Section 35D — Amortization of Certain Preliminary Expenses

Section 35D of the Income-tax Act, 1961, allows Indian companies and certain other taxpayers to amortize preliminary expenses over a period of five years. This section applies to expenses incurred before the commencement of business or in connection with the extension of an industrial undertaking or setting up a new unit. The significance of this provision lies in its ability to provide tax relief by spreading the deduction of these initial expenses over multiple years, thereby reducing the taxable income in the initial years of business operations. The statutory test requires that the expenses must be of the nature specified in the section, such as legal charges for drafting agreements, underwriting commission, or expenses for feasibility studies. The burden of proof lies with the taxpayer to substantiate the nature and purpose of the expenses claimed. In practice, this section is crucial for businesses looking to manage their cash flow and tax liabilities effectively during the formative years.

Common Litigation Flashpoints

1. Classification of expenses as preliminary
2. Eligibility of expenses for amortization
3. Disputes over the commencement date of business
4. Calculation of the allowable deduction amount

Judgments on Section 35D — Amortization of Certain Preliminary Expenses

• Kotak Mahindra Bank Limited vs DCIT — ITAT,
  Claims for deductions not made in the original return cannot be entertained unless filed through a revised return.
• Reliance Capital Ltd. vs Dy. Commissioner of Income Tax — ITAT,
  If there are sufficient interest-free funds available, it can be presumed that investments were made from these funds rather than borrowed funds.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.