Where an Indian Company or non- corporate resident assessee incurs any expenses at the time of commencement of business or on extension of existing undertaking or setting up of new unit, then deduction is allowed in respect of such preliminary expenditure. Amount of Deduction 1/5^th of the qualifying amount over 5 years is to be allowed as deduction starting from the year in which business has started or extension has been completed. For this purpose the qualifying amount is – For Indian Company  (Least of the following)

• Amount actually incurred
• 5% of cost of project or 5% of capital employed (whichever is higher)

For instance, X ltd commenced a new business and expenses incurred are as follows-

1. Cost of project – Rs. 2000000
2. Capital Employed – Rs. 3000000
3. Preliminary expenses – Rs. 200000

Soln:

Particulars	Amount
Qualifying amount – Lower of the following
        i.            Preliminary Expenses	200000
      ii.            5% of Cost of Project ( i.e., 5% of 2000000) ‘or’ 5% of Capital employed (i.e., 5% of 3000000) – Whichever is higher	150000
 Therefore, Q.A. – lower of  i. and ii.	150000

            Deduction will be allowed as – 1/5^th of 150000 = 30000 over 5 successive years. For non- corporate resident assessee (Least of the following)

• 5% of cost of project
• Actual expenditure incurred

For instance, Mr. X commenced a business on 1/05/2011. Preliminary expenses incurred is Rs. 200000. Cost of project is Rs. 120000. Soln:

Particulars	Amount
Qualifying amount – Lower of the following
    iii.            Preliminary Expenses	200000
    iv.            5% of Cost of Project ( i.e., 5% of 120000)	60000
 Therefore, Q.A. – lower of  i. and ii.	60000

            Deduction will be allowed as – 1/5^th of 60000 = 12000 over 5 successive years. Qualifying Expenses The qualifying expenses in respect of which deduction will be allowed are- For any assessee: Expenses incurred in respect of – a)      Preparation of feasibility report b)      Preparation of project report c)      Conducting market surveys and other survey required for business d)     Legal expenses for drafting agreement between the assessee and other person involved in setting up of business e)      Engineering services related to business of the assessee Also, provided that all the above mentioned work is done in connection with the assessee himself or by any other concern which is being approved for this work by the Board . For any company: Expenses incurred in respect of – a)      Printing of Memorandum and Articles of Association of the company b)      Registration fees of the company c)      Legal expense required for drafting of Memorandum and Articles of Association of the company d)     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 e)      Any other expenses as may be prescribed. Explanations:- I.            Cost of project -The actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenses incurred  on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences or the last day of the previous year in which the extension of the undertaking is completed , or the new unit commences its operation (as the case may be). II.            Capital Employed – The aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences or the last day of the previous year in which the extension of the undertaking is completed , or the new unit commences its operation (as the case may be). III.            Long term borrowings –

• Any moneys borrowed by the company from the Government or the Industrial Finance Corporation of India(IFCI) or the Industrial Credit and Investment Corporation of India(ICICI)  or any other financial institution which is eligible for deduction u/s 36(1)(vii) or any Banking institution or,
• Any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years.