When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses. Key Points to Note: Capital Nature of the Expense:Costs incurred in raising capitRead more
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses.
Key Points to Note:
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Capital Nature of the Expense:
Costs incurred in raising capital (by issuing shares or debentures) are treated as capital expenditure. They are part of the process of financing the company and are not directly linked to generating regular business income. -
Non-Deductibility Under the Income Tax Act:
Since these expenses are capital in nature, they are not allowed as a deduction when computing taxable income. In other words, you cannot reduce your current year’s taxable profits by the amount spent on issuing shares or debentures. -
Treatment as Capital Expenditure:
Instead of a direct deduction, such expenses may be capitalized. Depending on the applicable accounting and tax provisions, they might be written off over a period through amortization or depreciation if the law permits, but they are not deducted immediately as a revenue expense.
Relevant Provisions:
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Section 37 of the Income Tax Act, 1961:
This section generally allows deductions for revenue expenses incurred wholly and exclusively for business purposes. However, since the issuance expenses are of a capital nature, they do not qualify under this provision.
Conclusion:
In summary, the expenditure incurred on issuing shares or debentures is treated as a capital expense and is not allowed as a deduction in the current year under the Income Tax Act. It does not directly reduce your taxable income.
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When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act. What You Need to Know Relevant Provision:The deduction is provided under Section 35DD of the Income Tax Act, 1961. Eligibility: Only IRead more
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.
What You Need to Know
Relevant Provision:
The deduction is provided under Section 35DD of the Income Tax Act, 1961.
Eligibility:
Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.
The expenses must be directly related to the restructuring process.
How the Deduction Works:
The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.
This means you can claim 20% of the total expenditure each year as a deduction.
Step-by-Step Illustration
Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.
Annual Deduction:
Claim 20% of ₹50 lakhs = ₹10 lakhs per year.
Deduction Period:
You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).
Important Considerations
Documentation:
It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.
Exclusivity:
No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.
Key Takeaway
By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.
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