The Chartered Accountant

DECEMBER 2008 974 THE CHARTERED ACCOUNTANT
ACCOUNTING
642 is in addition to the powers conferred by section
641, therefore, the two sections form part of
the same scheme. The said instruction relating to
accounting for exchange difference in respect of
imported fixed assets was inserted by the Central
Government in 1968 vide exercise of its power
under section 641. Considering the Scheme of
the Act, the subsequent act of the Central Government
in prescribing AS 22 and stating, by way
of a foot note thereto, that the prescribed AS
22 is required to be followed irrespective of the
relevant provisions of Schedule VI implies that
the Central Government has, thereby impliedly,
exercised its’ power under section 641(1) of altering
Schedule VI to that extent. Considering
the Scheme of the Act, this subsequent act of
the Central Government is well within its powers
and as such the said instruction should not be
followed after coming into force of prescribed
AS 11
(b) Even if it is argued that there is no Implied exercise
of power under section 641(1), as held
by Honourable Supreme Court in case of J.K.
Industries (supra), since the two powers, namely
power to alter Schedule VI & power to make
Rules, are both delegated to the same authority,
namely, the Central Government and are at equal
footing, it could be said that the subsequent act
of the Central Government under section 642
prescribing a treatment contrary to the said instruction
would prevail and that the said instruction
should not be followed after the coming
into force of prescribed AS 11
VIEW 2: Schedule VI is mandatory and therefore
should be followed for the following reasons-
(a) Though power to alter Schedule VI under section
641 and the power to carry out gap filling
exercise under section 642 are both entrusted
to the Central Government and are part of
the same scheme, the scope of section 641 is
different from the scope of section 642. The
notification prescribing AS 11 is in exercise of
power under section 642 (1)(a) read with sections
211(3C) and 210A(1) as expressly mentioned
in the said notification and therefore it
cannot be said that the Central Government
has exercised powers under section 641 to alter
Schedule VI.
One cannot imply that the Central Government
has exercised its power under section 641 since
the foot note to prescribed AS 11 states that “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” and not that the said instruction
is omitted.
As such the said instruction is valid and continues
and should be followed by a company. This
argument is further strengthened by the fact
that the said instruction and section 43A of the
Income-tax Act, 1961 were brought in almost
simultaneously and since section 43A still exists
on the statute book, the said instruction also is
still effective.
(b) Schedule VI is part of the Act. Though Central
Government has been vested with the powers to
alter Schedule VI, till such power is exercised to
delete the said instruction, the said instruction
has authority of Law whereas the prescribed AS
11 is part of the Rules. Hence prescribed AS 11
is subordinate to Schedule VI and as such prescribed
AS 11 cannot mandate that the said instruction
of Schedule VI be not followed.
The judgement of Honourable Supreme Court
in case of J.K. Industries (supra) is distinguishable
since in that case Honourable Supreme
Court was concerned with the matter of application
of “Recognition & Measurement principles”
provided by prescribed AS 22 and that
they had held that the “Disclosure Principles”
of Schedule VI are subservient to the overriding
requirement of “True & Fair view”.
The said instruction being a “Recognition
Principle” is on equal footing to “Recognition
Principle” prescribed by AS 11. Since the said
instruction is part of Schedule VI which is part
of the Act and till the time the Central Government
exercises its power under section 641 to alter
Schedule VI by omitting the said instruction,
it could be said to have a superior authority over
prescribed AS 11. In other words, the power to
alter Schedule VI is equivalent to the power to
prescribe Accounting Standards. However, till
the time such power to alter Schedule VI is exercised,
the provisions of Schedule VI prevail in
case of any inconsistency with the prescribed
Accounting Standards
To conclude, this controversy needs to be set right by
the Central Government or else companies may choose
to follow different accounting treatment of exchange
difference in respect of imported fixed assets.q