Capital WIP Written off

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Sateesh (Querist)
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08 July 2011 In the Balance Sheet of company there was a capital WIP(Software Developement - Life span 4 Years)Rs. 2cr. In this f.Y we need to write off in next four years. so as per Companies act we followed a Policy to write off and transfer to P & la/c.

1. Is procedure Followed as per Companies act correct ?

2. under which head We can claim as Expense?
3. what is the procedure as per IT act ?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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08 July 2011 Once you have capitalised then you have to write it off by way of depreciation.

The other way round is to treat this as a deferred revenue expenditure and in 4 years transfer to P & L a/c by dividing by 4. In B/s it will appear under Miscellaneous Expenditure as Deferred Revenue items and in P & L a/c deferred revenue expenses written off

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Sateesh

Sateesh (Querist)
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08 July 2011 1.What about the income tax - how we claim it as an Expense

2. under what Section ?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 The scenario you've described involves writing off Work in Progress (WIP) related to software development in your company's Balance Sheet. Let's address your questions one by one:

### 1. Procedure Followed as per Companies Act

According to the Companies Act, the write-off of WIP is generally governed by accounting standards and principles rather than specific statutory provisions. Here are the general principles that apply:

- **Prudence Principle**: Ensuring that assets are not overstated and expenses are recognized as they are incurred.
- **Consistency Principle**: Using consistent accounting policies from year to year.
- **Materiality Principle**: Ensuring that only significant items are accounted for.

Since you mentioned the policy to write off the WIP over the next four years, this is typically acceptable if it aligns with prudent accounting practices and is disclosed properly in the financial statements.

### 2. Expense Recognition in Financial Statements

Under Indian Accounting Standards (Ind AS) or Generally Accepted Accounting Principles (GAAP):

- **Expense Head**: The amount written off from WIP will be recognized as an expense in the Profit and Loss Account (P&L Account).
- **Treatment**: It should be categorized appropriately under operating expenses or as part of the cost of goods sold, depending on the nature of the software development activity.

### 3. Income Tax Treatment

Now, addressing the income tax implications under the Income Tax Act:

1. **Claiming as Expense**: The amount written off from WIP can be claimed as an expense under Section 37 of the Income Tax Act, 1961.

2. **Section 37**: This section allows for deduction of any expenditure (not being capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession.

### Procedure under Income Tax Act:

- **Claiming Deduction**: The amount written off can be claimed as a deduction in the computation of taxable income under the head 'Profits and Gains of Business or Profession'.
- **Documentation**: Proper documentation should support the write-off, including evidence of the decision-making process (board resolution if applicable), calculation of the amount to be written off, and its treatment in the financial statements.

### Summary:

1. **Procedure Followed as per Companies Act**: As long as the write-off policy is in line with accounting principles and is properly disclosed, it should be compliant.

2. **Expense Head**: The written-off amount should be recognized in the P&L Account under operating expenses or cost of goods sold.

3. **Income Tax Treatment**: Deductible under Section 37 as an expense incurred wholly and exclusively for the business or profession.

To ensure compliance and accuracy in your specific case, it's advisable to consult with a qualified accountant or tax advisor who can review your company's financial statements and provide guidance tailored to your situation and relevant regulations.