In the course of setting up, expanding, or restructuring a business, companies and other eligible entities often incur substantial preliminary and professional expenses. These expenses, though capital in nature, are crucial for facilitating the long-term operations and growth of a business.

Section 35D:
This section is designed to provide relief for preliminary expenses incurred by an assessee before the commencement of business or in connection with expansion of an existing business or setting up of a new unit. These expenses are capital in nature and, therefore, not normally deductible under regular provisions (like Section 37). Section 35D allows such expenses to be amortised and claimed over 5 years.

Section 35DD:
This section aims to support corporate restructuring by allowing Indian companies to claim deductions for expenses incurred wholly and exclusively for amalgamation or demerger. These restructuring costs are often substantial and capital in nature. Section 35DD ensures that such costs don’t become a financial burden in a single year by permitting amortisation over 5 years.

🔹  Eligible Assessee

Section 35D:
Applicable to:

• Indian Companies
• Resident Individuals
• Resident Hindu Undivided Families (HUFs)
• Resident Firms
• Other Resident Non-Corporate Assessees

👉Not available to:

• Non-residents
• Foreign companies

Section 35DD:
Applicable only to Indian companies (including amalgamating and amalgamated companies). No other assessee — whether individual, firm, HUF, or foreign entity — is eligible to claim deduction under this section.

🔹 Nature of Expenditure Covered

Section 35D:
Covers preliminary capital expenses which are incurred:

• Before commencement of business, or
• In connection with the extension of an undertaking or setting up of a new unit.

Examples include:

• Preparation of project and feasibility reports
• Market surveys or demand forecasts
• Engineering services
• Legal charges for drafting Memorandum of Association (MoA) and Articles of Association (AoA)
• Registration fees for company incorporation
• Advertising and public issue expenses

Section 35DD:
Covers expenses directly linked to legal amalgamation or demerger:

• Legal and professional fees for drafting scheme
• Filing applications with regulatory bodies (NCLT, ROC, SEBI)
• Court expenses
• Stamp duty and registration charges
• Documentation charges and consultancy fees related to restructuring

🔹 Timing of Expense

Section 35D:
Expenses should be incurred:

• Before starting the business, or
• After commencement, but strictly for expansion or setting up a new industrial unit.

Section 35DD:
Expenses should be incurred in the year in which amalgamation or demerger actually takes place. Only those expenses directly related to the merger/demerger process are allowed.

🔹 Maximum Limit of Deduction Allowed

Section 35D:
There is a cap on the total amount that can be claimed:

• Maximum: 5% of the cost of the project or 5% of the capital employed, whichever is higher

Definitions:

• Cost of the project = actual cost of fixed assets as on the last day of the previous year.
• Capital employed = paid-up capital + long-term borrowings (in case of company)

Section 35DD:
There is no monetary cap.
The entire amount incurred for amalgamation/demerger (if valid and directly linked) is allowed in full, but amortised over five years.

🔹 Mode of Deduction

Both Sections provide amortisation over a period of 5 years.

• Equal deduction of 1/5th (20%) of the total eligible amount is allowed every year for 5 consecutive years starting from:
  • Year of commencement or expansion (for 35D)
  • Year in which amalgamation/demerger occurs (for 35DD)

🔹 Certification & Documentation

Section 35D:

• Often requires Chartered Accountant’s certification, especially if expenses are related to reports or surveys.
• Documents such as invoices, agreements, and evidence of services rendered are mandatory.

Section 35DD:

• While there is no specific rule requiring CA certification, the company must be able to prove the nexus of each expense with the amalgamation/demerger.
• Supporting documents like merger scheme, tribunal approval orders, legal invoices, and receipts are essential.

🔹 Legal Requirements for Eligibility

Section 35D:

• Expenditure must be in connection with a lawful business activity, whether in the form of new setup or expansion.
• Should comply with Rule 6AB of Income Tax Rules which lists specific allowed expenses.

Section 35DD:

• The amalgamation/demerger must be as per legal provisions, especially the Companies Act, 2013.
• Scheme must be approved by National Company Law Tribunal (NCLT) and registered with ROC.

🔹Availability to Foreign Companies

Neither 35D nor 35DD allows deduction to foreign companies.

• Only resident entities (35D) and Indian companies (35DD) are eligible.

🔹Disallowance on Non-Compliance

Section 35D:

• If business is not commenced, the deduction is disallowed.
• If expansion project fails or never starts, no claim is allowed.

Section 35DD:

• If amalgamation/demerger is not completed, or is abandoned, deduction is not allowed.
• Expenses for general restructuring without formal merger are not admissible.

🔹 Non-Claim under Other Sections

Both sections specifically bar claiming same expenses under any other section, including:

• Section 37(1) (general business expenditure)
• Section 32 (depreciation)
• Section 30-36 (other revenue deductions)

Once claimed under 35D or 35DD, no duplication is permitted.

🔹Example for Illustration

Section 35D Example:
A company incurs ₹10 lakhs in preliminary expenses before starting a manufacturing unit. As per project cost, 5% comes out to ₹7 lakhs (eligible).
So, ₹1.4 lakh per year for 5 years can be claimed under Section 35D.

Section 35DD Example:
A company incurs ₹15 lakhs in legal and professional expenses during merger with another Indian company.
Entire ₹15 lakhs is eligible, to be claimed as ₹3 lakhs/year for 5 years.