Sundry Debtors representing forex...Urgent Sir!!!

This query is : Open

Rajesh (Querist)
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19 August 2010 Dear Experts,
For Ex. Sale date on 1st Feb. 1000 $ at 40 per $.
Credit period 3 months.
On balancesheet date 31st March per $ =Rs.42
On 30th April when 1000 $ are received one $ = Rs.40.5
We have to credit Rs.2 per dollar totally Rs.2000 to foreign exchange difference a/c then the foreign exchange difference a/c will be transferred to P&L a/c.

Now my doubt is even though i have transferred to p&l a/c Rs.2000 my actual profit on the forex is Rs.500 only. What to do this notional profit of Rs.1500, why i have to pay tax for this Rs.5000?
Another doubt is again on 1st April should i have to reverse the profit of Rs.2000?
Please explain me...
With regards,
Rajesh.

CA SMR

CA SMR (Expert)
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24 August 2010 Refer to AS 22,this will come as deferred tax assets due to timing difference.The relevant excerpt from AS 11 is given below.

Tax Effects of Exchange Differences
35. Gains and losses on foreign currency transactions andexchange differences arising on the translation of the financial statementsof foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes onIncome.

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CA SMR

CA SMR (Expert)
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24 August 2010 No ,you need not reverse the profit of
Rs 2000 on 1st April.

If 40 % is the rate of income tax, then 0.40*2000=Rs 80/- is the Deferred tax liability for accounting purpose,which will get reversed in the next FY against actual tax on RS 500/- forex gain of RS 20/-.
Kept it open for further deliberation.

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Rashmi

Rashmi (Expert)
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29 August 2010 Hi Sukanya,

Does that mean that you will not recognise the exchange diffrence as per tax records??

Why should the assessing officer allow you that?

The income as per P&L a/c is supposed to be the income for tax adjustments.. This kind of tax adjustment can be allowed by the AO? if yes under which section?

and If this adjustment can not be carried out there is no question of deferred tax impact.. because there is no timing difference in that case...

According to me, the tax has to be paid extra and never mind if te tax rates remain same next year also the tax impact will get nullified in any case..

Lets discuss it out..

Rashmi

CA SMR

CA SMR (Expert)
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29 August 2010 Hi RAshmi,

I don't have much exposure in income tax, especially with respect to this matter.But I''ll try to find out an answer to this. Please share with us,in case you come across any relevant case law.