Taxation Entries

This article is helping hand for those students who feel problem in taxation entries. Experts and others are requested to correct me or give their valuable feedback.

Taxation and accounting are the soul of the accounting profession. To become a good accounting professional, a sound correlation between tax and accounts is required. Practically, it has been seen that students feel difficulty in passing the entries of taxation. Problem not arises because of lack of knowledge but due to lack of conceptual clarity. Confusion arises while reversing the entries of Tax Payments (Advance tax, Self assessment tax, TDS recoverable etc.) and Tax Provision. An attempt has been made to clear the concepts of students. Let us discuss point to point these entries.

Reversal entry of tax payments and provision of tax is required to be passed at the time when: -

·  Intimation received under section 143(1)


·  Assessment completed under section 147/144/143(3).

·  Neither intimation under section 143(1) received nor scrutiny notice under section 143(2) issued by department and the time limit of issue scrutiny notice has been expired.

·  In case of clients, where nature of income is of such nature that   chances of case to be open under section 147 “Income escaping assessment”, then these balances need to be reversed after the expiry of the period for issue notice under section 147 which is 4 / 6 years from the end of the financial year in which return is filed. ( 4 years if income is less than `1,00,000 and six years if income exceeds `1,00,000)

This is an exhaustive list of time period after which entries of provision for tax and tax payments can be knocked off.

However it’s advised not to reverse the amounts on the basis of intimation received under section 143(1). It’s good to reverse the amounts after the expiry of the time period for issue of scrutiny notice under section 143(2). Reason is there may be chances of issue of scrutiny notice under section 143(2) after the issue of notice under section 143(1).

Above discussion is all about the time limit for reversal of entries of taxes, but the question is how to reverse. These are following cases:-

(A) REFUNDS

Refund arises when aggregate of advance tax, self assessment tax and TDS recoverable is excess of tax payable by person. There can be three cases of refunds:-

<!--[if !supportLists]--> 1. <!--[endif]-->Actual refund received

<!--[if !supportLists]--> 2. Excess refund received

<!--[if !supportLists]--> 3. <!--[endif]-->Less refund received

Let us understand with this example:-

Company XYZ Ltd. Balance Sheet for 2009-10 reflects

Assets

Sum total of `15,00,000 of advances under current assets.

Advance tax                         `8,00,000

Self assessment tax              `4,00,000

TDS recoverable                  `3,00,000

Liabilities

Provision for tax                   `12,00,000

Case	Expected Reasons	Entry (`)	Remarks
Refund received 3,00,000	------------	Bank                         3,00,000 Provision for tax         12,00,000 To Advance tax             8,00,000 To Self assessment tax     4,00,000 To TDS Recoverable         3,00,000	Straight entry passed on the basis of Assessment Order
Refund received 2,00,000	<!--[if !supportLists]--> ·        <!--[endif]-->Expenses disallowed by Income Tax department. <!--[if !supportLists]--> ·        <!--[endif]-->TDS recoverable shown in books is not in accordance with Form 26AS. <!--[if !supportLists]--> ·        <!--[endif]-->Mistake apparent from record	Bank                         2,00,000 Provision for tax     12,00,000 Additional Provision 1,00,000 To Advance tax              8,00,000 To Self assessment tax      4,00,000 To TDS Recoverable      3,00,000 Profit & Loss                   1,00,000 To Additional Provision  1,00,000 Note In case of filing of appeal / application u/sec 154 instead of booking additional provision of income tax, balance amount can be shown as refund receivable.	<!--[if !supportLists]--> ·        <!--[endif]-->An appeal can be filed to commissioner (Appeals) / ITAT for allowance of expenditure. <!--[if !supportLists]--> ·        <!--[endif]-->An application u/s 154 can be filed for rectification of mistake apparent from record.
Refund received 4,00,000	<!--[if !supportLists]--> ·        <!--[endif]-->Provision is excess booked. <!--[if !supportLists]--> ·        <!--[endif]-->Expenses which seems to be disallowed allowed by department. <!--[if !supportLists]--> ·        <!--[endif]-->TDS recoverable entries are not properly booked in books. <!--[if !supportLists]--> ·        <!--[endif]-->Previous years Tax credits paid this year.	Bank                         4,00,000 Provision for tax         12,00,000 To Advance tax            8,00,000 To Self assessment tax     4,00,000 To TDS Recoverable         3,00,000 To Provision written back  1,00,000 Provision written back    1,00,000 To Profit & Loss              1,00,000	HAPPY MOMENT!!!!!!! Its time to party hard. Person received more than expectations. It is advised to confirm from Income Tax department. Be careful in that kind of situation. There may be chance of raising demand in future.

(B) DEMAND

Demand arises by the income tax department for various reasons;-

1. Mistake apparent from record on the order received by person.
2. Expenses disallowed by the person on certain reasons.
3. Non reflection of TDS details of person in Form 26AS statements.
4. Non giving of benefit of various exemptions for example section 10A, section 10AA, section 80A etc.
5. Less payment of income tax.

There can be more cases but above list cover major reasons.

In case of demand, following entries are required to be passed.

Provision for tax                     xxxx

Additional Provision             xxxx

To Advance tax                       xxxx    

To Self assessment tax           xxxx

To TDS Recoverable              xxxx

To Bank                                    xxxx

Profit & Loss                          xxxx

To Additional Provision          xxxx

 In case company accepts the demand, above entry can be passed, but if it doesn’t accept it and go for appeal or revision than put the matter on hold. Entry is to be passed after final disposal of appeal and revision.

(C) OTHER CASES

There can be cases where Provisions for last years are excess or short booked.

Case	Treatment	Entry	Presentation
Short booking of Provision for Income Tax	Short amount booked in current year	Profit & Loss                        To Additional Provision	Profit Before Tax Less: Tax Expenses              Current Tax               Deferred Tax              Additional Provision                       ( Last Years)  Add: Tax Adjustment                  Provision                  written back
Excess booking of Provision for Income Tax	Provision excess booked now written off.	Provision written back        To Profit & Loss

Notes

1. Section referred above are of Income Tax Act, 1961.

2. Profit & Loss Account: - Reversal entries don’t hit Profit & Loss account because these are below the line items. In case any additional provision is booked and any provision is written off, these treated below the line of Profit & Loss account. (i.e. after profit before tax)

3. Tax Computation: - Any additional provision created and provision written off is adjusted while computing taxable income as it is below the line item and doesn’t affect tax.

4. Balance sheet: - Any reversal entry cleans the position of balance sheet as the balances of current assets and liabilities come down.

5. Finalization: - At the time of finalizing accounts one has to be careful scrutinize the pending tax recoverable and tax payment accounts and reverse the entries where time limit is expired or assessment is done. It can be done by preparing a “T” shape accounts of tax payment and tax provision entries.

In the article, all most possible entries of taxation are covered; however there may be more entries/issues. These entries we have to pass in daily use and very useful for audit purpose.

Hope, the purpose and objective of the article is achieved.

You are welcome to write me at my  mail ID mr_manish_ca@yahoo.com