Allowability of Prior period Exp.

This query is : Resolved

vijay g. nalawade (Querist)
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21 August 2009 The Taxable profit for FY 2008-09 of the Company is Rs. 2 Crores.

The Company is having disputed debtor M/s XYZ amounting to Rs. 9 Crores which are accounted in Books of accounts. These consists of Rs. 5 Cr. as principal amount of debtors and Rs. 4 Cr. as interest charges thereon upto 2001-02.
However, case is pending before arbitrator for total claim of Rs. 15 Cr. i.e. Rs. 5 Cr as principal and Rs. 10 Cr interest uptodate i.e. Rs 4 Crs. accounted in books and Rs. 6 cr unaccounted.

Now, the company desires to write off interest of Rs. 1.50 Cr from above mentioned amount, on the ground there is no possibility of recovery of the same and to show taxable profit of FY 2008-09 as Rs. 0.50 Cr. [Rs. 2 Cr – Rs. 1.5 Cr.]

The query is:-

1. Now the question is whether the write off of prior period interest amount Rs. 1.50 Cr is allowable under Income Tax for the year 2008-09.

2. If the partly write off of prior period interest amount Rs. 1.50 Cr is not allowable, whether whole of interest ie. Rs. 4 Cr. is allowable under Income Tax for the year 2008-09 as change in policy of company i.e. not accounting the interest on disputed Debtors and account for the same only when it is actually realized.

Please comment in reference to Tax Audit Report and allowability of prior period interest income written off.

Jitender

Jitender (Expert)
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21 August 2009 first of all, this is not prior period item as per AS-5 or AS -2 of I. Tax Act.

Therefore, no question arises to recognize it as prior period item.

It will be allowable under income tax act and only its particulars are required to be disclsed in tax Audit Report.