27 April 2024
Deferred government grant income book in this year which is not received in this year. grant received in earlier year. but i want to know whether this government grant which is arising from earlier year can be considered for calculating profit under section 198.
11 July 2024
Under section 198 of the Income Tax Act, 1961 in India, the computation of business income requires adherence to the principles of accounting followed consistently by the taxpayer. When it comes to government grants, including deferred government grant income, the treatment for tax purposes depends on the nature of the grant and the accounting method adopted.
Here’s how government grants typically affect the calculation of profit under section 198:
1. **Recognition in Profit and Loss Account**: Government grants are generally recognized in the profit and loss account of the period to which they relate. If a government grant is deferred (i.e., not recognized immediately), it should be recognized over the period necessary to match it with the related costs which it is intended to compensate.
2. **Tax Treatment**: For tax purposes, the principles of accrual accounting apply. This means that income, including deferred income like government grants, should be included in the computation of profit for the year in which it is accrued or due, irrespective of whether it has been received.
3. **Conditions for Recognition**: The grant income should meet the conditions for recognition under section 198. This typically involves ensuring that the grant pertains to the current year’s operations or is linked to specific expenditures or activities.
4. **Impact on Taxable Income**: The deferred government grant income, which arises from an earlier year but is recognized in the current year’s financial statements, should be included in the taxable income for the current year. This is because it represents an accrual of income that is due to the taxpayer.
5. **Consistency and Disclosure**: It’s important to maintain consistency in the treatment of government grants and to disclose any deferred income or adjustments in the financial statements and tax returns.
Therefore, to directly answer your question: Yes, the government grant income arising from an earlier year but recognized (accrued) in the current year should be considered for calculating profit under section 198. This ensures compliance with accrual accounting principles and the tax laws governing income recognition in India. However, specific details of the grant, its purpose, and any conditions attached should be reviewed to confirm its proper treatment under both accounting and tax regulations.
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