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Provisions as per IT acts

Yasaswi Gomes new (Finance ) (4484 Points)

11 August 2023

If a company creates a provision for manufacturing defaults eg. Damaged finished goods during production, is it tax allowable?

Txs

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7 Replies

RAJA P M ("Do the Right Thing...!!!") (127179 Points)
Replied 11 August 2023

I can't understand the query...

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 11 August 2023

Dr Damaged stock - income statement

Cr. Provision 3% - liability for this year

So is this expense a tax allowable expense ie, will we get a tax relief due to this?

Eswar Reddy S (CFO- at NHTF) (58213 Points)
Replied 11 August 2023

It's very much allowable

1 Like

RAJA P M ("Do the Right Thing...!!!") (127179 Points)
Replied 11 August 2023

Yes, It's allowable Expenditure...

1 Like

prasad Nilugal ( GST Practitioner & Accounts ) (14171 Points)
Replied 11 August 2023

No , provisions are disallowed by the department on the ground that , they are Contingent in nature and not actually incurd .you Can refer some Case laws .

where some time disallowed by the Honorable Supreme Court / High Court and some time allowed depends on nature of Case .

Disallowed in Case of
1) Calcutta Company Ltd Vs CIT
2) E. Minerals India Pvt Ltd vs JCIT
3) TRF Ltd vs CIT

Allowed in Case of
1)Luke India PVT LTD vs CIT
2) Indian transformer vs CIT
3) Bank of Bahrain & Kuwait vs DCIT

1 Like

Yasaswi Gomes new (Finance ) (4484 Points)
Replied 11 August 2023

Naturally correct. Provision for future operating losses is not allowed as per the standard. But the damage occured during WIP. People can misunderstand this for an operating activity. Then waste in WIP is added back to finished stock.