Short & excess provision of expense

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 November 2015 i have made provision of expenses some are excess and also some are short provision of expenses at the year end now my question is that any impact of income tax while computing income tax return(whether prior period expenses shall be treated excess or short provision of expenses.)

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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25 July 2025 Good question!

When you have **short or excess provision of expenses** made at the year-end, it does affect your Income Tax computation. Here's how:

### 1. **Provision of Expenses — Accounting vs Tax Treatment**

* **Accounting Treatment:**
You create provisions based on estimates for expenses that may occur. These are recognized as expenses in the Profit & Loss account.

* **Tax Treatment:**
The Income Tax Act generally requires **actual expenses** to be allowed as deduction, not mere provisions.

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### 2. **Impact of Short or Excess Provision of Expenses**

* **Excess Provision:**
If you made excess provision (more than actual expense incurred), only the **actual expense paid or payable** is deductible for tax purposes.
The excess provision will be treated as a **'liability' or 'income' in the next year** when reversed. Hence, excess provisions do not reduce taxable income.

* **Short Provision:**
If you made short provision (less than actual expenses), you can deduct only the **actual expenses incurred** during the year. Short provision means you under-estimated expenses; still, only actual expenses matter for tax.

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### 3. **Prior Period Expenses**

* If a prior period expense is recognized now, it will be allowed as deduction **in the year it is actually paid or becomes payable** as per the accounting standard (AS 5). For tax, the timing matters:

* If prior period expense relates to earlier years and not paid or payable in current year, it is usually **not deductible** in current year.
* If paid or payable during current year, it is deductible now.

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### 4. **Summary for Tax Filing**

| Provision Type | Tax Deduction Allowed | Impact |
| --------------------- | ----------------------------------------------- | --------------------------------------------------------- |
| Excess Provision | Only actual expenses deductible | Excess provision is added back to income |
| Short Provision | Deduction limited to actual expense incurred | No addition; underestimation does not get extra deduction |
| Prior Period Expenses | Deductible only if paid/payable in current year | Treated as current expense if applicable |

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### **Bottom Line:**

* While preparing Income Tax Return (ITR), consider **actual expenses paid or payable**.
* Adjust your provisions accordingly — excess provisions should be reversed or added back in taxable income.
* Short provisions mean your taxable expense is limited to what is actually paid or payable.

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If you want, I can help you draft the tax adjustments journal or explain how to reflect these in your tax audit working papers. Would that help?

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