Category Archives: Treatment of pre-incorporation expenses

Treatment of pre-incorporation expenses (whether dead loss or capitalisation with fixed assets)

Section 3 of the Income tax Act, 1961 define the first previous year being the period beginning with the date of setting up of the business or profession. Setting up is broadly narrated as the date on which the assessee is ready to commence business. Further in the context of a company assessee section 35D provide for allowance of certain expenses incurred before actual commencement of business. Sub-section (2) of section 35 D list out such categories of expenses as under:

“ (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:–

(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 (1 of 1956);
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and