Event after Balance Sheet Date
I am stuck in an Audit with respect to reporting purpose. A client of mine has a propreitorship concern. He gets the Tax and Vat audit done from me. He got his case of scrutiny done from UP Vat department through an advocate in aug 2014 for FY 2011-12. He had to compulsorily get his annual Vat return form 26 revised as there was revesal of ITC for fy 2011-12. He also therefore revised the annual form for fy 2012-13 in aug 2014 showing reversal of ITC of rs. 75000 approx. as a precaution. however, the case of 2012-13 is pending as of now. His advocate who represents him in Vat deptt. is insisting him to show both reversals in fy 2013-14 Balance sheet so as to get the revisions of itc in line with 2013-14. He is insisting that if this reversal is not done in 2013-14 it will be difficult to get the scrutiny done for 2013-14 as would result in mismatch and litigation due to wrong representaion. The tax and vat audit have not yet been finalised due to this debate, as I insist to show this reversal in FY 2014-15 because the 2011-12 case and Annual vat return form for 2011-12 and 2012-13 were all done and revised respectively in Aug 2014 only. I am also inclined to do this in Fy 2014-15 due to the new point as mentioned in Tax audit form which requires auditor to mention the details of case of assessee done in other statutory deptt. in the FY under audit.
Kindly guide the right step to be taken that is in best interest of revenue and a professional.
This is a normal case of mis-statement, if as a professional we issue the audit report. Even if we refer to Accounting standard (though not applicable in case of proprietors), provisions are to be made only for contigent liability or expenses which have an impact on continuity of business.
Even if we follow the Generally accepted accounting principles(GAAP), i dont think we should create an asset or income based on the events occuring after financial year ending date.
In your case, what i understood is that proprietor reversed the input tax credit. Reversing Input tax credit would result in loss or creation of liability.
Since the transactions involves creation of additional liability, you can always provide a provision. In your case, reversal of ITC results in extra liability from the years 2011-13 and liability is of contingent nature. You can always in notes to accounts mention the amount of contigent liability.
However, assessee has reversed the ITC and given an impact in books of accounts, therefore its no more a contigent liability since proprietor is ready to pay to vat department.
You can create a provision showing reversal of ITC. However since the liability even existed on March 2014, you can create a provision for the amount already accepted by proprietor as liability (check the facts based on which he has reversed ITC).
If i was in your position,
I would have created a provision for amount demanded by VAT department and accepted by propreitor and disclosed in notes the amount demanded by VAT department but not accepted by proprietor.
Settled liabilities should be created and demand in appeal should be disclosed in notes.
Please, consult a senior professional friend for futher clarity and also update here as it will help to improve my knowledge too.
I have an opinion different from what Mr. Pulkit have shared. The points to be summarised here are as below
a. Following of Accounting standards are mandatory for all professionals practicing the profession of pratice. Though GAAP ( Generally Accepted Accounting Pratices) may differ, however its the honest duty of the professional to abide with the accounting pratices prescribed by ICAI.
b. The accounting treatment of an item of tax and resulting outcome of litigation are two different aspects and will not go hand in hand. Regarding partices of adjustument, i would like to keep quite, as this sort of pratice to fine tune financial statements based on litigation is not advised.
c. The out come of litigation due to ITC allowance or non allowance is an question of law and facets of transaction in question. Mere reversal or disclosing the same to satisfy the governement authorities just discloses that the audit is done hapazordly and no reliance can be placed on audit methodologies used to satisfy balances certified.
d. It would be prudent enough for the professional to disclose the items under extra ordinary items with a proper explanation in notes to accounts.
Thanks bro! I agree with your points. The client had received damages recovery as he paid damages of goods to buyers and sought credit notes from companies for damage recovery. The ITC is being reversed on such damages on which he failed to reverse ITC during 2011-2013. What could be the journal entry? what they have done is debited the capital Account and credited the ITC balance. They have a handsome amount of ITC in balance and therefore nothing is being paid in cash and the whole demand is being paid through ITC reversal. In 2013-14 I insisted on ITC reversal from damage recovery account so they debited the damage recovery account(income) and credited the ITC balance. But, for ITC reversal of earlier years there is no such way as they have already shown the damages recovery account as full income for income tax purpose.
As per me, there is no hard rule for it but entries would be:
For ITC from customers recovered.
Other income/ITC receoveryetc. Cr
To Customer Dr.
On receiving it, Credit cusomer and debit bank.
For reversing ITC, Debit Tax and Rates expenses and credit ITC account.
However even your entries are correct subjected to context.