Amount Deduction

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Deepak Tapse (Querist)
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13 May 2009 Dear Sir

Suppose we have purchased 5 Machinery @ 2 Lakhs each from 5 suppliers. Out of 5 one supplier never comes to collect his money.
In this regards, amount will be credited to which a/c. Written off or reduce from Machiney

If reduce from Machinery, the actual cost of Machiney is 10 Lakh, we shows 8 Lakh after reducing of Rs. 2 Lakhs.

Pl advise.

Ca Anand Dubey

Ca Anand Dubey (Expert)
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13 May 2009 reduce from machinery

Vipul J. Bhavsar

Vipul J. Bhavsar (Expert)
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13 May 2009 I dont agree with Mr.Anand.
Creditor not turning up doesnt mean that the liability for the machinery purchased has ceased. One must not write it off immediately. Its prudent to keep the liability under the head Creditors for a sufficient period.
Even after waiting for a sufficient period if the creditor doesnt turn up then you may write it off.
However you cannot deduct the amount from the WDV of the asset as asset is being used and will also be used in the future.

I request all the respected Experts to share their views on the question asked by Mr.Deepak.

jegannath G

jegannath G (Expert)
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13 May 2009 You cannot credit it to your machinery account.

The creditors who have not turned up for collecting money can be treated as misc. income during the year in which is written back after having kept it as a liability for least minimum period of 4 - 5 years

after having waited for 4-5 years, you may treat that as unpaid creditors and treat it as misc. income

Vipul J. Bhavsar

Vipul J. Bhavsar (Expert)
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13 May 2009 I request to keep this query open unless a consensus appears

Vipul J. Bhavsar

Vipul J. Bhavsar (Expert)
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13 May 2009 I request to keep this query open unless a consensus appears

chetan soni

chetan soni (Expert)
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13 May 2009 Even i also agree with opinion given by Vipul. You should give sufficient time to creditor to trun on for liability. Still is they don't come then it should treated as misc. income.

If the machine is also returned then you should credit this to machinery block.

Zeeshan

Zeeshan (Expert)
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13 May 2009 Vipul,Chetan and jagannath are right in this regard. the amount cannot be reduced from the machinery. As per the limitation act after 3 years the liability will be time barred therefore after 3 years you can write off the amount and the same will be treated as other/misc. income.
and the machine account will remain untouch.

CA.Tarun Maheshwari

CA.Tarun Maheshwari (Expert)
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13 May 2009 I agree with the views of Mr.Jegannath and Mr Soni. Vipul is correct that this amount can not be written off from the cost of macheinery.

taxindiaconnect

taxindiaconnect (Expert)
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13 May 2009 It is important to note that the following conditions are necessary to attract section 41(1) of the Act:
(a) an allowance or deduction has been made in respect of trading liability incurred by the assessee, and
(b) some benefit in respect of such trading liability by way of remission or cessation thereof has been obtained.
The amount received through cancellation of a contract of sale of capital assets do not constitute trading liability in the hands of the recipient as the same have not been incurred on account of a trading transaction but constitute a receipt on capital account. Further, no allowance or deduction has been claimed earlier by the recipient in respect of such liability while computing its taxable income for any of the years. The benefit accruing to the recipient as a result of termination of sale contract cannot be said to be on account of a trading liability for which an allowance or deduction had been made.
As discussed, amount so received can be brought to tax under the provisions of section 41(1) of the Act, only if a deduction has been allowed in respect of the liability in any previous year. Thus the amount received on account of termination of the sale contract sould be only a capital receipt not liable to tax.

Thus this amount will not be reduced from the cost of the machinery.

Zeeshan

Zeeshan (Expert)
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05 October 2009 But mr. Dua
the assessee has claimed depreciation over the whole amount. whether it can be considered as allowance or deduction claimed in previous years?

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