The Chartered Accountant

DECEMBER 2008 962 THE CHARTERED ACCOUNTANT
ACCOUNTING
Honourable Supreme Court has held that the prescribed AS 22, to the
extent it requires recognizing deferred tax liabilities/ assets in the Financial
Statements, is only a gap filling exercise. The Central Government has not
exceeded its authority in adopting prescribed AS 22 in exercise of section
642(1)(a). Prescribed AS 22 is not inconsistent with/ contrary to any of the
provisions of Companies Act including Schedule VI. Hence prescribed AS
22 should be mandatorily followed by all companies.
ment prescribed accounting standards 1-7 and 9-29 as
recommended by ICAI [herein after referred to as
“prescribed AS ___(relevant number)”].
These Rules were notified by the Central Government
in exercise of powers conferred under section 642(1)(a)
read with sections 211(3C) and 210A(1).
As per the Rules, every company and its auditor(s) shall
comply with the Accounting Standards in the manner
specified in Annexure to those Rules in preparation of
General Purpose Financial Statements.
Further para4 of Part I of the Annexure to the Rules
state that Accounting Standards, which are prescribed,
are intended to be in conformity with the provisions
of applicable laws. However, if due to subsequent
amendments in the law, a particular accounting standard
is found to be not in conformity with such law,
the provisions of the said law will prevail and the financial
statements shall be prepared in conformity with
such law.
As regards the accounting treatment of exchange differences
in respect of imported fixed assets, the following
foot note is contained in prescribed AS 11 under
para13 – “Recognition of Exchange Differences”-
“It may be noted that the accounting treatment of
exchange differences contained in this Standard is required
to be followed irrespective of the relevant provisions
of Schedule VI to the Companies Act, 1956.”
Thus the Central Government has vide the Rules stated
that the accounting treatment for exchange difference
in respect of imported fixed assets contained in Schedule
VI to the Act should not be followed.
{It is interesting to note that the Central Government
has not attempted to make similar amendment in the
Income-tax Act, 1961 like it had done originally in
1968.Hence section 43A of the Income-tax Act, 1961
continues on the statute book}.
Issue
The issue which has arisen consequently is - Whether
a company should follow Schedule VI or the prescribed
AS 11 in accounting for exchange differ-
ence in respect of imported fixed assets?
{It is interesting to note that this controversy exists
only in case of accounting for exchange difference in
respect of imported fixed assets not in case of indigenous
fixed assets which have been acquired out of
Foreign Currency External Commercial Borrowings
(ECBs)}
Discussion
A question which was before Honourable Supreme
Court in case of J. K. Industries Ltd. v. Union of
India [2008] 297 ITR 176 in the context of prescribed
AS 22- ‘Accounting for taxes in income’ to the extent
it requires recognizing deferred tax liabilities/ assets in
the Financial Statements
“Whether Accounting Standard 22 (AS 22) entitled 'accounting
for taxes on income' insofar as it relates to
deferred taxation is inconsistent with and ultra vires the
provisions of the Companies Act, 1956, ('the Companies
Act'), the Income-tax Act, 1961 ('the I. T. Act') and
the Constitution of India ?”
The judgement of Honourable Supreme Court is a
very detailed one. We have reproduced hereunder some
extracts of the judgement which are relevant to the issue
under consideration (Emphasis supplied wherever
considered necessary):
“Section 211(1) requires the balance-sheet to be in the
form set out in Part I of Schedule VI "or as near thereto
as circumstances admit". The said phrase "or
as near thereto as circumstances admit" allows
adoption of improved techniques in the presentation
of accounts to shareholders. It is important
to note that the information which is required to be
given to shareholders pursuant to Schedule VI should
be given in a manner which they will understand and
which must give a "true and fair" view of the company's
affairs as also it must give a proper picture of
the company's profits (losses) for the relevant year. By
the Companies (Amendment) Act, 1999, sub-sections
(3A), (3B) and (3C) as well as a proviso thereto stood
inserted in section 211 of the Companies Act with effect
from October 31, 1998, in order to provide for