Tax demand accounts query
This query is : Resolved
31 August 2013
Comment on following:
A Company has received a demand of Rs 50,000 from the income tax Department.
Against which it has already filed an appeal. The Accountant advises the Management to provide for payment of tax in the Accounts for 2011-2012
A Company has received a demand of Rs 50,000 from the income tax Department.
Against which it has already filed an appeal. The Accountant advises the Management to provide for payment of tax in the Accounts for 2011-2012
04 September 2013
kindly elaborate the query, appeal made after payment of tax or before?
26 July 2025
In this situation, here’s how the company should treat the Rs 50,000 tax demand in its accounts for FY 2011-12:
1. **Nature of the Demand:**
Since the demand arises from the Income Tax Department and the company has already filed an appeal, the demand is disputed.
2. **Accounting Treatment:**
* It is prudent **to provide for the demand amount as a liability in the accounts** since the company may have to pay it if the appeal is unsuccessful.
* The amount should be shown as a **provision for tax liability** (under current liabilities) in the balance sheet.
3. **Disclosure:**
* Adequate disclosure should be made in the notes to accounts mentioning the nature of the demand and that an appeal has been filed.
* This ensures transparency and informs the stakeholders about the contingent nature of the liability.
4. **Reasoning:**
According to **Accounting Standard (AS) 29** on Provisions, Contingent Liabilities, and Contingent Assets:
* A provision should be made when there is a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation.
* Since the demand has been raised, the obligation exists, and the probability of outflow is there until the appeal is decided.
**Summary:**
The management should **provide Rs 50,000 as a provision for tax liability** in the accounts of 2011-12, and disclose that an appeal is pending. This approach aligns with prudence and accounting standards.
1. **Nature of the Demand:**
Since the demand arises from the Income Tax Department and the company has already filed an appeal, the demand is disputed.
2. **Accounting Treatment:**
* It is prudent **to provide for the demand amount as a liability in the accounts** since the company may have to pay it if the appeal is unsuccessful.
* The amount should be shown as a **provision for tax liability** (under current liabilities) in the balance sheet.
3. **Disclosure:**
* Adequate disclosure should be made in the notes to accounts mentioning the nature of the demand and that an appeal has been filed.
* This ensures transparency and informs the stakeholders about the contingent nature of the liability.
4. **Reasoning:**
According to **Accounting Standard (AS) 29** on Provisions, Contingent Liabilities, and Contingent Assets:
* A provision should be made when there is a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation.
* Since the demand has been raised, the obligation exists, and the probability of outflow is there until the appeal is decided.
**Summary:**
The management should **provide Rs 50,000 as a provision for tax liability** in the accounts of 2011-12, and disclose that an appeal is pending. This approach aligns with prudence and accounting standards.
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