Treatment of Year-End Provisions for Expenses in ITR Filing

[Ramanathan Seshan]

Dear Experts,

Company A has been consistently following a practice of creating year-end provisions for expenses where either the vendors are not identifiable, the exact amount is not known, bills have not been received, or invoices haven't been processed for payment/credit before closing the books of account.

These provisions are then reversed on the first day of the following financial year. When the actual invoices are received in the next year, the company books the expenses accordingly and deducts and remits the applicable TDS at that point.

In this context, I have the following questions:

a) At the time of filing the ITR, should the company disallow 100% of such provisioned expenses where invoices are still pending?

b) If it is certain that the invoices will be received, but only after the ITR filing due date, can the company opt to disallow only 30% of those expenses under Section 40(a)(ia)?

c) Additionally, in cases where the invoice value received after filing the ITR is lower than the amount originally provisioned, what would be the appropriate remedial action for the company? How should the excess provision be treated in the books and from a tax compliance perspective ?

Regards,

S Ram

[YAGAY andSUN]

Treatment of Year-End Provisions for Expenses in ITR Filing

This is a well-framed query touching upon a recurring issue in corporate tax compliance — the treatment of year-end expense provisions (especially unpaid and unbilled expenses) in the Income Tax Return (ITR) under the Indian Income-tax Act, 1961, especially with reference to Section 40(a)(ia) and accrual-based accounting.

Let’s address each part of your query in a structured and authoritative way:

✅ Background:

Company A creates year-end provisions for:

• Unbilled expenses,
• Expenses for which vendors are not yet identified,
• Invoices not received before year-end.

These provisions are reversed on the first day of next financial year, and actual expense entries are booked later when invoices are received — TDS is deducted at that point.

🔍 a) At the time of filing the ITR, should the company disallow 100% of such provisioned expenses where invoices are still pending?

✅ Legal Position:

Under Section 37 of the Income Tax Act, expenses must be:

• Incurred wholly and exclusively for business, and
• Accrued (not necessarily paid) under the mercantile system of accounting.

However, Section 40(a)(ia) disallows 30% of any expense on which TDS was deductible but not deducted or remitted within the time specified under Section 200.

✅ CBDT Circular No. 3/2008 dated 12.03.2008:

Provision entries made at year-end without deducting TDS, even if reversed later, attract disallowance under Section 40(a)(ia).

So, even if these are estimates or reversed later, they are deemed "expenses claimed" and subject to TDS disallowance unless the vendor is known and TDS is deducted.

✅ Answer:

If vendors are not identifiable, or invoice amounts are not definite, and TDS cannot be deducted, the company must disallow 100% of such provisioned expenses at the time of filing the ITR — not just 30%.

🔍 b) If it is certain that the invoices will be received, but only after the ITR filing due date, can the company opt to disallow only 30% of those expenses under Section 40(a)(ia)?

✅ Answer:

Yes, if the payee is identifiable, and the expense is otherwise allowable under Section 37, but TDS has not been deducted before the ITR filing date, only 30% is disallowed under Section 40(a)(ia).

👉 However, the following must be true:

• The vendor/payee must be known,
• Nature of service and TDS applicability must be determinable,
• TDS must be deducted and deposited in the following year, at which point the 30% disallowed can be claimed back under Section 40(a)(ia) second proviso.

📌 Reference: CIT v. Ansal Land Mark Township (P) Ltd. [2015 (9) TMI 79 - DELHI HIGH COURT]

🔍 c) When the invoice received in the next year is lower than the provisioned amount, how should the excess be treated in the books and for tax purposes?

✅ Accounting Treatment:

• The excess provision is reversed in books on 1st April (or when invoice is received).
• The actual expense is booked based on invoice, with correct TDS deduction.

✅ Tax Treatment:

1. In Assessment Year 1 (year of provision):
   • If expense was disallowed in full due to TDS non-deduction, then there is no tax benefit availed, and no further adjustment needed.
2. In Assessment Year 2 (when invoice is booked):
   • Book the actual expense (say ₹80,000 vs earlier provision of ₹1,00,000).
   • Deduct and remit TDS on ₹80,000.
   • Claim expense of ₹80,000, and ignore the earlier ₹1,00,000 provision, since it was already disallowed or reversed.

✅ Key Point: You cannot claim deduction twice. Ensure the allowable deduction is taken only once — on actual payment/booking with TDS compliance.

📝 Suggested Compliance Practice:

• Maintain vendor-wise provision schedule.
• Disclose provision amounts in Tax Audit Report – Clause 21 (regarding disallowances u/s 40(a)(ia)).
• Create reconciliation workings between provisioned and actual expenses.
• Ensure timely TDS deduction in next FY to reclaim 30% disallowance.

✅ Summary Table:

Scenario	Vendor Identified	TDS Deducted Before ITR?	Disallowance in ITR
Vendor unknown, invoice pending	❌ No	❌ No	✅ 100% disallowance
Vendor known, invoice pending, TDS not yet deducted	✅ Yes	❌ No	✅ 30% disallowance
Vendor known, TDS deducted before ITR	✅ Yes	✅ Yes	❌ No disallowance
Invoice lower than provision	✅ Yes	✅ Adjust in actuals	✅ Claim only actual

***

AI Summary

Tax Expense Provisions: Navigating Complex Deduction Rules with Precision for Accurate Income Tax Reporting and Vendor Compliance Legal Analysis Summary:A company's year-end expense provisions require careful tax treatment under income tax regulations. When invoices are pending or vendors are unidentified, the company must disallow 100% of provisioned expenses during income tax return filing. If vendors are known, only 30% may be disallowed under Section 40(a)(ia). When actual invoice amounts differ from provisions, the company should book actual expenses, deduct appropriate TDS, and ensure no duplicate deductions are claimed across assessment years.