Write backs of creditors-whether a provision or free reserve?
Mohan Pawar
(Querist) 26 June 2012
This query is : Open
Facts;
1).The Company is registered with BIFR as a sick industrial unit since 2005.
2).The Company write backs such creditors unilaterally in their books of accounts without any remission or cessation by the creditors because of which the liability is still existing.
3).The Company credited such write backs to their Profit and Loss Account in the respective years and the Income Tax Returns for the respective years were filed with the same profits and adjusted against the carry forward of business losses.
4).The company transferred such profits to profit & loss Account because of which that amount is included in Capital Base of the company in calculation of Net Worth.
5).As a result the company’s net worth has become positive & company comes out of sickness but operationally it is other way round. The company is making such profits because of such write backs only and not because of operational activities i.e. no cash profits.
Queries-
1).Can we create any contingency reserve with an equivalent amount of creditors write back in our balance sheet as these are written off unilaterally?
2).Can such write backs are in the nature of provisions as these are write back unilaterally in our balance sheet and the liability is still existing?
a).If Yes, then whether it is a short term or a long term provision?
b).If No, then how can we show it in the balance sheet?
3).Can we include such write backs in our free reserve for the distribution of dividends?
4).If we can do any of the above treatment, what are the implications of the same under Income Tax Act/Companies Act for the respective years:
a).Whether there is any need for revision of Income tax return for the respective years?
b).If Yes, then what are the procedures for revision of returns?
c).If No, then please suggest any other way for such treatment.
d).Whether any restatement of balance sheet is required?
