Preliminary Expenses explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Four sections in clause 19 spread a cost over years rather than allowing it at once: 35D for preliminary expenses, 35DD for amalgamation and demerger costs, 35DDA for voluntary retirement payments — all over five years — and 35E for mineral prospecting, over ten.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961; the table reproduced is the law prevailing on 1 April 2025, applicable from A.Y. 2025-26. For tax years under the Income-tax Act, 2025 the corresponding provisions must be identified afresh.
Section 35D — preliminary expenses
| Position | |
|---|---|
| Who | An Indian company, and a person other than a company who is resident in India |
| What | Any expenditure incurred (a) before the commencement of his business, or (b) after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit |
| Quantum | One-fifth of such expenditure for each of five successive previous years, beginning with the previous year in which 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 |
Section 35D's five-year run starts at whichever of three events applies: commencement of business, completion of the extension, or commencement of production or operation of the new unit. For a company incurring preliminary expenses on several projects, more than one five-year series can be running at once, each with its own start year. A single blended "one-fifth of everything" figure at clause 19 will not survive scrutiny.
Section 35DD — amalgamation and demerger expenditure
| Position | |
|---|---|
| Who | An Indian company |
| What | Any expenditure incurred wholly and exclusively for the purposes of amalgamation or demerger of an undertaking |
| Quantum | One-fifth for each of five successive previous years beginning with the previous year in which the amalgamation or demerger takes place |
The start year is fixed by the event, not by payment — and the event is the amalgamation or demerger taking place, which in a court-approved scheme can be several years before the order date. Paragraph 18.9 makes the same point in another context: courts and authorities approve a scheme from a date specified in the application or petition, and there is often a lapse of years between that date and the order.
Section 35DDA — voluntary retirement payments
| Position | |
|---|---|
| Who | An assessee incurring expenditure by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement |
| Quantum | One-fifth of the amount so paid is deducted in computing the profits and gains for that previous year, and the balance in equal instalments for each of the four immediately succeeding previous years |
This is the section most likely to produce a large gap between the two columns of clause 19. A voluntary retirement scheme is usually fully expensed in the accounts in the year of payment; only one-fifth is admissible. The difference belongs in the "amount admissible" column and, over the next four years, produces admissible amounts with nothing debited.
Section 35E — mineral prospecting
| Position | |
|---|---|
| Who | An Indian company or a person other than a company who is resident in India, engaged in any operations relating to prospecting for, or extraction or production of, any mineral |
| What | Any eligible expenditure incurred for those operations — the Guidance Note directs the reader to the section itself for the detail |
| Quantum | One-tenth of the eligible expenditure |
The four compared
| Section | Spread | Start year | Eligible assessee |
|---|---|---|---|
| 35D | 1/5 × 5 years | Commencement, completion of extension, or start of the new unit | Indian company; resident non-company person |
| 35DD | 1/5 × 5 years | Year the amalgamation or demerger takes place | Indian company only |
| 35DDA | 1/5 in the year of payment + 4 equal instalments | Year of payment | Any assessee |
| 35E | 1/10 | Per the section | Indian company; resident non-company person |
Where preliminary expenses also appear in the report
Paragraph 33.6 connects clause 19 to clause 21(a): preliminary expenses incurred by the assessee which are capital expenditure and are debited to the profit and loss account should be reported under clause 21(a) — and the amount reported in the e-filing portal is the total capital expenditure to the extent written off and debited to the profit and loss account.
So the same amount can legitimately touch two clauses: it is capital expenditure debited for clause 21(a), and it is the amount debited against the one-fifth admissible for clause 19. Under paragraph 19.3(a) the auditor should ensure the information is furnished at one clause with a cross-reference at the other, rather than presented as two separate items.
Worked example
An Indian company in its third year since incorporation:
| Item | Section | Debited to P&L | Admissible |
|---|---|---|---|
| Preliminary expenses of Rs 50,00,000 incurred before commencement; business commenced two years ago | 35D | Rs 10,00,000 written off | Rs 10,00,000 — third of five instalments |
| New unit set-up costs of Rs 30,00,000; the unit commenced production this year | 35D | Nil | Rs 6,00,000 — first of a fresh five-year series |
| Merger advisory and court costs of Rs 25,00,000; scheme effective from a date in this previous year | 35DD | Rs 25,00,000 | Rs 5,00,000 |
| Voluntary retirement payments of Rs 2,00,00,000 | 35DDA | Rs 2,00,00,000 | Rs 40,00,000 |
Total debited Rs 2,35,00,000; total admissible Rs 61,00,000. The gap of Rs 1,74,00,000 is the whole point of clause 19, and it recurs as admissible-with-nothing-debited amounts in later years.
Audit checklist
- Identify the start year for each amortisation series separately; section 35D can have several running.
- Confirm the assessee is an Indian company for section 35DD.
- Test that voluntary retirement payments are under a scheme of voluntary retirement.
- Carry forward the instalment schedules year to year; a fresh-start approach loses later instalments.
- Report the admissible instalment even where nothing was debited.
- Cross-refer preliminary expenses written off between clause 19 and clause 21(a).
- Check clause 8a, and reference any separate audit report in Form No. 3CA.
Common mistakes
- Allowing the whole voluntary retirement payment in the year of payment.
- Blending several section 35D series into one one-fifth figure.
- Starting the section 35DD series from the order date rather than the year the scheme takes place.
- Dropping instalments in later years because nothing is debited.
- Reporting preliminary expenses twice across clauses 19 and 21(a) with no cross-reference.