Treatment of expenses in cwip

This query is : Resolved

R.C.Jain and Associates (Querist)
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12 July 2013 Query:
Suppose the assessee “XYZ Company” has incurred expenses towards its Head Office. The assesse has paid the certain Sum of Money to the supplier i.e. Mr. A for work done by him. However the Company has paid advance to Mr. A for the work, But due to dispute between the parties work has not completed and Mr. A has not given bills as supporting for the amount of work done by him. The above advance given to the parties are shown under CWIP. Now how the said expenses will be disposed off?
There are 2 possibilities for the same either charge to P& L or to Capitalized the same by transferring to fixed assets.
• Whether company can transfer the same to fixed assets? If company transfers to FA, we can claim depreciation. But we do not have any bills of the same to produce before department in case of Scrutiny.
• Whether company can transfer to Profit & Loss account? If company transfers to P/L, then there is a huge amount of expense which will be charged to P/L account again the same problem will arise in case of Scrutiny since the assessee doesn’t have supporting bills for the said Expenditure .

Regards,
Pooja Gogri

CA Lokesh Pokharna

CA Lokesh Pokharna (Expert)
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13 July 2013 Its very unfair to show said expenses in p &l a/c. two reasons are there first is that expenses incurred with the intention of creating fixed assets which will not be held for disposal in foreseeable future... and second is that its a huge amount which wont be allow even in income tax act for the purpose of claiming deduction as a business expenses.. so better to show cwip till no more development..and claim for depreciation...

now co. may have proof of advance given .. trf this advance to cwip a/c and for remaining work for which bills not provided by him -create provision by passing journal entry by debiting cwip & crediting Mr.A(service provider) as per prudence...