PGBP ( Recovery of any deduction Section 41(1)

Dear Nishie,

Look, the first question in this case would be whether the expense in FY 2007-08 of Rs. 1.20 Lacs was recognised based on accepted principles or not,Keeping in mind what AS-4  says Event occuring After Balance Sheet Date

If yes the expense was rightly recognised during FY 07-08, THEN -  

As u have mentioned, X was alowed deduction of Rs. 1.20 Lacs in FY 07-08

Therefore same will be allowed & in FY 2008-09, Rs. 30,000 will be treated as Income of X..

If expenses was wrongfully/errorneously recognized or it was just a provision based on AS -29, in FY 07-08, then the expenditure of Rs. 1.20 Lacs will not be allowed in FY 07-08 itself

IN FY 2008-09, When Liability becomes concrete then Rs. 90,000 will be allowed as deduction.

the first entry in respect of ur transaction will be in X books is

purchases a/c..............Dr 120000

     to Y a/c......................                      120000

u can make a corresponding debit to Y account only if payment is made or goods are returned to Y. 

in the subsequent year when payment is settled is for 90000 there will be a balance of 30000 in Y a/c and that 30000 will be considered as deemed income u/s 41 of Income Tax Act.  Remission or cessation of liability read section 41 u ll have a better understanding.........