Treatment of fines & penalties in books of accounts

Fines and penalties are not given deduction as business expenses for calculating profit as per IT Act.

They are to be added back to profits.

They are Dr. to Profit and loss a/c but IT Act adds it back to arrive at profits and tax compliance.

- Ashi(www.meritranker.com)

THANK YOU SIR,,,

CAN YOU PROVIDE ENTRY FOR RS. 2,61,823/- PENLATY TO KHAAN KHANIJ DEPARTMENT, GOVT OF INDIA....IN TALLY PRIME

Fines and penalties can be debited to the Profit & Loss Account when the liability arises. However, the tax treatment depends on the nature of the fine or penalty.

If the payment is for an offence or for something prohibited by law, it is generally not allowable as a business deduction under Section 37 of the Income-tax Act. Such an amount would therefore need to be added back while computing taxable business income.

For example, the accounting entry can be:

Penalty/Fine A/c Dr.
To Bank/Creditor A/c

The exact treatment should be checked based on the nature of the penalty and the applicable law.

For businesses that need professional support with accounting and bookkeeping services, you can refer to:

https://digitalsarvani.websead.in/accounting-bookkeeping/

Point not covered: since AY 2022-23 (Explanation 3 to Sec 37(1)), even amounts paid to settle or compound proceedings for violation of law are disallowed; in Tally, book the mining department penalty to a separate 'Penalty – Disallowable' ledger under Indirect Expenses so it's easy to add back and report in Form 3CD.

Accounting versus tax:

• Books: debit fines or penalties to P&L when the liability arises (e.g. "Penalties & Fines"). Show them separately if material. Tally entry: Dr Penalty – [Authority], Cr Bank/Payable.

• Income-tax:

– Explanation 1 to Sec 37(1): expenditure for any purpose that is an offence or prohibited by law is disallowed. Penalties for infringement of law (traffic fines, GST or customs penalties, pollution fines) are added back.

– Compensatory payments for delay or breach of contract (liquidated damages, interest on late GST or TDS, penal interest to banks) are allowed.

– Mining department ("Khaan Khanij") amounts: royalty or dead rent is allowed. A "penalty" for illegal or excess mining is disallowed. A compounding fee for a regulatory lapse is commonly treated as penal and disallowed.

• Report disallowed penalties in Form 3CD clause 21(a). From tax year 2026-27, under the Income-tax Act, 2025, the equivalent provision continues.