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