Sundry creditors written back

Since you are planning to write back payables outside India, I think your company must comply with FEMA regulations, not very sure about it. But there is similar provision, wherein if a company wants to write off debtors receivable from outside India, RBI permission is required and it is not an easy task.

Apart from the FEMA regulations (which i am not very sure) , If the payables is towards capital expenditure or a capital advance, then it is not taxable in IT Act. If it is payable in the nature of revenue expenditure, then, tax is payable on the amount written back.

A FEMA expert required in here to reply to determine the writing back of the amount, in my opinion.

You may ask your CA to issue a certificate regarding this write back and submit it to the authorised dealer (banker). There are certain guidelines issued by the RBI that is required to be followed before writing the balance back.

The query is not clear as to how the liability was created in the first place. First theAccounting treatment :

1. If the liability was on account of purchase of goods or services - then the amount written back must be reflected in the Profit and lOss account under other income. Suitable disclosure may also be required under Prior Period Items.

2. If the liability was on account of Capital goods purchased - then the asset value will have to reduced by the amount of writeback and also depreciation may have to be charged on the reduced amount - not only for this year but also reorked for the entire life time of the asset, i.e. from the date of capitalisation till date. The reversal of depreciation will also hav eto be disclosed separately under prior period items.

The tax treatment

If falling under 1 above - fully taxable in the year of accounting entry, if falling under 2 above then not taxable at all, but if AO wants can reopen the earlier years on account of possible excess depreciation claim.

The reason why the amount is now written back is is not clear. It is also relevant to see what amount was declared in the Customs and Forex Forms at the time of inport of Goods/services. This will only determine if there are FEMA issues involved

Dear Sir,

Thank you very much for your reply.

Mr. Venkatesh, one of the CA in the forum has asked for the reason why this is being written back. Can you specify the reason? whether it is towards cap. expenditure or revenue expenditure (goods and services)?

For write off of foreign debts no prior approval from AD or RBI is required upto 10%. Above 10% approval from AD bank is needed. Power of approval is delegated to AD by RBI subject to compliance of certain conditions.

I am not aware of any prior or post approval is needed for write back of liabilities for FEMA compliances. Regarding taxation , yes, the amount written back is liable to be taxed.

REgards,

What is AD?

Authorised Dealer. Normally banks, money changers.

Originally posted by : Supreeth Sharma
	Mr. Venkatesh, one of the CA in the forum has asked for the reason why this is being written back. Can you specify the reason? whether it is towards cap. expenditure or revenue expenditure (goods and services)?

Hi, I am writing here to get guidance for a similar situation of write back of Trade Payables in foreign currency. This was for purchase of goods and the inability to pay is due to lack of sufficient documentation like Original Bill of Entry. Could the experts here guide on what process needs to be followed before write back. Should an approval be sought from RBI ?