18 July 2011
If Sales of Rs. 100 is not considered while doing tax audit of F.Y.2009-10. But later at the time of vat audit,there was a vat liablity of Rs. 12.5 on the above sales of Rs. 100.This liability was paid in F.Y.2010-11. No provision of such vat was done in F.Y.2009-10. So in F.Y.2010-11 whether such expenses is an allowable expenses. If no then what is the effect of such payment.
14 July 2024
In the scenario described, where there was a sales amount of Rs. 100 not considered during the tax audit of FY 2009-10, and later a VAT liability of Rs. 12.5 was identified on that sales amount during the VAT audit, the treatment of this expense in FY 2010-11 would typically be as follows:
### Treatment in FY 2010-11:
1. **Nature of Expense**: - The VAT liability of Rs. 12.5 is an expense related to the previous year (FY 2009-10) because it pertains to sales made during that year.
2. **Allowability as Deduction**: - As per income tax principles in India, expenses are allowed as deductions in the year in which they are incurred, provided they are related to business activities and meet other tax deductibility criteria. - Since the VAT liability of Rs. 12.5 pertains to sales made in FY 2009-10 and the payment was made in FY 2010-11, the deduction for this expense should ideally be claimed in FY 2009-10 when the liability accrued, and it should have been accounted for as a provision in that year's financial statements.
3. **Tax Audit Implications**: - If the VAT liability was not considered during the tax audit of FY 2009-10, there could be an adjustment required in the tax computation for that year to include this liability. - However, if the expense was not claimed or provisioned in FY 2009-10, the deduction cannot be claimed retroactively in FY 2010-11 because it is considered an expense of the previous year.
4. **Effect of Payment in FY 2010-11**: - The payment of Rs. 12.5 towards VAT in FY 2010-11 is a cash outflow related to the VAT liability identified in FY 2009-10. - While you cannot claim this payment as an expense in FY 2010-11 for income tax purposes (since it relates to a previous year), it should still be recorded as an outflow in your financial statements for FY 2010-11.
### Conclusion:
- **Allowability**: The VAT liability of Rs. 12.5 should ideally have been accounted for and provisioned in FY 2009-10 when the sales occurred. If it was missed during the tax audit of that year, it might require an adjustment. - **Effect**: The payment made in FY 2010-11 is a financial outflow but cannot be claimed as an allowable expense in that year for income tax purposes since it relates to FY 2009-10.
It’s recommended to review the specific details with a tax advisor or chartered accountant who can provide tailored advice based on the exact circumstances of your case and ensure compliance with both VAT and income tax regulations.
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