SALES TAX DEMAND - INCOME TAX

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 August 2010 WHILE AUDITING YEAR 2009-10, I FOUND THAT COMPANY PAID RS. 10000/- SALES TAX DEMAND OF YEAR 2006-07,

THE WHEATHER IT IS ALLOWABLE UNDER INCOME TAX ACT .
AND IN BOOKS I MEAN UNDER COMPANIES ACT FOR CALCULATING MAT.

Querist : Anonymous

Querist : Anonymous (Querist)

26 August 2010 CAN ANY SOLVE MY PROBLEM?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

23 July 2025 Great question!

### Can Sales Tax Demand Paid Be Allowed as Expense for Income Tax and MAT?

1. **Under Income Tax Act:**

* **Sales tax demand (like penalty, interest, or arrears)** paid by a company is generally considered a **business expense** and is allowed as a deduction in the year it is paid, as per Section 37(1) of the Income Tax Act, provided it is not a penalty or fine for violation of law.
* If the demand is a **penalty or fine**, it is **not deductible**.
* Since this is a demand for **earlier years (2006-07) but paid in 2009-10**, it can be claimed as an expense in 2009-10 (year of payment) if it is a tax demand and not penalty.

2. **Under Companies Act and MAT (Minimum Alternate Tax):**

* For **MAT calculation under Section 115JB**, the **book profit** is adjusted by adding back certain expenses and disallowances.
* **Sales tax demand paid is usually allowable as expense** unless it is specifically disallowed (e.g., penalty).
* So, the amount can be **deducted while calculating book profit** unless it's a penalty or fine.

---

### Summary:

| Aspect | Allowable or Not | Notes |
| --------------------- | ----------------- | ------------------------------------------ |
| Sales tax demand paid | **Allowable** | Deduct in year of payment, if not penalty. |
| Penalty/Fine | **Not Allowable** | Not deductible under IT or MAT. |

---

If you want, I can help draft the journal entries or the note for the tax audit report. Let me know!

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now

Summarize this with AI

ChatGPT Perplexity Claude Google AI Grok