Section 44 Amortisation of certain preliminary expenses.

Income-tax Act, 2025

At a Glance

These two texts set out Clause/Section 44 as proposed in the Income Tax Bill, 2025 (old version) and as enacted in the Income-tax Act, 2025 (Section 44). The provision governs amortisation of specified pre-commencement or pre-extension expenses for resident Indian assessees, in particular companies, by permitting five equal annual deductions. The primary stakeholders are Indian companies and other resident persons incurring preliminary/project-related expenses; the government's revenue administration is the other affected party. Effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hooks: clause/section titled "Amortisation of certain preliminary expenses" appearing in the Income Tax Bill, 2025 (old version) and the Income-tax Act, 2025 (final). The provision sits in the head "Profits and gains of business or profession." Scope: resident Indian assessees (Indian companies and persons other than companies) who incur certain specified expenditures either (a) before commencement of business or (b) after commencement in connection with extension of undertaking or setting up a new unit. The text contains definitions and formulas governing the timing of the five equal annual amortisation allowances and caps expressed as a percentage of project cost or capital employed. Definitions included in the text: "cost of the project," "capital employed in the business of the company," and "long-term borrowings" (with variations between the two documents). Other definitional and procedural directions (e.g., prescribed forms, audit reports) are referenced in general terms.

Statutory Provision Mode

Text & Scope

Coverage: Resident Indian assessees who are Indian companies or persons other than companies. The provision permits amortisation-one-fifth of specified preliminary/project expenditures-to be claimed in each of five successive tax years beginning with the year of commencement (for pre-commencement expenses) or the year in which the extension/new unit becomes operational (for post-commencement related extensions/new units).

Specified expenditures (sub-section (2) in both texts) include: (a) expenditures on preparation of feasibility and project reports, market surveys and engineering services; (b) legal charges for drafting agreements relating to setting up or conduct of business; (c) where the assessee is a company, legal charges for drafting and printing of Memorandum & Articles, registration fees under Companies Act, 2013, and expenditure relating to public issue (underwriting commission, brokerage, drafting/printing/advertisement costs for prospectus); and (d) other prescribed items not eligible for allowance/deduction under any other provision of the Act.

Interpretation

Legislative intent (as indicated by the text): to permit spreading over five years of bona fide preliminary/project development costs that are incurred to establish, extend or set up business units, while preventing double tax relief under other provisions. The inclusion of an express cap tied to project cost or capital employed indicates a policy balance between allowing relief for start-up activity and protecting the revenue base by capping the quantum of such relief.

Exceptions/Provisos

Carve-outs and conditions in the text: deduction is permitted only for resident assessees; paragraph (d) requires that other items be "not being expenditure eligible for any allowance or deduction under any other provision of this Act." There is an explicit restriction that once a deduction under this section is claimed and allowed, that same expenditure cannot be claimed under any other provision of the Act for the same or any other tax year (sub-section (9)). For non-company persons (other than co-operative societies), audited accounts and filing of audit report as prescribed are preconditions (sub-section (6)). Amalgamation and demerger treatment: the amalgamating/demerging company is denied the deduction for the year of the scheme, and the provisions continue to apply to the amalgamated/resulting company "as if" the transfer had not occurred (sub-sections (7) and (8)).

Illustrations

• Example 1: A resident Indian company incurs preliminary expenditure of INR 10 lakh (eligible as per sub-section (2)) before commencing business. It may claim INR 2 lakh (one-fifth) in each of the five successive tax years starting with the tax year in which business commences, subject to the 5% cap expressed in sub-section (4) of the Act. (The specific numerical interaction with project cost/capital employed must be checked against the books.)

• Example 2: A resident person (not a company) incurs market survey and project report costs; to claim the amortisation they must have audited accounts for the year(s) of expenditure and must furnish the auditor's report in the prescribed form for the first year of claim. Not stated in the document: specific form number or due dates for filing the audit report. (Therefore: "Not stated in the document.")

Interplay

The text expressly prevents double relief under other provisions (sub-section (9)). It cross-refers to section 32(e) when defining eligible financial institutions (for long-term borrowings). References to prescribed forms, particulars and manner indicate delegated rules/notifications will fill in procedural specifics. Not stated in the document: specific rules/regulations and forms; interaction with other specific sections beyond section 32(e) (e.g., accounting standards, transfer pricing, or GST) is not addressed in the text.

Differences between Section 44 of the Income-tax Act, 2025 and Clause 44 of the Income Tax Bill, 2025 (old version) 

Comparison source labels: Document 1 = Section 44 (Income-tax Act, 2025). Document 2 = Clause 44 (Income Tax Bill, 2025 - Old Version).

• Drafting of subsection (4) / monetary cap formulation. Document 1 (Act) states: "The allowable deduction under sub-section (1) in respect of aggregate of expenditure referred to in sub-section (2) shall be restricted to 5%- (a) of the cost of the project; or (b) of the capital employed ... at its option." Document 2 (Bill) states: "The total expenditure referred to in sub-section (2) shall be restricted to 5%- (a) ... (b) ... at its option."
  • Practical impact: The Act's phrasing focuses the restriction on the allowable deduction (i.e., the deductible amount under sub-section (1)), whereas the Bill's phrasing purports to limit the total expenditure that may be considered. That difference can affect interpretation: under the Act text, the statutory cap is clearly a limit on deduction rather than on the quantum of expenditure that may be incurred; this reduces ambiguity and aligns the cap to tax relief rather than business accounting. The Bill text could have been read to prevent recognition of expenditure beyond 5% for any purpose under the section. The Act's change therefore clarifies tax treatment and likely narrows a potential restrictive reading.
• Definition wording for "cost of the project." Document 1 defines "cost of the project" as "the actual cost of the fixed assets ... 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 ...; (ii) for cases under sub-section (1)(b), the actual cost as shown in the books ... in so far as such fixed assets have been acquired or developed ..." Document 2 uses more general phrasing: "the cost is calculated as of the last day ..." and adds "which only includes fixed assets acquired or developed in connection ..."
  • Practical impact: The Act's explicit reference to "actual cost as shown in the books" imposes an objective anchor (book values) that may reduce disputes as to valuation methodology; the Bill's wording is marginally less specific. The change to a books-based metric in the Act strengthens administrative certainty and evidentiary expectations (books as the reference point).
• "Long-term borrowings" - named institutions vs. generic description. Document 2 names IFCI Ltd. and ICICI Ltd. expressly ("IFCI Ltd., or ICICI Ltd., or any other financial institution which is eligible for deduction u/s 32(e)") and refers to "loan or debt" terminology. Document 1 uses a generic description: "Government or Industrial Finance Corporation of India Limited or any other financial institution which is eligible for deduction u/s 32(e) or any banking institution (not being a financial institution referred to above)."
  • Practical impact: The Bill's naming of ICICI Ltd. (and explicit naming of IFCI) would have tied the definition to particular historic institutions, potentially creating interpretive anomalies (what about successor entities, renamed entities, or other similar institutions). The Act's more generic drafting is administratively preferable: it covers the class of eligible financial institutions without reliance on enumerated entities, reducing obsolescence and limiting legal challenges based on specific corporate names.
• Subsection cross-references and prescription language. Document 1 tends to use "as may be prescribed" while Document 2 uses "as prescribed" in several places.
  • Practical impact: This is a drafting nuance; "as may be prescribed" emphasises delegated legislative power to prescribe rules, forms and particulars. The practical effect is minor but reflects conventional statutory drafting; no substantive change in taxpayer obligations is apparent from this wording alone.
• Minor wording/tense differences in amalgamation/demerger clauses. Document 1 uses "as if the amalgamation had not taken place." Document 2 uses "has not taken place."
  • Practical impact: Purely grammatical; no material legal consequence unless read in context of temporal effect. The Act's past-perfect phrasing is slightly clearer as to hypothetical treatment.

Practical Implications

• Compliance and risk areas: taxpayers must ensure eligible expenditure is not simultaneously claimed under other sections; for non-company taxpayers, timely audit and prescribed filing of the auditor's report is a strict precondition. The Act's books-based definition of project cost means that accounting treatment (capitalisation in books) will materially affect allowable limits-tax planning must align accounting and tax positions.

• Record-keeping/evidence: maintain detailed ledgers and supporting invoices for feasibility studies, project reports, legal invoices, engineering services, and prospectus-related costs; maintain board resolutions/agreements evidencing connection of expenditure to the setting up or extension; keep auditor's report and books as evidence of "actual cost as shown in the books."

Key Takeaways

• The Act preserves five-year amortisation for specified preliminary expenses for resident assessees, as in the Bill.
• The Act clarifies the 5% cap as a restriction on the allowable deduction rather than on the total expenditure considered, reducing potential ambiguity.
• The Act's definition of "cost of the project" ties the cap to "actual cost as shown in the books," increasing reliance on accounting records.
• The Act adopts generic wording for "long-term borrowings" and financial institutions (versus specific naming in the Bill), avoiding obsolescence and narrowing interpretive disputes.
• Non-company taxpayers must comply with audit and prescribed filing requirements to claim the deduction; amalgamation/demerger rules maintain continuity but deny claim in year of the scheme.

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Full Text:

Section 44 Amortisation of certain preliminary expenses.

Amortisation of preliminary expenses allows spreading eligible start-up costs over successive years subject to statutory cap and compliance conditions. The provision permits amortisation of specified preliminary and project-related expenditures by resident Indian assessees through equal annual deductions over five successive tax years beginning with the year the undertaking becomes operational or the year of commencement. Eligible items include feasibility and project reports, market surveys, engineering services, specified legal and registration costs, prospectus and public issue expenses for companies, and other prescribed items not deductible under any other provision. A statutory cap restricts the allowable deduction to a percentage of project cost or capital employed, with project cost tied to actual cost as shown in the books, and procedural conditions require prescribed filings and audited accounts for certain taxpayers.