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Prior Period Expenses (Income Tax)

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This query is : Resolved


( Author )
09 October 2007

As Per Income Tax Act, What is Prior Period Expenses, and its Impect of Computation of Taxable Income ?



Ravikumar.G

( Expert )
09 October 2007

Preliminary expenses which can be w/off over period of 5 years and same is an allowable expenditure as per the IT act u/s 35D.

Pre-Operative expenses (i.e after incorporation and till commencement of production as per IT act which is a capital expenditure and the same cannot be treated as a revenue expenses.


Jai Prakash Shrivastava

( Author )
10 October 2007

Thanks for reply but I would like to know expenses of earlier year, is deductible or not as per IT Act.


Ravikumar.G

( Expert )
10 October 2007

You are asking about preliminary expenses or pre-operative expenses.


Jai Prakash Shrivastava

( Author )
10 October 2007

I am not asking about Preliminary/Pre-operative, let me know about expenses of 2002-03 is deductible in 2007-08 or not. and what is section of IT Act.


Ravikumar.G

( Expert )
10 October 2007

Expenses are incidental to the business which can be allowed as an expenditure and the same should be disclosed in the financial statements separately as "Prior period items" as per AS 5.


Suresh Agrawal

( Expert )
10 October 2007

Expenses pertaining to previous financial year paid during current year are not deductible from the current income under Income Tax Act unless provision has been made for these expenses in the books of accounts of that year.


Ravikumar.G

( Expert )
10 October 2007

Suresh Sir, Can you please provide me some examples.


Gul

( Expert )
10 October 2007

Also Suresh, if you can support your comment with section or any judgement


Suresh Agrawal

( Expert )
10 October 2007

Suppose some expenses like Rent Expenses, Audit fees and Telephone expenses relating to the year 2006-07 are not provided in the books. These expenses are subsequently paid in the current year 2007-08. Therefore they will not be deductible during the assessment of the accounting year 2006-07.

This is as per the practice followed by the assessing authorities.


jatin kapoor

( Expert )
10 October 2007

Preliminary expenses which can be w/off over period of 5 years and same is an allowable expenditure as per the IT act u/s 35D.

Pre-Operative expenses (i.e after incorporation and till commencement of production as per IT act which is a capital expenditure and the same cannot be treated as a revenue expenses


Mallidi Ramabrahmananda Reddy

( Expert )
10 October 2007

Assessment of income of one year is independent from other year. For assessment of income, profit arrived as per the books of account of the concerned year is taken as basis. The profit of a particular year is dependent upon the method of accounting followed. Any expendiute incurred as per the method of accounting followed in any year charged to the profit and loss account of future years is called prior period item for the year in which such expenditure is charged to the P & L a/c. Such expenditure is admissable only in the year in which it is incurred as per the method of accounting employed i.e. accrual or cash method.


Suresh Agrawal

( Expert )
11 October 2007

In the example given by me the cited expenses will not be deductible in the assessment of the accounting year 2007-08 also being not pertaiing to that year.

The reason is simple logic and generic principle of accrual accounting.
In the year 2006-07 it will be disallowed as not provided in the books though it pertains to the same year. And in 2007-08 it will be disallowed because it does not pertain to that year though paid in that year.


Ravikumar.G

( Expert )
11 October 2007

Thanks for your inforamtion Suresh Sir,

Further,
According to Income tax Act the expenses to which the accrual rule does not apply:
Accrual concept does not hold good under the head profits and Gains of Business or Profession in the following circumstances. i.e The following expesnes are allowable only on payment basis irrespective of the time of accrual -
1. Sec 43B
2. Sec 35ABB
3. Sec 35D
4. Sec 35DD
5. Sec 35DDA


KAAPIL

( Expert )
14 November 2007

Very useful.


CA BHARATH KUMAR

( Expert )
04 August 2012

i agree all experts


CA BHARATH KUMAR

( Expert )
04 August 2012

i agree all experts


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