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Creditors Written Off

Anususha (Client Engagement Associate) (61 Points)

04 October 2010

Dear All,

Can we consider Creditors written off for computing Income tax in Tax working sheet? HOw do we consider it? Business Income ? or Other Income? Please calrify. Its bit urgent

Anu

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9 Replies

krishna Teja (CA Final) (85 Points)
Replied 04 October 2010

Creditors written off comes under the purview of S.41(1) (deemed income). The amount written off is taxable as Income from Business or profession in the year of write off. Hence it is taxable as business income.

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vijay (Accountant) (884 Points)
Replied 04 October 2010

Creditors w/off will be considered as normal businees income and not as other income since

creditors was related to business and it need not required to be shown seperately

You can treat it as misc. income

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CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 04 October 2010

Agreed With Krishna

Gouri Sankar (General Manager - Accounts) (25 Points)
Replied 04 October 2010

It is bussiness Incoem only

A.K.Agrawal (Investments & Finance) (132 Points)
Replied 05 October 2010

If the assessee is merely an investor, having income from other sources, then it can not be a business income. Then it should also be an income from other sources. Am I right ?

The situation is taken for granted that the creditor has forgotten to demand his money back, or you do not wish to reurn his money back anyhow.

But the bigger question is that the creditor can any time open its claim to demand its deposits back thru civil court or otherwise even after 3 years time bar. Then paying back money will be a capital loss or revenue loss ? Will you be able to trace & establish say a 20 years back "written off" as an income, would be a revenue loss now.

In other two cases also, it is again a great risk - either you run it, as it is, in credit, or drop it into a suspense A/C; you will not be able to produce credit certificate to explain these deposits to the IT authorities.

It is a great dilemma. Pl. suggest, somebody to come out of the situation.

Anususha (Client Engagement Associate) (61 Points)
Replied 05 October 2010

I'll tell U waht exactly has happened?

One of my client has a loss of Rs 7,70,000/- for th year 2009-2010 after writting back the creditors of Rs 15,00,000/- Now if I conider this amount ( Rs 15,00,000)as other income then I have to pay a tax on it which will be huge.

So Pls suggest me what I have to do in this case

A.K.Agrawal (Investments & Finance) (132 Points)
Replied 05 October 2010

1. In a normal course, creditors money can not be written off against your loss. However current year loss can be taken in future 8 years to be adjusted against future incomes.

2. Pl. explain creditors deposit status. If no demand from him due to his lack of knowledge & you have not been paying any interest to him for many previous years, then only you can think in this direction.

3. Even then many IF & BUTS, as raised earlier.

4. This matter should be resolved by some expert here.

CA.G.Muguntha Narayanan (Internal Auditor at TVS Motors) (2195 Points)
Replied 05 October 2010

Dear Anususha,

It is to be treated as Deemed Income u/s.41. COz, the company would have written off the amount as Purchases in the earlier years. Hence, tax wud have been reduced to that extent. Now, the creditors are written back. hence, the benefit given earlier should be reversed. THerefore, the amount has to be shown as deemed income u/s.41

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