Introduction:

Section 35D of the Tax Act provides for deduction of specified initial expenditure by an Indian company or resident person seeking to start a business, set up a new industrial division, or expand a business.

The deduction is granted to the Indian company on the basis of profits earned over ten equal years, starting from the year preceding the commencement of the business. These deductions apply to a specific group of expenses defined under special headings as of March 31, 1970. Qualifying expenses covered under this provision include expenses such as writing summaries of the business and marketing so assessment required for performance appraisal. 

 Preliminary Expenses:

Preliminary expenses refer to the costs incurred by a corporate entity before formally registering or commencing the venture. Additionally, expenses incurred while establishing new units of an established business are also categorized as preliminary expenses.

For non-corporates, all initial amounts include the costs detailed in the feasibility report, market surveillance report, and legal fees associated with contract award but for companies, the costs set out in the letter of intent and understanding (MOA) are also considered . In both cases, it is mandatory for a Chartered Accountant (CA) to conduct an audit.

 Expenses Under Section 35D:

The corporate entity seeking deduction must demonstrate satisfactory competence and eligibility to engage in consultancy services outlined in Section 35D(2)(a) of the IT Act. The relevant committee evaluates the firm’s past success in consultancy activities before granting approval. Authorization is granted to Indian consultancy firms primarily operating within India

Conversely, for overseas entities seeking approval, the Board allows services that are specifically unavailable through domestic firms. All applicants intending to benefit from the deduction must have at least one year of professional experience in the consultancy field. Additionally, they must have invoiced a minimum of ₹10,000 from a single client within any operational annual cycle.

Eligibility Criteria for section 35D:

To be eligible for deduction under Section 35D, the following conditions must fulfilled.

• The expenditure must have been incurred for the purpose of either establishing a business or expanding an existing one.
• The expenditure need to had been incurred for the cause of both setting up a business or expanding an present one.
• The expenditure must not be of capital nature.
• The expense must have been incurred prior to the commencement of the project or within the last year in which the project was commenced.
• Expenses related to the issuance of shares and debentures for public subscription.
• The cost of preparing the feasibility report and project report.

Deductions :

• Section 35D allows deductions for specified expenses associated with the establishment or expansion of a business. These costs include:
• Expenses associated with the training of a feasibility file, project document, or some other record vital for the status quo or enlargement of a enterprise.
• Expenses incurred for the acquisition of know-how, patents, copyrights, trademarks, licenses, franchises, or any similar rights.
• Expenses incurred for the purchase of plant and machinery for the enterprise.
• Expenses incurred for the training of personnel to be employed in the business.

Amount of Deduction:

• The deduction allowed under Section 35D is a maximum of 5% of the project cost. For companies, these deductions cannot exceed 5% of the project cost or capital used in the business of the company.
• Deductions under the specified limits will be allowed to be reduced in five equal annual installments. This classification shall commence from the year following the commencement of the project, the completion of the expansion of the manufacturing operations, or the commencement of production of goods or services in the new industrial unit.

Points to Remember:

• Below are key points to remember regarding Section 35D of the Income Tax Act (ITA):
• It is vital to consider the yr in which the initial fees had been incurred and to have the company’s bills audited by means of its Chartered Accountant (CA) as a consequence before claiming tax deductions under this Section.
• The assessee is required to furnish a declaration of account through Form 3AE while claiming tax deduction for the first year.
• Section 35D does not allow tax deduction for a company that has merged or ceased operations in the previous year when it remained in business or ceased operations.
• The specific provisions of Section 35D apply to merger and demerger of companies and deductions will be provided accordingly.

Conclusion:

In conclusion, Section 35D of the Income Tax Act provides companies with a valuable opportunity to claim deductions for expenses associated with setting up or expanding their businesses. By taking advantage of these deductions, companies can reduce their tax liability and channel the savings into their growth and development. However, it is important to ensure that all eligibility criteria are met and that proper documentation is maintained to prevent potential disputes between tax authorities.