Section 44 — Amortisation of Preliminary Expenses | ITA 2025

Section 44 — - AMORTISATION OF CERTAIN PRELIMINARY EXPENSES

Section 44 is the substantive equivalent of 1961 s. 35D -- the 5-year amortisation regime for PRE-COMMENCEMENT and EXTENSION-OF-UNDERTAKING preliminary expenses. Pre-1976, such expenses were treated as enduring-benefit capital expenditure (CIT v. Coal Shipments SC, 1971) and entirely disallowed; FA 1976 introduced a partial relief through 1/5 amortisation over 5 tax years; now codified in 2025 Act as s. 44. NINE sub-sections cover: (1) eligibility / start-of-amortisation; (2) covered expenditure types; (3) prescribed-form statement; (4) 5% project-cost / capital-employed cap; (5) definitions; (6) audit requirement for non-corporates; (7) amalgamation continuity; (8) demerger continuity; (9) anti-double-deduction. Practitioner-grade rule: every start-up's pre-incorporation cost / new-unit-set-up cost should be tested for s. 44 amortisation -- often misclassified as 'organisational expense' and lost.

Statutory text — Income-tax Act, 2025

Marginal note -- Amortisation of certain preliminary expenses

(1) If an assessee, being an Indian company or a person (other than a company), who is resident in India, incurs any expenditure specified in sub-section (2)—

(a) before the commencement of its business; or

(b) after the commencement of its business, in connection with the extension of its undertaking or in connection with its setting up a new unit, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive tax years beginning with—

(i) the tax year in which the business commences, for clause (a); or

(ii) the tax year in which the extension of the undertaking is completed or the new unit commences production or operation, for clause (b).

(2) The expenditure referred to in sub-section (1) shall be—

(a) the 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;

(iv) engineering services relating to the business;

(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;

(c) in addition to expenditure in clauses (a) and (b), if the assessee is a company,—

(i) legal charges for drafting and printing of the Memorandum and Articles of Association of the company;

(ii) fees for registering the company under the provisions of the Com- panies Act, 2013 (18 of 2013);

(iii) expenditure 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; and

(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) In relation to expenditure specified in sub-section (2)(a), the assessee shall furnish a statement containing the particulars of the expenditure in such form and manner, as may be prescribed.

(4) The allowable deduction under sub-section (1) in respect of aggregate of expend- iture referred to in sub-section (2) shall be restricted to 5%—

(a) of the cost of the project; or

(b) of the capital employed in the business of the company, where the assessee is an Indian company, at its option.

(5) For the purposes of this section,—

(a) “cost of the project” means 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) and—

(i) for cases under sub-section (1)(a), the actual cost as shown in the books of the assessee as on the last day of the tax year in which the business commences;

(ii) for cases under sub-section (1)(b), the actual cost as shown in the books of the assessee as on the last day of the tax year in which either the extension of the undertaking is completed, or the new unit commences production or operations, as the case may be, in so far as such fixed assets have been acquired or developed in connection with the extension of the undertaking or setting up of new unit;

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

(i) in cases under sub-section (1)(a), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the business of the company commences;

(ii) in a case under sub-section (1)(b), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the extension of the undertaking is com- pleted 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;

(c) “long-term borrowings” means—

(i) any moneys borrowed by the company from Government or Indus- trial Finance Corporation of India Limited or any other financial institution which is eligible for deduction under section 32(e) 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 tenure of moneys borrowed or debt is not less than seven years.

(6) If the assessee is a person, other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless,—

(a) the accounts of the assessee for the year or years in which the expend- iture specified in sub-section (2) is incurred have been audited by an accountant before the specified date referred to in section 63; and

(b) the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit by such date in such form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed.

(7) If an undertaking of Indian company entitled for deduction under sub-section

(1) is transferred before expiry of five years specified in the said sub-section, in a scheme of amalgamation, to another Indian company, then—

(a) no deduction under sub-section (1) shall be allowed to the amalgamating company for the tax year in which amalgamation takes place; and

(b) all provisions of this section shall continue to apply to the amalgamated company as they would have applied to the amalgamating company, as if the amalgamation had not taken place.

(8) If an undertaking of Indian company entitled for deduction under sub-section

(1) is transferred before five years specified in the said sub-section, in a scheme of demerger to another company, then—

(a) no deduction under sub-section (1) shall be allowed to the demerged company for the tax year in which demerger takes place; and

(b) all provisions of this section shall continue to apply to the resulting company as they would have applied to the demerged company, as if the demerger had not taken place.

(9) If a deduction under this section is claimed and allowed for any tax year in respect of any expenditure referred to in sub-section (2), deduction shall not be allowed for such expenditure under any other provision of this Act for the same or any other tax year. Expenditure on scientific research.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 -- s. 44	INCOME-TAX ACT, 1961 -- s. 35D
s. 44(1) -- Eligibility (Indian co. / resident person other than co.); 1/5 amortisation over 5 years	1961 s. 35D(1)
s. 44(2)(a) -- Feasibility / project / market-survey / engineering services	1961 s. 35D(2)(a)
s. 44(2)(b) -- Legal charges for agreements	1961 s. 35D(2)(b)
s. 44(2)(c) -- Co. specific: MoA/AoA, ROC fees, IPO-issue costs	1961 s. 35D(2)(c)
s. 44(2)(d) -- Other prescribed items	1961 s. 35D(2)(d)
s. 44(3) -- Statement of particulars (prescribed form)	1961 s. 35D(2) Explanation
s. 44(4) -- 5% cap on project cost / capital employed (company option)	1961 s. 35D(3)
s. 44(5)(a) -- 'cost of project' definition (fixed assets at end of commencement / extension year)	1961 s. 35D(3) Explanation (b)
s. 44(5)(b) -- 'capital employed' definition (issued share capital + debentures + LT borrowings)	1961 s. 35D(3) Explanation (b)
s. 44(5)(c) -- 'long-term borrowings' definition	1961 s. 35D(3) Explanation (c)
s. 44(6) -- Audit requirement for non-corporate, non-co-op entities	1961 s. 35D(4)
s. 44(7) -- Amalgamation continuity	1961 s. 35D(5)
s. 44(8) -- Demerger continuity	1961 s. 35D(5A)
s. 44(9) -- Anti-double-deduction	1961 s. 35D(6)

STATUTORY ARCHITECTURE

Section 44 operates in two trigger-modes -- PRE-COMMENCEMENT (clause 1(a)) and EXTENSION OF UNDERTAKING / NEW UNIT (clause 1(b)). ELIGIBLE ASSESSEE: Indian company OR resident person other than company. Foreign companies / non-resident proprietorship -- NOT eligible. Co-operative societies -- NOT in opening words BUT see audit-requirement carve-out under sub-s. (6) which excludes co-op societies (suggesting they ARE eligible without audit certificate). MECHANISM: 1/5 of expenditure deducted in EACH of FIVE consecutive tax years starting with: (i) tax year of business commencement [for clause (a)]; OR (ii) tax year of extension completion / new unit commercial operation [for clause (b)]. QUANTIFICATION CAP (sub-s. 4): aggregate expenditure deductible cannot exceed 5% of: (a) cost of project; OR (b) capital employed in business of company [Indian companies only -- option]. Practitioner trip: while expenditure may exceed 5% cap, only 5% is deductible -- the balance is lost (no carry-forward to later years). Plan project capitalisation accordingly.

SUB-SECTION (2) -- COVERED EXPENDITURE TYPES

Four enumerated categories: (a) PROJECT-DEVELOPMENT expenses: feasibility report; project report; market survey or other necessary survey; engineering services for the business. These cover pre-investment due diligence and engineering-design phase. (b) LEGAL CHARGES for drafting AGREEMENTS between assessee and any other person related to setting up or conducting the business -- e.g., shareholders agreement, supply contracts, lease deed, JV agreement, technology licence drafting. (c) COMPANY-SPECIFIC (in addition to a, b): (i) drafting and printing MEMORANDUM and ARTICLES OF ASSOCIATION; (ii) ROC fees for company registration under Companies Act 2013; (iii) IPO / public-issue expenditure: underwriting commission, brokerage, drafting / typing / printing / advertisement of prospectus. (d) other prescribed items (Rule-prescribed; not eligible for any other deduction provision). Common practitioner mistakes: (a) treating these as 'goodwill' or 'capital reserve' (Schedule III treatment) and forgetting tax claim; (b) classifying engineering-design fees of plant as preliminary expense vs cost-of-asset (latter benefits from depreciation only).

SUB-SECTION (4) -- THE 5% CAP

5% cap applies to AGGREGATE of expenditure under sub-s. (2). Two bases (option-based for INDIAN COMPANY; non-co. assessees use only project-cost basis): (a) COST OF PROJECT = actual cost of fixed assets (land / buildings / leaseholds / plant / machinery / furniture / fittings / railway sidings + land-and-building development), as per books on last day of: (i) commencement-year [clause 1(a)]; OR (ii) extension-completion / new-unit-operation year [clause 1(b)] -- only for assets attributable to extension / new unit. (b) CAPITAL EMPLOYED [INDIAN CO. ONLY] = aggregate of issued share capital + debentures + long-term borrowings, as on same dates. Long-term borrowings (sub-s. 5(c)): (i) borrowings from Govt / IFCI / financial institution under s. 32(e) / banking institution; (ii) FOREIGN borrowings for purchase of capital plant outside India with tenure >= 7 years. Practitioner: Indian companies typically have higher capital-employed than project-cost (gearing ratio); choose capital-employed basis for higher cap. Non-corporate proprietors / partnerships limited to project-cost basis. Worked example: Indian co. project cost INR 50 crore; capital employed INR 100 crore; preliminary expenses INR 8 crore. Project-cost cap: 5% × 50 = INR 2.5 crore. Capital-employed cap: 5% × 100 = INR 5 crore. Choose capital-employed -- claim INR 5 crore over 5 years (INR 1 crore per year). Excess INR 3 crore lost.

SUB-SECTION (6) -- AUDIT REQUIREMENT

For NON-CORPORATE, NON-CO-OP-SOCIETY assessees (i.e., individual / firm / LLP), deduction is admissible only if: (a) accounts of years in which expenditure incurred have been AUDITED by an accountant before specified date in s. 63 (tax audit threshold provisions); (b) audit report furnished for FIRST YEAR of deduction claim. Effectively requires CA-certified audit even if assessee is below tax-audit threshold. Practitioner: extra compliance burden for proprietorships / firms; ensure audit BEFORE return-filing for first claim year.

SUB-SECTIONS (7) AND (8) -- AMALGAMATION / DEMERGER CONTINUITY

Where eligible Indian company's undertaking is transferred BEFORE EXPIRY of 5 years to another Indian company in: (a) Amalgamation -- amalgamating co. gets NO deduction in year of amalgamation; amalgamated co. continues amortisation from where amalgamating co. left off. (b) Demerger -- demerged co. gets NO deduction in year of demerger; resulting co. continues. Effect: c/f of unfinished amortisation seamlessly through tax-neutral M&A. Coordinated with s. 70(1)(e) and (j) tax-neutrality. The 5-year amortisation clock continues unbroken across the corporate event.

SUB-SECTION (9) -- ANTI-DOUBLE-DEDUCTION

Once a deduction is claimed under s. 44 for any expenditure, NO deduction allowed for the SAME expenditure under any other provision of this Act in same or any other tax year. Prevents double-dipping (e.g., claiming legal-fees both under s. 44 amortisation AND s. 28 / s. 34 deduction). Practitioner: maintain expense-by-expense ledger marking s. 44 claim; cross-check against s. 28/32/34/45 to prevent overlap.

CASE LAW -- LEADING DECISIONS

(i) CIT v. Bombay Steam Navigation Co (P) Ltd (SC, 1965) -- preliminary expenses pre-1976; foundational on enduring-benefit character. (ii) Brooke Bond India Ltd v. CIT (SC, 1997, 225 ITR 798) -- pre-FA 1995, IPO expenses fell outside s. 35D; legislatively addressed by clause (c)(iii). (iii) Punjab State Industrial Development Corporation v. CIT (SC, 1997, 225 ITR 792) -- shares-issue expenses analysed; clause (c)(iii) origin. (iv) ITAT precedents: Asea Brown Boveri (Bom HC) -- engineering services scope; Reliance Industries -- project cost vs capital employed cap optimisation. (v) Cadbury India Ltd v. ACIT (Bom HC) -- amalgamation continuity under sub-s. (7). (vi) Goodlas Nerolac Paints v. CIT -- legal charges scope; agreement-related vs general legal expense distinction. (vii) Nimbus Communications Ltd v. ACIT (ITAT Mumbai) -- 5% cap calculation methodology.

PLANNING NOTES (SEVEN AREAS)

(i) PRE-INCORPORATION TRACKING -- maintain ledger from concept stage; classify expenses into sub-s. (2) categories vs other capital / revenue. Misclassification often loses the s. 44 deduction. (ii) PROJECT-COST VS CAPITAL-EMPLOYED CAP -- model both at end of commencement year; choose higher base for Indian companies; document the option-exercise via board resolution. (iii) IPO COSTS (clause c(iii)) -- pair with SEBI / merchant banker invoices; underwriting commission is the largest line-item; ensure not also claimed under s. 35DD (amalgamation expenses). (iv) NON-CORPORATE AUDIT (sub-s. 6) -- engage CA early; audit report covers expenditure-year accounts even if below tax-audit threshold under general s. 63. (v) M&A CONTINUITY -- pre-amalgamation pending amortisation flows to amalgamated co.; ensure schedule update in transferee's tax computation. (vi) ANTI-DOUBLE-DEDUCTION -- annual reconciliation of s. 44 claim with all other deduction provisions; ITAT precedents flag overlap routinely. (vii) FOREIGN BORROWINGS (sub-s. 5(c)(ii)) -- only 7+ year tenure capital-plant borrowings count; review ECB documentation for tenure validation.

CROSS-REFERENCES

Section 26 -- PGBP charge.
Section 32(e) -- PFI / banking institution definition (referenced in sub-s. 5(c)(i)).
Section 33 -- Depreciation (no overlap with s. 44 capitalised cost-of-fixed-assets).
Section 35 -- Disallowance regime.
Section 45 -- Scientific research expenditure (similar 5-year amortisation architecture).
Section 63 -- Specified tax-audit due date (referenced in sub-s. 6(a)).
Section 70(1)(e) -- Amalgamation tax-neutrality (paired with sub-s. 7).
Section 70(1)(j) -- Demerger tax-neutrality (paired with sub-s. 8).
Companies Act 2013 -- ROC fees / MoA / AoA framework (sub-s. 2(c)).
SEBI Regulations -- IPO disclosure framework (sub-s. 2(c)(iii) IPO costs).
Form 3CD clauses -- preliminary expenses disclosure.
Form 3CEA / equivalent -- s. 44 audit certificate.

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