35D

ITA 1961 · Section 35D

Section 35D — Amortisation of certain preliminary expenses

Chapter IV-D — Profits and Gains of Business or ProfessionITA 1961Up to AY 2025-26

Function in the statutory architecture

Statutory text — Income-tax Act, 1961

CHAPTER IV

COMPUTATION OF TOTAL INCOME / D. PGBP

Amortisation of certain preliminary expenses.

35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),—

(i) before the commencement of his business, or

(ii) after the commencement of his business, in connection with the extension of his undertaking or in

connection with his setting up a new unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the undertaking is completed or the new unit commences production or operation :

Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted.

(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 :

15[Provided that the assessee shall furnish a statement containing the particulars of expenditure specified in this clause within such period, to such income-tax authority, in such form and manner, as may be prescribed;]

(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;

(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 charges for drafting, typing, printing and advertisement of the prospectus;

(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction

under any other provision of this Act) as may be prescribed.

(3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at two and one-half per cent—

(a) of the cost of the project, or (b) where the assessee is an Indian company, at the option of the company, of the capital employed in

the business of the company,

the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1) :

Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-half per cent", the words "five per cent" had been substituted.

Explanation.—In this sub-section—

(a) "cost of the project" means—

(i) in a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets,

(ii) in a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets,

being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure 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 extension of the undertaking is completed or, as the case may be, the new unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the undertaking or the setting up of the new unit of the assessee;

(b) "capital employed in the business of the company" means—

(i) in a case referred to in clause (i) of sub-section (1), 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;

(ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share

capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the undertaking is completed or, as the case may be, the new unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company;

(i) any moneys borrowed by the company from Government or the Industrial Finance

Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which is eligible for deduction under clause (viii) of sub-section

(1) of section 36 or any banking institution (not being a financial institution referred to above), or

(ii) 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.

(4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the

Explanation below sub-section (2) of section 288, before the specified date referred to in section 44AB and the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit by that date in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

(5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of amalgamation,—

(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company

for the previous year in which the amalgamation takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they

would have applied to the amalga-mating company if the amalgamation had not taken place.

(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger,—

(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the

previous year in which the demerger takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would

have applied to the demerged company, if the demerger had not taken place.

(6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year.

— Footnotes (gazette text) —

15. Sub. by Act No. 08 of 2023, w.e.f. 1-4-2024.

— Source —

Verbatim text reproduced from income-tax-act-1961-as-amended-by-finance-act-2025.pdf (full layout extract, 0-indexed lines 9905-10041). Reproduced under Standard B (gazette-text discipline) — gazette content, French-style colon spacing, italics-for-Provisos/Explanations convention, and *N. footnote-numbering preserved.

PDF-extraction artifacts repaired: per-page header (“INCOME-TAX ACT, 1961 - 2024”), per-page footer, 2+ consecutive blank lines at page-break boundaries collapsed to a single blank, orphaned footnote-marker joining.

Finance Act 2026 overlay: not applicable. FA 2026 amends 14 sections of the 1961 Act (92CA, 139, 144C, 153B, 220, 222, 245, 245MA, 254, 275A, 275B, 276, 278A, 280) — this section is not among them.

Function in the statutory architecture

Amortisation of preliminary expenses — 5 instalments.

Historical context / FA amendment trail

Substantively stable / sunset by Finance Act; see source-block FA-amendment trail (where applicable).

Operative consequences

• Operates within the Chapter IV-D PGBP computational framework.

• Cross-references operative companion sections.

Case Laws & Commentary

SECTION 35D — Amortisation of certain preliminary expenses

Important Case Laws — 1961 Treatise (FA 2026)

Provision in brief: Allows Indian companies / resident non-corporate assessees to amortise certain preliminary expenses (preparation of feasibility/project report, market survey, engineering services, legal charges for drafting / printing MoA/AoA / agreements, registration fees, IPO/FPO expenses, underwriting commission, prospectus printing) incurred BEFORE commencement of business OR after commencement in connection with extension / setting-up of new unit. Aggregate cap: 5% of cost of project (or capital employed for companies, if higher). Amortisation: 1/5th each year over 5 successive years from year of commencement / completion of extension. Conditions: audit (Form 3AE), specified categories of expenditure, no double benefit. FA 2025 amended s. 35D — removed the requirement of activity through approved entities for feasibility/market survey etc.

Section Commentary

Preliminary-expense amortisation — codification of pre-commencement spend

Section 35D allows Indian companies and resident non-corporate assessees to amortise specified preliminary expenses in 5 equal annual instalments. The categories — preparation of feasibility report, project report, market survey, engineering services, legal charges for drafting MoA/AoA and agreements, registration fees, expenses on issue of shares / debentures (prospectus, underwriting commission, printing) — are exhaustively listed in sub-s. (2) and the courts have refused to read in additional categories (Ashok Leyland, Punjab State IDC).

Share-issue expenses — Brooke Bond locus classicus

Brooke Bond (SC) is the foundational ruling: share-issue expenses are capital and NOT deductible u/s 37(1). They fall under s. 35D(2)(c)(iv) for amortisation only if and to the extent the assessee fits the section's eligibility and the expense fits the specified clause. Punjab State IDC carved out an awkward 'no-deduction zone' — ROC fee for increase in AUTHORISED share capital is capital but does NOT fit s. 35D(2)(c)(iv) clauses, so no deduction is available anywhere. India Cements provides the parallel dichotomy: loan-raising costs are revenue u/s 37 / 36(1)(iii) (not s. 35D).

5%-of-cost / capital-employed ceiling

Sub-s. (3): aggregate expenditure eligible for amortisation is capped at 5% of cost of project (for non-companies) OR 5% of cost of project or capital employed, whichever is higher (for companies). 'Cost of project' is ascertained as on the last day of the PY in which business commences / extension is completed (Multi Metals, Raj). Subsequent revisions do not unscramble the amortisation schedule (Hindusthan Engineering, Cal).

FA 2025 liberalisation — approved-authority requirement removed

FA 2025 removed the long-standing requirement that feasibility / project report / market survey / engineering services be conducted through an approved authority (concerned department / institution). This significantly reduced documentation friction. The change applies from AY 2026-27 onwards — practitioners should refresh internal checklists.

Practical compliance

(i) Capture preliminary expenses in a separate ledger ('s. 35D pool'). (ii) Apply 5% test at year-end of commencement / extension completion. (iii) Maintain Form 3AE audit report. (iv) For demergers / amalgamations, evaluate succession of unamortised balance. (v) For ROC fee on authorised-capital increase — no deduction is available; plan accordingly. (vi) Form 3CD Cl. 19 disclosure.

FA 2026 impact: FA 2026: No fresh amendment. FA 2025 had liberalised by removing the 'approved authority' requirement for feasibility/project report/market survey/engineering studies — easing the documentation burden. Continues with 5%-of-cost-of-project / capital-employed cap.

Leading Decisions

1. Brooke Bond India Ltd. v. CIT

Citation: (1997) 225 ITR 798 (SC)

Forum: Supreme Court of India

Facts & Issue: Assessee company incurred expenditure on issue of bonus shares and shares to public — claimed as revenue u/s 37 alternatively as preliminary expense u/s 35D.

Held / Ratio: The Supreme Court held that share-issue expenditure (issuing shares for the first time / public issue) is capital expenditure — not allowable u/s 37(1). However, where it falls within the categories specified in s. 35D(2)(c)(iv), it is amortisable under s. 35D. The Court reaffirmed the principle that expenditure related to capital structure is capital.

Section relevance: Locus classicus on share-issue expenditure under s. 35D / s. 37 boundary.

2. CIT v. Ashok Leyland Ltd.

Citation: (1997) 224 ITR 122 (SC)

Forum: Supreme Court of India

Facts & Issue: Question whether legal expenses for drafting agreements with foreign collaborators, payable BEFORE commencement of business, are amortisable under s. 35D.

Held / Ratio: The Supreme Court held that the categories in s. 35D(2) are exhaustive. Only expenditure falling within those specific clauses qualifies — others, even if related to setting-up, do not. Legal expenses for drafting collaboration agreements may fall under s. 35D(2)(c)(iv) but each has to be carefully matched to a clause.

Section relevance: Exhaustive-list principle under s. 35D(2) — strict construction.

3. Punjab State Industrial Development Corpn. Ltd. v. CIT

Citation: (1997) 225 ITR 792 (SC)

Forum: Supreme Court of India

Facts & Issue: Whether fees paid to Registrar of Companies for increase in authorised share capital are amortisable under s. 35D.

Held / Ratio: The Supreme Court held that fee paid for increase in authorised capital is capital expenditure (analogous to share-issue cost) but does NOT fall within the specific clauses of s. 35D(2). Hence not amortisable under s. 35D — and not allowable under s. 37(1) either. This created a 'no-deduction zone' for ROC fee on capital-increase.

Section relevance: Foundational on the exhaustive nature of s. 35D(2) — Court declined to extend the list.

4. India Cements Ltd. v. CIT

Citation: (1966) 60 ITR 52 (SC) — principles applied

Forum: Supreme Court of India

Facts & Issue: Loan-raising expenses — assessee argued these were revenue u/s 37; Revenue argued capital. While decided pre-s. 35D, the principles continue to shape the s. 35D / 37 boundary.

Held / Ratio: Held that expenditure on raising LOAN capital is revenue (deductible u/s 37(1)) — distinguished from share/equity-capital-raising expenditure which is capital. This dichotomy is critical for s. 35D applicability — share-capital costs go to s. 35D; debt-raising costs go to s. 37.

Section relevance: Foundational dichotomy — share-capital vs debt-capital expenditure. Critical for s. 35D scope.

5. CIT v. Multi Metals Ltd.

Citation: (1991) 188 ITR 151 (Raj)

Forum: Rajasthan High Court

Facts & Issue: Question of mechanics of 5%-cap — whether 'cost of project' / 'capital employed' is computed at end of PY or commencement of business; treatment of work-in-progress in 'cost of project'.

Held / Ratio: Held that 'cost of project' for s. 35D(3) is computed as on the last day of the PY in which the business commences / extension is completed. Capital work-in-progress as on that date is included; subsequent additions are not.

Section relevance: Defines computational date for the 5%-of-cost ceiling under s. 35D(3).

6. CIT v. Hindusthan Engineering & Industries Ltd.

Citation: (1995) 215 ITR 365 (Cal)

Forum: Calcutta High Court

Facts & Issue: Whether the 5-year amortisation under s. 35D can be re-determined if the cost-of-project figure changes due to later adjustments.

Held / Ratio: Held that the amortisation series, once commenced, is fixed by the cost-of-project as ascertained at commencement. Subsequent revisions do not unscramble the schedule. The Court emphasised certainty in tax computation.

Section relevance: Locks the amortisation schedule under s. 35D — no retrospective recomputation.

— End of Section 35D Case-Law Note —

← All sections (939)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025 / Allied Sources
s. 35D — Amortisation of preliminary expenses — 5 instalments.	Corresponding provision in the 2025 Act preserves the same framework where the section remains operative; superseded for omitted sections.