Deduction in case of Company
| Proft and Loss of Ajay Ltd,a Company | |
| SALES | 800000 |
| Less | |
| EXPENSES | 500000 |
| PROFIT |
300000 |
| Suppose Expenses Include | |
| Preminary Expenses | 100000 |
Company's Fixed Assets on starting and end of year were 10 lacs and 12 lacs
Capital Employed during year was 14 lacs
View Answer| Maximum 35D Deduction | ||
| A | 5% of Cost of Project | 60000 |
| (5%*1200000) | ||
| B | 5% of Capital Employed | 70000 |
| (5% *1400000) | ||
| C | Higher of A and B | 70000 |
| D | Actual Preminary Expenses | 100000 |
| E | Deduction available (Lower of C and D) | 70000 |
This 70000 deduction is available in 5 years
Deduction every year=70000/5=14000
| Computation of PGBP Income | |
| Profit as per P& L A/c | 300000 |
| Add | |
| Expense Disallowed | |
| Preliminary expenses charged to P & L | 100000 |
| Less | |
| Expense Allowed | |
| 1/5 of Preliminary expenses | 14000 |
| PGBP INCOME | 386000 |
