Union Budget 2023 – Amendment in Section 35D regarding claiming deduction on amortization of preliminary expenditure

In the existing provisions of Section 35D, the assessee, whether an Indian Company or a person other than company who is resident in India, can claim the deduction of Section 35D on account of :-

a. expenditure incurred before the commencement of the business; or

b. expenditure incurred after the commencement of the business in connection with the existing undertaking or in connection with setting up of a new unit.

The expenditure which qualifies for the deduction are :-

a. preparation of feasibility report,

b. preparation of project report,

c. conducting market survey or any other survey necessary for the business of the assessee and

d. engineering services relating to the business of the assessee.

For claiming the expenditure under points a to d, the said work is to be carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

e. legal charges for drafting any agreement between the assessee and any other person for setting up the business

f. In case of an assessee being a Company, the expenditure in relation to

• Legal charges for drafting the MOA and AOA of the Company
• Printing of MOA and AOA
• Fee for registering the Company under Companies Act
• In relation to the issue, the public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing and advertisement of the prospectus;

g. Any other expenditure as may be specified.

Amount and Timeframe for deduction

In case of Company – 5% of the Cost of the project or the capital employed in the business of the company, whichever is beneficial to the Company.

In case of person other than Company – For the points a to g, it cannot exceed 5% of the cost of the project.

The said deduction  shall be available to the assessee in 5 equal instalments starting from the previous year of the commencement of business or setting up of the new unit.

Amendment proposed in the Finance Bill 2023

In the proposed Finance Bill 2023, the condition of expenditure ,referred to in point a to d, in relation to the work being carried out by the Concern approved by the Board has been relaxed. Instead the assessee shall be required to furnish a statement containing the particulars of this expenditure within prescribed period to the prescribed Income tax authority in the prescribed form and manner. The said prescribed manner shall be notified by the Department.

The said amendment shall be effective from 1st April 2024 and will apply to the AY 2024-25 and the subsequent assessment years.