Expenses
This query is : Resolved
28 November 2013
There had been a dispute between Company A and Company B in 2011-12. Company A issued a debit note to Company B for Rs 10 Cr and booked the same as its income in that year. Later on in the next year i.e. in 2012-13, the dispute was mutually solved for Rs 4 Cr. Company A wants to book expenses of Rs 6 Cr in its books in FY 2013-14. How can it be done and what are the documents required for this to claim it in Income Tax?
29 November 2013
Dear Swasti,
At the time of booking income of Rs 10 cr, the company A shall also have booked some debtors in its books for receivable of Rs 10 cr. Now A has received Rs 4 cr. So you can write off the remaining 6 cr and claim it is as tax deduction.
At the time of booking income of Rs 10 cr, the company A shall also have booked some debtors in its books for receivable of Rs 10 cr. Now A has received Rs 4 cr. So you can write off the remaining 6 cr and claim it is as tax deduction.
29 November 2013
Thanks Nikhil ji. What documents would be required for supporting? Secondly since the dispute has been resolved in 2012-13, can the same booked in 2013-14 ? Can't it be termed as Prior Period Expenses?
29 November 2013
Dear Swasti,
Did the Company A receive Rs 4 cr in 2012-13? was any document executed between the two parties back then for one time settlement?
Did the Company A receive Rs 4 cr in 2012-13? was any document executed between the two parties back then for one time settlement?
02 December 2013
Yes, the settlement had been made in FY 2012-13 and an agreement between the two parties were made in writing for this one time settlement.
24 July 2024
In the scenario you described, where Company A issued a debit note to Company B in FY 2011-12 for Rs 10 Cr and recognized it as income, and later the dispute was settled for Rs 4 Cr in FY 2012-13, leaving a balance of Rs 6 Cr to be settled in FY 2013-14, here’s how the accounting and tax treatment can be approached:
### Accounting Treatment:
1. **Recognition of Expenses (Rs 6 Cr) in FY 2013-14**:
- Since the settlement agreement was reached in FY 2012-13, and there was a mutual understanding to settle the dispute for Rs 4 Cr, the remaining Rs 6 Cr can be booked as an expense in FY 2013-14.
- This expense should be recorded in the Profit and Loss Account of FY 2013-14 to reflect the actual cost incurred by Company A to settle the dispute.
2. **Documentation Required**:
- **Settlement Agreement**: A copy of the written agreement between Company A and Company B detailing the settlement amount of Rs 4 Cr in FY 2012-13.
- **Debit Note**: The original debit note issued by Company A to Company B for Rs 10 Cr in FY 2011-12.
- **Supporting Documents**: Any other correspondence or documentation that supports the settlement and the recognition of the remaining Rs 6 Cr as an expense in FY 2013-14.
### Tax Treatment:
- **Income Tax Implications**: In terms of income tax, expenses are deductible if they are incurred wholly and exclusively for the purposes of the business. Since the settlement agreement was reached and documented in FY 2012-13, and the remaining liability was confirmed and booked in FY 2013-14, it can be claimed as an expense in FY 2013-14.
- **Prior Period Expenses**: Prior period expenses generally refer to expenses relating to a prior financial year that are not discovered or settled until a subsequent period. Since the settlement agreement was made in FY 2012-13 and the liability was recognized and booked in FY 2013-14, it should be treated as a current period expense (FY 2013-14) rather than a prior period expense.
### Conclusion:
To summarize:
- **Booking the Expense**: Record Rs 6 Cr as an expense in the Profit and Loss Account of FY 2013-14.
- **Documentation**: Ensure you have the settlement agreement, original debit note, and any supporting documents ready to substantiate the expense claim in case of tax assessment.
- **Tax Compliance**: Consult with a tax advisor or accountant to ensure compliance with income tax laws and regulations regarding the deduction of expenses.
By following these steps and ensuring proper documentation, Company A can correctly reflect the settlement expense in its financial statements and claim it as a deduction for income tax purposes in FY 2013-14.
### Accounting Treatment:
1. **Recognition of Expenses (Rs 6 Cr) in FY 2013-14**:
- Since the settlement agreement was reached in FY 2012-13, and there was a mutual understanding to settle the dispute for Rs 4 Cr, the remaining Rs 6 Cr can be booked as an expense in FY 2013-14.
- This expense should be recorded in the Profit and Loss Account of FY 2013-14 to reflect the actual cost incurred by Company A to settle the dispute.
2. **Documentation Required**:
- **Settlement Agreement**: A copy of the written agreement between Company A and Company B detailing the settlement amount of Rs 4 Cr in FY 2012-13.
- **Debit Note**: The original debit note issued by Company A to Company B for Rs 10 Cr in FY 2011-12.
- **Supporting Documents**: Any other correspondence or documentation that supports the settlement and the recognition of the remaining Rs 6 Cr as an expense in FY 2013-14.
### Tax Treatment:
- **Income Tax Implications**: In terms of income tax, expenses are deductible if they are incurred wholly and exclusively for the purposes of the business. Since the settlement agreement was reached and documented in FY 2012-13, and the remaining liability was confirmed and booked in FY 2013-14, it can be claimed as an expense in FY 2013-14.
- **Prior Period Expenses**: Prior period expenses generally refer to expenses relating to a prior financial year that are not discovered or settled until a subsequent period. Since the settlement agreement was made in FY 2012-13 and the liability was recognized and booked in FY 2013-14, it should be treated as a current period expense (FY 2013-14) rather than a prior period expense.
### Conclusion:
To summarize:
- **Booking the Expense**: Record Rs 6 Cr as an expense in the Profit and Loss Account of FY 2013-14.
- **Documentation**: Ensure you have the settlement agreement, original debit note, and any supporting documents ready to substantiate the expense claim in case of tax assessment.
- **Tax Compliance**: Consult with a tax advisor or accountant to ensure compliance with income tax laws and regulations regarding the deduction of expenses.
By following these steps and ensuring proper documentation, Company A can correctly reflect the settlement expense in its financial statements and claim it as a deduction for income tax purposes in FY 2013-14.
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