Eligible Assessee – Indian company or any non-corporate assessee resident in India
Eligible Deductions – If preliminary expenses are incurred
- before the commencement of his business, or
- after the commencement of business in connection with extension of an undertaking or setting up a new unit.
Amount of Deduction – 1/5th of qualifying expenditure for each of the 5 successive years
Period from which deduction starts – Deduction start from the previous year in which the business commences, or the year in which extension of undertaking is completed or the new unit commences production or operation as the case may be.
Qualifying expenditure –
For an Indian Company – 5% of cost of project or 5% of capital employed whichever is higher
For all other assessee – 5% of cost of project
Audit of accounts – Audit of accounts by a Chartered Accountant, of the years in which the qualifying expenditure is incurred is required to claim deduction under this section.
If deduction is claimed under this section, then deduction is not allowed for such expenditure under any other section.
The expenditure eligible for deduction are:—
(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 :
Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board
(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
(iv) in connection with the issue, for public subscription, 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.
Meaning of ‘Cost of Project’ – Cost of project means actual cost of fixed assets as on the last day of the year in which the business commences. In case of extension of business or setting up a new unit the fixed assets only in relation to such extension or new unit is taken as cost of project.
Meaning of ‘Capital Employed’ – Capital employed means Issued share capital ,debentures and long term borrowing as on the last day of the year in which the business commences. In case of extension of business or setting up a new unit, capital only in relation to such extension or new unit is taken as Capital employed.