Section 44 — Amortisation of certain preliminary expenses. Successor to s.35D of the 1961 Act.
Section 44 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) allows an Indian company, or a person other than a company who is resident in India, a deduction of one-fifth of qualifying expenditure for each of five successive tax years. The expenditure must be incurred either before the commencement of the business, under clause (a), or after commencement in connection with the extension of the undertaking or the setting up of a new unit, under clause (b). The five years start with the tax year in which the business commences for a clause (a) case, and with the tax year in which the extension is completed or the new unit commences production or operation for a clause (b) case.
Sub-section (2) fixes what qualifies: clause (a) covers feasibility report, project report, market survey or any other survey necessary for the business, and engineering services relating to the business; clause (b) covers legal charges for drafting any agreement between the assessee and another person relating to the setting up or conduct of the business; clause (c) adds, for a company only, legal charges for drafting and printing the Memorandum and Articles of Association, fees for registering the company under the Companies Act, 2013, and public issue expenditure being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; clause (d) leaves room for other prescribed items, excluding expenditure eligible for any allowance or deduction under any other provision. Sub-section (3) requires a statement of particulars of sub-section (2)(a) expenditure in the prescribed form and manner.
Sub-section (4) caps the aggregate at 5%, computed either on the cost of the project, or, where the assessee is an Indian company, at its option, on the capital employed in the business of the company. Sub-section (5) defines both bases. Cost of the project is the actual cost of fixed assets — land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings, including expenditure on development of land and buildings — as shown in the books on the last day of the tax year in which the business commences, or, for an extension or new unit, on the last day of the year of completion or commencement, so far as those assets were acquired or developed for that extension or new unit. Capital employed is the aggregate of issued share capital, debentures and long-term borrowings on the same closing day, similarly confined to what was issued or obtained for the extension or new unit. Long-term borrowings means moneys borrowed from Government, the Industrial Finance Corporation of India Limited, any other financial institution eligible for deduction under section 32(e) or any banking institution, or moneys borrowed or debt incurred in a foreign country for purchase outside India of capital plant and machinery where the tenure is not less than seven years.
Sub-section (6) makes audit a condition for a person other than a company or a co-operative society: the accounts for the year or years in which the expenditure is incurred must have been audited by an accountant before the specified date referred to in section 63, and the audit report must be furnished for the first year in which the deduction is claimed, by the prescribed date, in the prescribed form, duly signed and verified. Sub-sections (7) and (8) deal with transfer of an entitled undertaking of an Indian company before the five years expire — in a scheme of amalgamation to another Indian company, and in a scheme of demerger to another company. In both, the transferor gets no deduction for the year of the amalgamation or demerger, and the section continues to apply to the amalgamated or resulting company as it would have applied to the transferor had the reorganisation not taken place. Sub-section (9) bars a second deduction for the same expenditure under any other provision, for the same or any other tax year.
Expenditure on getting a business off the ground is incurred before there is any business income to set it against, and it is capital in character, so without a special provision it would fall between the ordinary revenue deduction and the depreciation regime. The section answers that by spreading it evenly over five years, and then fences the concession: an exhaustive list of qualifying items, a 5% ceiling tied to the size of the project or the capital raised for it, an audit condition for non-corporate claimants, and a bar on claiming the same amount twice.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Annual instalment of the deduction | One-fifth of the qualifying expenditure | For each of five successive tax years | Sub-section (1) |
| Number of years over which the expenditure is spread | Five successive tax years | Beginning with the year the business commences, or the year the extension is completed or the new unit commences production or operation | Sub-section (1)(i) and (ii) |
| Ceiling on aggregate qualifying expenditure | 5% | Of the cost of the project; or, where the assessee is an Indian company, at its option, of the capital employed in the business of the company | Sub-section (4) |
| Minimum tenure for a foreign borrowing to count as a long-term borrowing | Not less than seven years | Moneys borrowed or debt incurred in a foreign country in respect of the purchase outside India of capital plant and machinery | Sub-section (5)(c)(ii) |
| Period within which a transfer triggers sub-sections (7) and (8) | Before the expiry of the five years specified in sub-section (1) | Transfer of an entitled undertaking of an Indian company in a scheme of amalgamation or of demerger | Sub-sections (7) and (8) |
| Audit deadline for a non-company, non-co-operative assessee | Before the specified date referred to in section 63 | For the year or years in which the sub-section (2) expenditure is incurred; the report is furnished for the first year of claim | Sub-section (6)(a) |
The 5% ceiling is applied to the aggregate expenditure before the one-fifth split, so the excess over 5% is lost outright and never enters the five-year run. The choice between cost of the project and capital employed under sub-section (4) belongs to an Indian company alone, and both bases are measured at a fixed date — the last day of the tax year of commencement, or of completion of the extension or start of the new unit — so borrowings raised or assets acquired after that day do not enlarge the base. Sub-section (6) is a condition of admissibility for a non-corporate, non-co-operative assessee, not a filing formality: no audit before the section 63 specified date and no report for the first year of claim means no deduction at all. On a reorganisation, the entitlement does not die but the transferor's share of the year is forfeited — sub-sections (7)(a) and (8)(a) deny the amalgamating or demerged company any deduction for the year of the reorganisation, while the transferee carries on the remaining instalments as if nothing had happened.
An Indian company spends Rs 60 lakh on a feasibility study, project report, drafting of its Memorandum and Articles and prospectus expenses before commencing business, and its cost of the project on the last day of the year of commencement is Rs 8 crore. Sub-section (4) caps the qualifying aggregate at 5% of Rs 8 crore, that is Rs 40 lakh, so Rs 20 lakh is lost. The company deducts one-fifth of Rs 40 lakh, Rs 8 lakh, in each of the five tax years beginning with the year of commencement. If in year three its undertaking is transferred in a scheme of amalgamation to another Indian company, the amalgamating company gets nothing for that year and the amalgamated company takes the remaining instalments.
In the computation attached to a return in the first five years of a new business, extension or new unit, and in the prescribed statement of particulars of sub-section (2)(a) expenditure required by sub-section (3). A non-corporate claimant meets it again through the audit report under sub-section (6), which must be furnished for the first year of claim.
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
The allowable deduction under sub-section (1) in respect of aggregate of expenditure referred to in sub-section (2) shall be restricted to 5%
no deduction under sub-section (1) shall be allowed to the amalgamating company for the tax year in which amalgamation takes place
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See every circular and notification on this section, or the circulars index.
See every circular and notification on this section, or the notifications index.