Accounting treatment for companies act vs income tax act
This query is : Resolved
12 July 2012
Hi,
If any company get liquidated damages income from supplier due to non supply of material on time schedule.
We as a company policy treated as income and shown in the books as same.
While calcuating Income tax we treated the same as capital receipt and dedcut from the cost of assets and calculate depreciation accordingly.
My query is that as per our auditor company as per I tax should do the same treatment in companies books i.e. reduced the same from Gross block and calculate dep accordingly.
So I just wanted to knwo wheter co give different treatment in Company act and IT Act.
As there is not relation between the same
If any company get liquidated damages income from supplier due to non supply of material on time schedule.
We as a company policy treated as income and shown in the books as same.
While calcuating Income tax we treated the same as capital receipt and dedcut from the cost of assets and calculate depreciation accordingly.
My query is that as per our auditor company as per I tax should do the same treatment in companies books i.e. reduced the same from Gross block and calculate dep accordingly.
So I just wanted to knwo wheter co give different treatment in Company act and IT Act.
As there is not relation between the same
12 July 2012
As per the accounting standard the cost of the assets can not be reduced by the amount of liquidated damages irrespective of the treatment given in the IT.
Further, I think, In IT also section 43(1) does not reduces such amount from actual cost
Further, I think, In IT also section 43(1) does not reduces such amount from actual cost
12 July 2012
According to Income tax it is in the nature of capital receipt and does not have any tax effect.
12 December 2012
1. What is the nature of liquidated damages received by a company from the supplier of plant for failure to supply machinery to the company within the stipulated time – a capital receipt or a revenue receipt?
CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
The assessee, a cement manufacturing company, entered into an agreement with a supplier for purchase of additional cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery within the stipulated time, the assessee would be compensated at 5% of the price of the respective portion of the machinery without proof of actual loss. The assessee received Rs.8.50 lakhs from the supplier by way of liquidated damages on account of his failure to supply the machinery within the stipulated time. The Department assessed the amount of liquidated damages to income-tax. However, the Appellate Tribunal held that the amount was a capital receipt and the High Court concurred with this view.
The Apex Court affirmed the decision of the High Court holding that the damages were directly and intimately linked with the procurement of a capital asset i.e., the cement plant, which lead to delay in coming into existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore, the amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of business, is a capital receipt in the hands of the assessee.
CIT v. Saurashtra Cement Ltd. (2010) 325 ITR 422 (SC)
The assessee, a cement manufacturing company, entered into an agreement with a supplier for purchase of additional cement plant. One of the conditions in the agreement was that if the supplier failed to supply the machinery within the stipulated time, the assessee would be compensated at 5% of the price of the respective portion of the machinery without proof of actual loss. The assessee received Rs.8.50 lakhs from the supplier by way of liquidated damages on account of his failure to supply the machinery within the stipulated time. The Department assessed the amount of liquidated damages to income-tax. However, the Appellate Tribunal held that the amount was a capital receipt and the High Court concurred with this view.
The Apex Court affirmed the decision of the High Court holding that the damages were directly and intimately linked with the procurement of a capital asset i.e., the cement plant, which lead to delay in coming into existence of the profit-making apparatus. It was not a receipt in the course of profit earning process. Therefore, the amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of business, is a capital receipt in the hands of the assessee.
12 December 2012
Company can give different treatment in Company Act and Income Tax Act.
example - interest income is shown as income in profit & loss account but in income tax act it is not treated as business income but income from other source.
example - interest income is shown as income in profit & loss account but in income tax act it is not treated as business income but income from other source.
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