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Income received in advance

15 March 2018

Please clarify income tax liability on commission/brokerage received in advance. Commission received is partly for current FY and partly meant for the next financial year. Can we postpone tax liability on commission received in advance till next year ? If so how to treat this in our books of accounts. Please also help me providing relevant sections in Tax Laws.

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8 Replies

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (177949 Points)
Replied 15 March 2018

" we postpone tax liability on commission received in advance till next year?"

Check TDS deducted and take call.....

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A B Kundu (Professional) (1422 Points)
Replied 15 March 2018

I think if you book the whole receipt as revenue, you have to offer such amount for tax. Rather, you deduct the advance amount from the total receipt and show the advance amount as your liability in the books of a/c.

For E.g. - Commission income earned during the year for Rs.11,000 out of which Rs.1,000 pertains to next FY. In this case you need to pass the following entry:

1) Bank A/c Dr. 11,000

To, Commission Income A/c 10,000

To, Commission Received in Advance A/c 1,000

Here, Rs.1,000 will be shown under Liability side of the Balance Sheet and net Rs.10,000 has been offered for tax purpose.

Next year, you have debit the Commission Received in Advance A/c and credit the Commission Income A/c to book the revenue.

But, if the TDS has been deducted on the whole amount in the year of receipt, you have to book the whole amount as your revenue.

JERRY JOHN (62 Points)
Replied 15 March 2018

Your reply sounds very useful. Since there is no TDS on commission received, I will put off tax liability on advance portion till next year.

Thanks again...

CA Vijeta Nathani (Chartered Accountant) (505 Points)
Replied 15 March 2018

Even if TDS has been deducted on whole amount. You can offer the current year commission as Income and remaining as advance.
Please note that you have to mention and claim TDS in your Current year income only to the extent that relates to current year income.

In the next year, when you offer remaining advance commission amount as Income, You have to mention and Claim TDS amount deducted in previous year for advance made to you.

JERRY JOHN (62 Points)
Replied 15 March 2018

Thanks Vijeta.

Request one more clarification from this forum.

Is it necessary to consider the advance amount while determining Gross Receipt/Turnover for tax audit purpose?

Example:

Commission pertains to current FY: 82 lakh

Advance commission received for next year: 22 lakh

As you know, tax audit is mandatory if the gross receipt is above Rs.1 crore

In the above example, since the income for the current FY is only below the thresh hold limit for tax audit, is it necessary necessary to go for tax audit in the current FY.

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A B Kundu (Professional) (1422 Points)
Replied 15 March 2018

There is no proper definition of the word "Turnover" in the Act, but In the books of accounts, as you are treating the advance commission as the liability, that means you are not including such advance amount in the turnover. Hence, it can be inferred that such advance is not to be reckoned as part of the turnover for the purpose of Sec.44AB.

A B Kundu (Professional) (1422 Points)
Replied 15 March 2018

Also you can refer this article.

https://www.indiantaxupdates.com/inclusions-exclusions-from-sales-turnover-gross-receipts-for-tax-audit-us-44ab/

CA Vijeta Nathani (Chartered Accountant) (505 Points)
Replied 15 March 2018

If current year income consists of only this 82,00,000 ... And turnover doesn't exceed 1 crore. There is no need to go for Tax Audit provided your net profit is 8% or more..

Receipt of cash or cash equivalent exceeding 1 crore ..which includes advance, doesn't amount to Turnover as mentioned for 44AB.