Inadmissible expenditure
This query is : Resolved
21 August 2014
Hi sir
I have doubt regarding tax audit... My question is when preparing Tax audit whether we have to disallow int paid for late payment of tds and service tax? And what about penalty paid to vat department?
My another question VAT department has raised the demand... But we did not pay all the tax? In this case whether we have to take all tax as a expenses or only payment portion?
Thank you
With regards
Arun
I have doubt regarding tax audit... My question is when preparing Tax audit whether we have to disallow int paid for late payment of tds and service tax? And what about penalty paid to vat department?
My another question VAT department has raised the demand... But we did not pay all the tax? In this case whether we have to take all tax as a expenses or only payment portion?
Thank you
With regards
Arun
21 August 2014
any amount paid for breaking the law is inadmissible expenses.
so all expenses are disallowed.
so all expenses are disallowed.
Message likes :
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21 August 2014
Hi sir
In which accounting standard we can find the thorough information? And one more doubt is unpaid amount for demand raised by tax department is inadmissible?
please reply fast... its very urgent
Thank you
In which accounting standard we can find the thorough information? And one more doubt is unpaid amount for demand raised by tax department is inadmissible?
please reply fast... its very urgent
Thank you
29 July 2024
### **Disallowance of Expenditure in Tax Audit**
**1. Interest Paid for Late Payment of TDS and Service Tax**
- **Interest on Late Payment of TDS:**
- **Tax Audit Treatment:** Interest paid for late payment of TDS is generally considered inadmissible as it is a penalty for non-compliance with tax obligations.
- **Tax Deductibility:** As per Section 37 of the Income Tax Act, interest on late payment of TDS is not deductible as it is considered an offence-related expense.
- **Interest on Late Payment of Service Tax:**
- **Tax Audit Treatment:** Similar to TDS, interest on late payment of service tax is inadmissible and should be disallowed in the tax audit.
- **Tax Deductibility:** Section 37 does not allow deduction for interest on late payment of service tax.
**2. Penalty Paid to VAT Department**
- **Penalty for VAT Non-Compliance:**
- **Tax Audit Treatment:** Penalties imposed by VAT authorities for non-compliance, such as late filing or late payment, are generally inadmissible as they are considered penal in nature.
- **Tax Deductibility:** Section 37 of the Income Tax Act excludes penalties from deductible expenses.
**3. VAT Demand Raised but Not Paid**
- **Accounting Treatment:**
- **Tax Audit Treatment:** If the VAT demand has been raised by the VAT department but not fully paid, you should account for the demand amount in the financial statements.
- **Expense Recognition:** The VAT demand should be treated as an expense in the year in which it was raised, regardless of whether it has been paid or not. The expense should be recorded in full as per the demand notice, while the actual payment will be reflected in the cash flow.
- **Payment Portion:** If only part of the demand is paid, the expense recognized should still reflect the full demand. Any unpaid portion should be shown as a liability.
**4. Accounting Standards**
- **Relevant Accounting Standards:**
- **Accounting Standard 29 (AS 29):** This standard deals with provisions, contingent liabilities, and contingent assets. It provides guidance on recognizing and measuring provisions and liabilities, including tax-related matters.
- **International Financial Reporting Standards (IFRS):** For companies following IFRS, IAS 37 deals with provisions, contingent liabilities, and contingent assets, similar to AS 29.
**5. Unpaid Amount for Tax Department Demand**
- **Inadmissibility:**
- **Tax Audit:** An unpaid amount related to a tax demand should be accounted for as a liability and not as an expense if it has not been settled. The amount should be disclosed as a contingent liability until paid.
- **Expense Recognition:** While the demand is recorded as an expense, it should be recognized as a liability until the payment is made. This ensures accurate representation of financial obligations.
### **Summary of Key Points:**
- **Interest on late payment of TDS and Service Tax:** Inadmissible.
- **Penalty paid to VAT department:** Inadmissible.
- **VAT Demand:** Recognize the full amount as an expense, and any unpaid portion should be shown as a liability.
- **Accounting Standard for Reference:** AS 29 (Indian GAAP) or IAS 37 (IFRS).
- **Unpaid Amount:** Recognize as a liability and expense in the period the demand arises.
For further clarification or detailed guidance, consulting with a tax professional or auditor is recommended.
**1. Interest Paid for Late Payment of TDS and Service Tax**
- **Interest on Late Payment of TDS:**
- **Tax Audit Treatment:** Interest paid for late payment of TDS is generally considered inadmissible as it is a penalty for non-compliance with tax obligations.
- **Tax Deductibility:** As per Section 37 of the Income Tax Act, interest on late payment of TDS is not deductible as it is considered an offence-related expense.
- **Interest on Late Payment of Service Tax:**
- **Tax Audit Treatment:** Similar to TDS, interest on late payment of service tax is inadmissible and should be disallowed in the tax audit.
- **Tax Deductibility:** Section 37 does not allow deduction for interest on late payment of service tax.
**2. Penalty Paid to VAT Department**
- **Penalty for VAT Non-Compliance:**
- **Tax Audit Treatment:** Penalties imposed by VAT authorities for non-compliance, such as late filing or late payment, are generally inadmissible as they are considered penal in nature.
- **Tax Deductibility:** Section 37 of the Income Tax Act excludes penalties from deductible expenses.
**3. VAT Demand Raised but Not Paid**
- **Accounting Treatment:**
- **Tax Audit Treatment:** If the VAT demand has been raised by the VAT department but not fully paid, you should account for the demand amount in the financial statements.
- **Expense Recognition:** The VAT demand should be treated as an expense in the year in which it was raised, regardless of whether it has been paid or not. The expense should be recorded in full as per the demand notice, while the actual payment will be reflected in the cash flow.
- **Payment Portion:** If only part of the demand is paid, the expense recognized should still reflect the full demand. Any unpaid portion should be shown as a liability.
**4. Accounting Standards**
- **Relevant Accounting Standards:**
- **Accounting Standard 29 (AS 29):** This standard deals with provisions, contingent liabilities, and contingent assets. It provides guidance on recognizing and measuring provisions and liabilities, including tax-related matters.
- **International Financial Reporting Standards (IFRS):** For companies following IFRS, IAS 37 deals with provisions, contingent liabilities, and contingent assets, similar to AS 29.
**5. Unpaid Amount for Tax Department Demand**
- **Inadmissibility:**
- **Tax Audit:** An unpaid amount related to a tax demand should be accounted for as a liability and not as an expense if it has not been settled. The amount should be disclosed as a contingent liability until paid.
- **Expense Recognition:** While the demand is recorded as an expense, it should be recognized as a liability until the payment is made. This ensures accurate representation of financial obligations.
### **Summary of Key Points:**
- **Interest on late payment of TDS and Service Tax:** Inadmissible.
- **Penalty paid to VAT department:** Inadmissible.
- **VAT Demand:** Recognize the full amount as an expense, and any unpaid portion should be shown as a liability.
- **Accounting Standard for Reference:** AS 29 (Indian GAAP) or IAS 37 (IFRS).
- **Unpaid Amount:** Recognize as a liability and expense in the period the demand arises.
For further clarification or detailed guidance, consulting with a tax professional or auditor is recommended.
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