# Section 35D - Preliminary Expenses

## Eligibility

Allowed only to Residents (resident individuals, companies, firms, etc.)
Non-residents cannot claim this deduction.

## Qualifying Preliminary Expenses

Expenses incurred before commencement of business or for extension of existing undertaking:

1. Market survey or other survey necessary for business

2. Engineering services related to the business

3. Legal fees for drafting agreements

4. Preparation of feasibility study or project report

5. Drafting & printing of MOA / AOA

6. Expenses on public issue of shares & debentures (underwriting commission, brokerage, etc.)

## Amount of Deduction

### For Indian Company

Lower of:

(i) Actual expenses incurred, OR
(ii) 5% of the higher of:
(a) Cost of project, OR
(b) Capital employed

### For Other Assessees (Resident non-corporate)

Lower of:

(i) Actual expenses incurred, OR
(ii) 5% of Cost of Project

## Method of Claim

Deduction is allowed in 5 equal annual installments beginning from the year in which business commences (or extension is completed).

## Key Definitions

Cost of Project = Amount invested in fixed assets for the new project.
Capital Employed = Share Capital + Debentures + Long-term borrowings for the new project.
Reserves & Surplus are NOT included.

## Special Condition for Non-Company / Non-Co-operative Society Assessees

Deduction is allowed only if a Tax Audit u/s 44AB has been conducted for that year.

Worked example

### Example 1

Example: XYZ Ltd. (Indian company) incurred preliminary expenses of ₹10,00,000. Cost of project = ₹1,00,00,000; Capital employed = ₹1,50,00,000.

Higher of Cost of project / Capital employed = ₹1,50,00,000
5% of ₹1,50,00,000 = ₹7,50,000
Actual expenses = ₹10,00,000
Lower of two = ₹7,50,000
Annual deduction = ₹7,50,000 / 5 = ₹1,50,000 per year for 5 years

⚠️ Common exam mistakes

Including Reserves & Surplus while computing 'Capital Employed' — these are excluded.
Allowing the full deduction in one year instead of spreading over 5 equal installments.
Claiming the deduction for a non-resident assessee — Section 35D only applies to residents.
For non-corporate assessees, forgetting that Tax Audit u/s 44AB is a precondition for the deduction.
Using 'Cost of Project OR Capital Employed (whichever is lower)' instead of 'whichever is higher' for Indian companies.

Bare-Act text Section 35D · Income Tax Act, 1961 · click to expand

Section 35D allows amortisation of preliminary expenditure incurred by an Indian company or resident assessee before the commencement of business or after commencement in connection with extension of an industrial undertaking or setting up a new industrial unit. The aggregate amount eligible is restricted to 5% of cost of project (or capital employed in the case of an Indian company, whichever is higher) and is allowed in five equal annual installments.

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Section 35D - Amortisation of Preliminary Expenses

Worked example

⚠️ Common exam mistakes