## Amortisation of Preliminary Expenses — Section 35D
### Idea
When a business is being set up (or an existing business is being expanded), the assessee incurs one-time "start-up" costs such as project reports, surveys, and incorporation expenses. These are capital in nature, so they cannot be claimed in full in one year. Section 35D lets you spread (amortise) them over 5 equal annual instalments.
### 1. Who can claim (Applicability)
- Indian companies, and
- Resident non-corporate assessees (i.e., all residents).
- Expenses must be incurred before commencement of business, OR for extension of an existing business / setting up a new unit.
### 2. How much is eligible (Ceiling)
The total preliminary expenditure that qualifies is capped:
| Assessee | Maximum eligible expenditure |
|---|---|
| Companies | Higher of 5% of Cost of Project or 5% of Capital Employed |
| Other assessees | 5% of Cost of Project |
- The qualifying amount is amortised over 5 years, one-fifth each year, starting from the year of commencement / expansion.
- The same expenditure cannot be claimed again under any other section, in any year.
- Audit condition: Deduction is allowed only if accounts are audited before the due date u/s 139(1), and a statement of expenditure is furnished within 1 month before the 139(1) due date.
### 3. Which expenses qualify (Eligible Expenses)
For all eligible assessees:
- Feasibility / project report preparation
- Market or other surveys essential for the business
- Engineering services related to setting up the business
- Legal charges for agreements relating to setting up the business
Additionally, for companies:
- Legal charges for drafting MOA and AOA
- Printing of MOA and AOA
- Incorporation fees under the Companies Act
- Flotation costs — share/debenture issue costs, underwriting commission, prospectus expenses
### Key definitions
- Cost of the Project = actual cost of fixed assets shown in the books as on the last day of the previous year in which business commences / extension happens.
- Capital Employed = Issued Share Capital + Debentures + Long-term Borrowings, as on the last day of the previous year of commencement / extension.
> Note: "Capital Employed" is relevant only for companies (since the higher-of test applies only to them).