Payment of tax demand raised by the taxation authority is not an extra ordinary expenditure

Query

A company (Y Ltd.) is engaged in the business of providing works contract service. Few days back, it had received a notice from excise authority raising a demand of service tax on works contract services provided by it of Rs. XXX. Recently Y Ltd. paid the demand. In the books the payment is being recorded as extra ordinary expenditure. 

Whether payment of tax demand raised by the taxation authority can recognise as extra ordinary item?

Answer

No.

As per Para 4.2 of AS 5, “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. In the given case, providing works contract service is ordinary activity of Y Ltd. Thus, service tax paid either pursuant to the demand raised by the excise authority or otherwise in this connection is also a part of ordinary activity of Y Ltd. Recognising such payments as extra ordinary item is contrary to Para 4.2 of AS 5.