Treatment of expenditure incurred for formationof 100% subs

[NITIN DESAI]

We haveestablised new 100% subsidiary company inUAE.for thispurposewe haveincurredexpensesin India and use Pl guide for accountingtreatment

[Rama Krishana]

It is onus on the assessee to prove that the expenditure incurred is for the purpose of its business. It is case of facts and circumstances. You may encounter two type of situations, 1 whether the expenditure are capital or revenue in nature 2. whether incurred for business purpose.

If you any input or details, please share on this platform to further elaborate and discuss

[NITIN DESAI]

Sir,

we acknowledge with thanks for receipt of your guidance, however as explain I would like to mention as under.

For establishing new 100% subsidiary in UAE, we have incurred expenses in India viz. Legalisation charges of various documents in rupee, legalisation charges in UAE, Licence fee, professional fees, visa fee in AED and also required share capital to be transferred in AED. Request to guide the treatment of all such expenses as to whether it should be treated as revenue expenses in our books of accounts or what should be treatment of all such expenses. if any case law or judgment are available in this regard please provide.

[NITIN DESAI]

SIR,

Further to our discussion, we have shared the information with a request to provide clarity for this issue.

As per Accounting Standard 26 "INTANGIBLE ASSETS " preliminary expenses incurred in establishment of legal entity such as legal and secretarial expenses has to be treated as revenue expense.

AI Summary

Formation expenses classification: costs to establish a foreign subsidiary may be capital or revenue; accounting standard treats preliminaries as revenue.
Classification of costs to establish a wholly owned foreign subsidiary depends on factual determination of capital vs revenue classification and whether expenditures were for the taxpayer's business; the taxpayer carries the onus of proof. Identified expenditures include legalisation, licence, professional and visa fees and share capital transfers. Accounting guidance on intangible assets treats preliminary legal and secretarial establishment costs as revenue expenses, which informs accounting treatment though each case requires facts-based assessment.