Treatment of prior period income and expense
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
27 February 2015
As per provisions of income tax, revenue and expenditure of a particular period must be booked in that FY year only.
There are restriction on prior period expenses, is there any restriction on prior period incomes ??
Some companies having regular practice to book expenses 4/5 month after actual receipt of the invoice (like. actual bill for the month of Feb used to book in the month of june/july). how can they get the benefit of that. ??
Please clarify, mentioning the provisions of income tax.
There are restriction on prior period expenses, is there any restriction on prior period incomes ??
Some companies having regular practice to book expenses 4/5 month after actual receipt of the invoice (like. actual bill for the month of Feb used to book in the month of june/july). how can they get the benefit of that. ??
Please clarify, mentioning the provisions of income tax.
27 February 2015
no, there is no restrcition on same.
it is all tax planning done by compnaies
it is all tax planning done by compnaies
Querist : Anonymous
Querist :
Anonymous
(Querist)
27 February 2015
Please explain in detail...
02 August 2025
Great question! Here’s a detailed explanation about **treatment of prior period income and expenses under Income Tax law** along with practical considerations:
---
### 1. **General Principle (Income Tax Act):**
* Income and expenses should be recognized **in the year they relate to** — i.e., on **accrual basis** as per normal accounting principles.
* The **Income Tax Act follows the accounting treatment** as per the books, subject to certain disallowances and restrictions.
* Income and expenses **pertaining to prior periods** that are recognized in the current year are called **prior period income/expenses**.
---
### 2. **Prior Period Expenses:**
* Expenses relating to earlier years but booked in current year should ideally be charged to the earlier year.
* However, if booked in the current year, they are allowed **only if properly recorded and shown in the accounts**.
* Some expenses may be **disallowed if not properly substantiated** or if related to **capital nature**.
* **Section 37** allows deduction of business expenses, but they should be **wholly and exclusively for business** and properly documented.
* If the prior period expenses are shown as **"prior period expenses" in accounts** and are revenue in nature, then they are allowed deduction in the year they are booked.
---
### 3. **Prior Period Income:**
* Similar logic applies to prior period income.
* If income relating to prior years is booked in the current year, it must be offered to tax in the current year.
* There is **no restriction on prior period income** — it should be taxed when received or accrued as per accounting treatment.
* Example: If a bill relating to an earlier period is raised/received now, the income should be included in the current year.
---
### 4. **Practical Issues with Delay in Booking Expenses:**
* **Delay in recording expenses (like Feb bills booked in June/July)** is generally not recommended.
* For Income Tax, deduction is claimed in the year the expense is booked, **not the year it relates to**.
* So, companies booking old invoices late will get deduction only in the year of booking.
* This could affect profit and tax payable in those years.
* Tax authorities may scrutinize such delays for genuineness and consistency.
---
### 5. **Relevant Provisions and Standards:**
* **Section 145(1):** Taxpayer must follow either cash or mercantile system of accounting consistently.
* **Section 37:** Business expenses are allowed if revenue in nature and wholly for business.
* **Accounting Standards (AS-5):** Requires recognition of prior period items separately in P\&L.
* **CBDT Circulars** emphasize consistency and bona fide nature of expenses/incomes.
---
### 6. **Summary Table:**
| Aspect | Treatment under Income Tax |
| ------------------------ | -------------------------------------------------- |
| Prior period expenses | Allowed if revenue in nature and properly recorded |
| Prior period income | Taxable in year booked, no restrictions |
| Delay in expense booking | Deduction allowed only in year of booking |
| Capital expenses | Not deductible as revenue expense |
---
### Recommendation:
* Always book income and expenses in the period to which they relate for proper matching.
* Maintain clear supporting documents to justify prior period items.
* Avoid undue delays in accounting entries to prevent tax complications.
---
If you want, I can help draft a brief note or guidance document for your company or clients explaining this with relevant citations. Would you like that?
---
### 1. **General Principle (Income Tax Act):**
* Income and expenses should be recognized **in the year they relate to** — i.e., on **accrual basis** as per normal accounting principles.
* The **Income Tax Act follows the accounting treatment** as per the books, subject to certain disallowances and restrictions.
* Income and expenses **pertaining to prior periods** that are recognized in the current year are called **prior period income/expenses**.
---
### 2. **Prior Period Expenses:**
* Expenses relating to earlier years but booked in current year should ideally be charged to the earlier year.
* However, if booked in the current year, they are allowed **only if properly recorded and shown in the accounts**.
* Some expenses may be **disallowed if not properly substantiated** or if related to **capital nature**.
* **Section 37** allows deduction of business expenses, but they should be **wholly and exclusively for business** and properly documented.
* If the prior period expenses are shown as **"prior period expenses" in accounts** and are revenue in nature, then they are allowed deduction in the year they are booked.
---
### 3. **Prior Period Income:**
* Similar logic applies to prior period income.
* If income relating to prior years is booked in the current year, it must be offered to tax in the current year.
* There is **no restriction on prior period income** — it should be taxed when received or accrued as per accounting treatment.
* Example: If a bill relating to an earlier period is raised/received now, the income should be included in the current year.
---
### 4. **Practical Issues with Delay in Booking Expenses:**
* **Delay in recording expenses (like Feb bills booked in June/July)** is generally not recommended.
* For Income Tax, deduction is claimed in the year the expense is booked, **not the year it relates to**.
* So, companies booking old invoices late will get deduction only in the year of booking.
* This could affect profit and tax payable in those years.
* Tax authorities may scrutinize such delays for genuineness and consistency.
---
### 5. **Relevant Provisions and Standards:**
* **Section 145(1):** Taxpayer must follow either cash or mercantile system of accounting consistently.
* **Section 37:** Business expenses are allowed if revenue in nature and wholly for business.
* **Accounting Standards (AS-5):** Requires recognition of prior period items separately in P\&L.
* **CBDT Circulars** emphasize consistency and bona fide nature of expenses/incomes.
---
### 6. **Summary Table:**
| Aspect | Treatment under Income Tax |
| ------------------------ | -------------------------------------------------- |
| Prior period expenses | Allowed if revenue in nature and properly recorded |
| Prior period income | Taxable in year booked, no restrictions |
| Delay in expense booking | Deduction allowed only in year of booking |
| Capital expenses | Not deductible as revenue expense |
---
### Recommendation:
* Always book income and expenses in the period to which they relate for proper matching.
* Maintain clear supporting documents to justify prior period items.
* Avoid undue delays in accounting entries to prevent tax complications.
---
If you want, I can help draft a brief note or guidance document for your company or clients explaining this with relevant citations. Would you like that?
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