SIMPLEX CONCRETE PILES (INDIA) LTD. v. UNION OF INDIA
2007-04-19
BHASKAR BHATTACHARYA, KISHORE KUMAR PRASAD
body2007
DigiLaw.ai
BHASKAR BHATTACHARYA, J. ( 1 ) ALL these writ applications were heard together pursuant to the order of transfer passed by the Hon'ble Supreme Court of India as a pure question of law arises for determination in these applications. ( 2 ) THE question is whether the Accounting Standard 22 ("as-22"), particularly, the paragraphs 9 and 33 thereof, which have now being incorporated in the form of the Rules framed by the Central Government under section 642 (1) of the Companies Act, 1956 are ultra vires the Statute, viz. sections 209 (1), 209 (3) and 211 of the Companies Act and consequently, void, inoperative and in excess of the statutory provisions of the Companies Act or the constitution of India. Simplex Concrete Piles vs. Union of India (B. Bhattacharya,. , JJ.) (DB) 145 ( 3 ) DR. Pal, the learned senior Advocate appearing on behalf of the Simplex concrete Piles (India) Limited and Ors. , the writ petitioners in W. P. No. 1459 of 2002 advanced the main argument on behalf of all the writ petitioners and those were supplemented by Mr. Arvind Datar and Mr. V. Ramchandran, Mr. J. P. Khaitan. the learned senior Counsel for the other writ petitioners. ( 4 ) DR. Pal, at the very outset, points out that paragraph 9 of AS-22 lays down, that the tax expense for the period comprising the current tax and deferred tax should be included in the determination of the net profit or loss for the period concerned. e. the relevant financial year. He then refers to the definition of the 'deferred tax' as provided in paragraph 4 to mean the tax effect of the timing differences. Deferred tax-liability due to timing differences can arise, according to Dr. Pal, if at all, only in the future years in respect of the transactions which had taken place in the earlier period and out of which, the difference between the accounting profit and the assessable profit for the purpose of Income-tax Act arises. Such difference, Dr.
Deferred tax-liability due to timing differences can arise, according to Dr. Pal, if at all, only in the future years in respect of the transactions which had taken place in the earlier period and out of which, the difference between the accounting profit and the assessable profit for the purpose of Income-tax Act arises. Such difference, Dr. Pal continues, does not create a present legal liability to tax for the current financial year but may arise only, if at all, in the future years when the written down value of the assets according to Schedule of depreciation laid down under the Income-tax Rules, 1962 and the depreciation calculated under the Companies Act either on straight line method or according to Schedule XIV of the Companies Act may reverse. The liability arising as a result of the timing difference, according to Dr. Pal, is a notional or contingent liability, which may or may not arise in the future years and therefore, the said liability cannot accrue nor can the same be ascertained as a present legal liability. Such a contingent or a notional liability, which is not an accrued or ascertained liability for the current year, therefore, according to the petitioners, cannot be charged to the Profit and Loss Account for the current year, and if the contingent or notional liability is so directed to be charged to the Profit and Loss Account, it will be contrary to and inconsistent with the mandatory provisions of section 209 (3) of the Companies Act read with section 211 (2) of the Companies Act and therefore, such a direction embodied in paragraph 9 of AS-22 as incorporated in the prescribed Rules will be in excess of, contrary to, and inconsistent with, the said mandatory provisions of the Companies Act. ( 5 ) DR. Pal submits that the Central Government, in exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of the Companies Act, 1956 read with sub-section (3c) of section 211 and sub-section (1) of section 210a of the said Act in consultation with the National Advisory Committee on accounting Standards, had framed the said Rules viz. Companies (Accounting standard) Rules, 2006 on 7th December, 2006 and accordingly, his clients, by filing supplementary affidavit, have challenged those rules with the leave of this Court.
Companies (Accounting standard) Rules, 2006 on 7th December, 2006 and accordingly, his clients, by filing supplementary affidavit, have challenged those rules with the leave of this Court. ( 6 ) CLAUSE (2) of the general instructions incorporated in the said prescribed rules lays down that the Accounting Standard prescribed are intended to be in conformity with the provisions of the 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. ( 7 ) IT is also relevant to note that prescribed rules have incorporated the AS- 22. Therefore, the Accounting Standards as prescribed by the rules are to be considered for the purpose of the present application. ( 8 ) ON an analysis of the aforesaid provisions of the Companies Act and the prescribed rules, Dr. Pal refers to the following features, which according to him, are relevant for consideration: a) Section 209 (1) obliges the company to keep at its registered office the proper books of account with respect to all sums of money received and expended by the company and the matters relating thereto. b) Under section 209 (3), the proper books of account shall not be deemed to be kept with respect to the matters specified in sub-section (1) of section 209, if such books are not kept as are necessary to give the true and fair view of the state of affairs of the company or branch office, as the case may be. and at the same time, such books are required to be kept on accrual basis and according to the double entry system of accounting. ( 9 ) IN other words, according to Dr. Pal, the true and proper accounts are to be maintained for each financial year according to the accrual method and double entry system of accounting and the Parliament intended that such true and fair accounts must be for (a) the financial year in question (b) it must be on the accrual method and double entry system of accounting. If therefore, any entries in the books of account are not made on the basis of the aforesaid method viz. accrual basis and double entry system of accounting, Dr.
If therefore, any entries in the books of account are not made on the basis of the aforesaid method viz. accrual basis and double entry system of accounting, Dr. Pal continues, such entries are not permitted or allowed under the law to be entered into the profit and Loss Account for the relevant financial year. ( 10 ) THE Profit and Loss Account, according to Dr. Pal, has to be prepared and maintained according to Part II of Schedule VI to the Companies Act and if any of the prescribed rules incorporating the accounting standard is in conflict with or inconsistent with the maintenance of the Profit and Loss Account according to Part II of Schedule VI, the said provisions are liable to be quashed and/or struck down. ( 11 ) DR. Pal, in this connection, refers to the clause (3) (vi) of Part II of Schedule vi to the Companies Act by way of illustration. The said clause (3) (vi) lays down that what is to be included by way of provision in the Profit and Loss account is the amount of charge for Indian Income Tax and other Indian taxation on profits, including, where practicable, with Indian Income-tax, any taxation imposed elsewhere to the extent of the relief, if any, from Indian Income-tax and distinguishing, where practicable, between the income-tax and other taxation. ( 12 ) THEREFORE, Dr. Pal contends that an amount of income-tax, which is charged during the relevant financial year, can be allowed as a deduction for the purpose of preparing the Profit and Loss Account according to Part II of schedule VI of the Companies Act. Dr. Pal submits that the expression 'charge to income-tax' has been defined and is a well-settled concept in fiscal jurisprudence and section 4 of the Income-tax Act, 1961 lays down that where any Central Act enacts that the income-tax shall be charged for any assessment simplex Concrete Piles vs. Union of India (B. Bhattacharya,. , JJ.) (DB) 147 year at any rate or rates, the income-tax at that rate or those rates shall be charged for that financial year in accordance with, and subject to the provisions of the Act. ( 13 ) DR.
, JJ.) (DB) 147 year at any rate or rates, the income-tax at that rate or those rates shall be charged for that financial year in accordance with, and subject to the provisions of the Act. ( 13 ) DR. Pal submits that it will appear therefore that what is charged to tax is the amount which is liable to be taxed by way of income-tax for that financial year and any amount which is not charged to income-tax for that financial year cannot be debited to the Profit and Loss Account in determining the true and fair profits or losses of that financial year. If any amount, which is not so charged to income-tax for that financial year, is included in the Profit and Loss Account, dr. Pal submits, it will not present or reflect a true and fair view of the state of affairs and also of the profits and losses for that financial year of the company. ( 14 ) BY giving example of the timing difference which has been defined in clause 4. 6 of the Accounting Standard as prescribed by the rules. Dr. Pal contends that such timing differences has been defined to mean the differences between the taxable income and accounting income for a period that originates in one period and are capable of reversal in one or more subsequent periods. Timing differences, according to clause 4. 7 of the said standards, arise because the period, in which some items of revenue and expenses are included in the taxable income, do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at the accounting income. To take an illustration - for the purpose of computing the taxable income, Dr. Pal explains that the tax laws allows depreciation on the basis of written down value method whereas for accounting purposes it is allowed on straight line method. According to section 43 (6) of the Income-tax Act, 1961 written down value' has been defined to mean (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciations actually allowed to him under the Income-tax Act, 1961 or under the Indian Income-tax act, 1922.
In other words, suppose a machinery has been acquired in the year 2000 at a cost of Rs. 10 lakh and the rate of depreciation allowed under the schedule to the Income-tax Act is 20%; then in the second year, the written down value will be Rs. 10 lakh minus Rs. 2 lakh (20% of Rs. 10 lakh ). e. Rs. 8 lakh. In the third year, the written down value will be (Rs. 8 lakh minus 20% of Rs. 8 lakh ). e. Rs. 6. 40 lakh. In this way, the calculation of depreciation under the Income-tax Act is to be made. But, under section 205 of the Companies Act, depreciation is provided either under the straight-line method or according to schedule XIV of the Companies Act. In either case, the rate of depreciation allowed under the Companies Act is much lower than the rate of depreciation allowed under the Income-tax Act. The result is that under the Income-tax Act, the taxable income computed after allowing the depreciation will be lower in the first few years whereas under the Companies Act the rate of depreciation being lower, the accounting income will be higher in the first few years. When, however, over a certain period of years, say 7 or 8 years, the taxable income under the Income-tax Act will be higher as the rate of depreciation will be gradually low and low, under the Companies Act, the rate of depreciation being higher in the subsequent year, the accounting income will be lower. Because of this timing difference in the future years, say 8 or 10 years, according to Dr, pal, there will be a difference between the taxable income and the accounting income. The timing differences provide for such differences between taxable income and accounting income in subsequent future years and such differences are required to be charged to the Profit and Loss Account of the year according to Para 9 of the AS-22 in which the machinery has been acquired. ( 15 ) DR. Pal in this connection produced a chart showing such differences for a proper appreciation of the correct situation and submits that it will, therefore, appear that the liability arising in the future years as a result of the timing differences is not a liability, which has accrued. Such liability in the future years, according to Dr.
( 15 ) DR. Pal in this connection produced a chart showing such differences for a proper appreciation of the correct situation and submits that it will, therefore, appear that the liability arising in the future years as a result of the timing differences is not a liability, which has accrued. Such liability in the future years, according to Dr. Pal, may or may not arise depending upon the subsequent events but the liability arising out of timing differences cannot be said to have accrued during the financial year when the plant and machinery had been acquired and the depreciation of such plant and machinery has been provided for according to Income-tax Act. By way of example, Dr. Pal points out that the machinery which has been purchased in the relevant year may be destroyed or lost or the machinery in the subsequent year, say in the third or forth or fifth year, may be sold away. In such a case, according to Dr. Pal, the timing differences between the taxable income and the accounting income may not arise at all and such liability, therefore, is a contingent one and cannot be allowed under section 209 (3) read with section 211 (2) of the Companies Act. ( 16 ) IN support of his contentions, Dr. Pal relied upon the follownig decisions: 1) Commissioner of Income Tax vs. Jai Prakash Om Prakash Company ltd. , reported in 52 ITR 23 at 26; 2) Commissioner of Income Tax vs. P. Mariappa Gounder, reported in 147 ITR 676 at 682-683; 3) P. Mariappa Gounder vs. Commissioner of Income-Tax, reported in 232 ITR 2 (SC); 4) Tuticorin Alkali Chemicals and Fertilizers vs. Commissioner of Income tax, reported in 227 ITR 172; 5) B. S. C. Footwear Ltd. vs. Ridgway (Inspector of Taxes), reported in 77 itr 857; 6) Vazir Sultan Tobacco Company Ltd. vs. Commissioner of Income Tax, reported in 132 ITR 559 (SC); 7) K. S. Paripooran vs. State of Kerala, reported in AIR 1995 SC 1012 at 1034 Para 44; 8) Income Tax Officer Alleppy vs. M. C. Ponnooseetc, reported in AIR 1970 SC 385 at Para 6 and 7; 9) Bakul Cashew Co. vs. Sales Tax Officer, Quilon, reported in 1986 (2) scc 365 ; 10) Commissioner of Income Tax vs. A. Gajapathy Naidu, reported in 53 itr 114 at 118. ( 17 ) MR.
vs. Sales Tax Officer, Quilon, reported in 1986 (2) scc 365 ; 10) Commissioner of Income Tax vs. A. Gajapathy Naidu, reported in 53 itr 114 at 118. ( 17 ) MR. Khaitan, the learned senior Counsel appearing on behalf of three other writ petitioners, has adopted the submissions made by Dr. Pal and has simplex Concrete Piles us. Union of India (B. Bhattacharya,. , JJ.) (DB) 149 supplemented those arguments by contending that AS-22 requires a wholly notional working as regards tax to be made in respect of individual transaction. According to Mr. Khaitan, under the Income-tax Act, the tax is determined with the reference to the total income and not with reference to any individual transaction. The total income in the future the year, according to Mr. Khaitan, is uncertain, as is the statutory tax-liability in respect thereof. Whether the difference between the current accounting income and the current taxable income will have any impact or relevance or bearing in the computation of the total income in the future the year cannot be predicted; but the AS-22, Mr. Khaitan complains, requires a company to account for the future taxation with reference to the current individual transaction which is an entirely imaginary situation. According to him, merely because the depreciation charged in the accounts is lower than the depreciation allowed under the Income-tax Act for the computation of the taxable income for the current year, it does not thereby follow that in respect of the difference between the two figures, the company would have a higher tax-liability in the future years. He submits that the tax- liability in the future year would depend upon factors like the working of the company and the state of the law. He submits that it is wholly arbitrary and unreasonable to require the company to make tax accounting with reference to the difference between the income assessable under the Income-tax Act and the income as reflected in the accounts on the assumption that such difference would give rise to a liability in a future year. On the face of it. Mr. Khaitan continues, such an approach is contrary to the accrual basis of accounting. He submits that any amount on account of income-tax for which there is no liability under the Income-tax Act cannot be considered as "tax expense" for the period of account.
On the face of it. Mr. Khaitan continues, such an approach is contrary to the accrual basis of accounting. He submits that any amount on account of income-tax for which there is no liability under the Income-tax Act cannot be considered as "tax expense" for the period of account. In other words, he contends that the AS-22 is inconsistent with and contrary to the accounting standards notified by the Central Government under section 145 (2) of the Income-tax Act and is therefore, wholly imaginary, unrealistic and unworkable and therefore, ultra vires the provisions of the companies Act and the Income-tax Act as well as the Constitution of India. He further submits that the AS-22 would not result in presentation of the true and fair view, but in fact will bring about a distorted picture by which healthy- looking balance sheets would be presented by the loss-making companies by creating deferred tax effects; on the other hand, Mr. Khaitan contends, the profit-making companies would show lower profit by creating deferred tax- liability and there would be every possibility of a lay person getting misguided by such presentation and making an investment in the share of a loss-making company because of its healthy-looking balance sheet. Similarly, such a person would miss the opportunity of investing in a profit-making company. He, therefore, prays for declaring the AS-22 as a nullity in so far as it relates to the deferred taxation. ( 18 ) MR. Datar and Mr. Ramchandran, the learned senior Counsel appearing for another writ petitioner virtually adopted the submissions of Dr. Pal. ( 19 ) MR. Chowdhury and Mr. Poddar, the learned senior Advocates appearing on behalf of the Institute, in different matters, have, on the other hand, opposed the contentions of the learned Counsel for the writ petitioners and have contended that the Accounting Standard fixed by the Institute and adopted by the Central Government by framing the rules are in no way conflict with the provisions of the Companies Act and at the same time, the Institute was vested with the authority to frame such standard.
They elaborate their submissions in the following ways: sub-section (1) of the section 211 of the Companies Act clearly requires that every Balance Sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall be in the form as set out in Part I of the Schedule VI of the said Act. Similarly, sub-section (2) of section 211 of the Act also requires that every Profit and Loss account of the company shall give a true and fair view of the profit and the loss of the company for the financial year and comply with the requirements of the part II of the Schedule VI of the said Act. Paragraph 4 of the AS-1 issued by the government of India lays down that accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business in the field and prepared and presented on the basis of such accounting policies. Similarly, the insertion of the concept of "a true and fair" in place of "a true and correct"state of affairs of the company was primarily made to do away with the view previously prevailing that the account should disclose only the arithmetical accuracy. All that could be inferred is that the annual financial statement should not only be made out correctly, but they should convey an overall view and would not give any misleading impression. Adherence to the disclosure of the requirements as per Schedule VI is subservient to the overriding requirement of true and fair view as regards the state of affairs. The observance to the disclosure requirements under Schedule vi, as laid down, are the minimum requirement. This is apparent from section 211, which stipulates that the Balance Sheet shall be in such form or as near thereto as the circumstances admit and clause (3) of Part II of the Schedule VI also stipulates that the Profit and Loss Account shall in particular disclose the information specified therein. The use of these expressions shows that the writings may be included in the accounts, if their inclusion is necessary to present a true and fair view.
The use of these expressions shows that the writings may be included in the accounts, if their inclusion is necessary to present a true and fair view. The basic objective is to ensure that the financial statements disclosed are not only a true but also a fair view of the state of affairs and the working results of the company and that they do not give a misleading picture. Hence, whatever information is relevant and necessary for showing a true and fair view should be disclosed, although those may not be the specific legal requirement. The information should be disclosed in the clear and unambiguous manner. Further, the information, which is disclosed, should be in consonant with the fundamental accounting-assumptions and commonly- accepted accounting policy. ( 20 ) SECTION 200a of the Companies Act, as inserted by the Companies (Amendment) Act, 1999 with retrospective effect from October 31, 1998, provided that the Central Government may by notification in the Official Gazette, constitute National Advisory Committee on Accounting Standards to advise the Central Government on the formation and laying down of the accounting policies or the class of the companies under the said Act. The National Advisory committee should consist of the members as specified in sub-section (2 ). The advisory Committee should give its recommendations to the Central government on such matters of accounting policies and standards and auditing as may be referred to it for advice from time to time. The Advisory Committee was constituted vide the notification dated June 15, 2001. Sub-section (3a) of section 211 of the Act as inserted by the amendment clearly provides that every profit and Loss Account and the Balance Sheet of the company should comply with the Accounting Standards. Sub-section (3b) of the section 211 of the said act further provides that where the Profit and Loss Account and the Balance sheet of the company do not comply with the Accounting Standards, such companies should disclose in its Profit and Loss Account and the Balance Sheet, the following particulars: a. the deviation from the accounting standard; b. the reasons for such deviation; and c. the financial effect, if any, arising due to such deviation.
( 21 ) SUB-SECTION (3c) of section 211 of the Companies Act, 1956 further provides that the expression "accounting Standards" for the purpose of the said section means the standard of accounting recommended by the Institute or as may be prescribed by the Central Government in consultation with the national Advisory Committee on Accounting Standards established under section 210a (1 ). Proviso to section 211 (3c) further provides that the Standards of the Accounting specified by the Institute should be deemed to be the accounting Standard until the Accounting Standards are prescribed by the central Government under section 211 (3c ). Clause (50) of the listing agreement, clearly provides that every listed company will mandatorily comply with all the Accounting Standards issued by the Institute of Chartered Accountants of india from time to time and clause (41) of the listing agreement further provides that every listed company would comply with the Accounting Standards on accounting for taxes on income in respect of the quarterly unaudited financial result with effect from the quarter ending on or after September 30, 2001. Before the introduction of sub-sections (3a), (3b), and (3c) in section 211 of the companies Act, 1956, the Accounting Standards issued by the Institute of chartered Accountants of India were not mandatory qua the corporate management. At that time, the management of the compan. es was free to adopt such accounting practice while preparing the annual financial statements, as they deemed expedient. However, the Institute had laid down that it was the duty of the Statutory Auditors to qualify their audit report furnished by them under section 227 of the Companies Act. 1956. if there was deviation from the accounting Standards. After the enactment of the rules, the Accounting standard prepared by the Institute are now mandatory and non-compliance with these standards would lead to the violation of the provisions of the section 211 of the Companies Act, 1956 inasmuch as the annual accounts maintained shall not be regarded as showing its true and fair view. It is now the requirement under the Companies Act all over the world that the corporate accounts should disclose a true and fair view and it is also a requirement that the auditors should ensure that the true and fair view is disclosed.
It is now the requirement under the Companies Act all over the world that the corporate accounts should disclose a true and fair view and it is also a requirement that the auditors should ensure that the true and fair view is disclosed. As there was no legal definition of what is true and fair, that is why, the accounting profession had taken the responsibility of formulating the Accounting Standards. ( 22 ) PRIOR to the passing of the Companies Act, 1956, the requirement was to disclose a true and correct view. When we speak of disclosing a true and correct view, it may be permissible to look only into the legal liability for tax and make a provision accordingly; but when the requirement is to disclose a true and fair view, a wider perspective is warranted and that is why, the income-tax provision should be based not only on the strict legal liability to be discharged immediately but also on the legal liability based on book profits, which are earned and reflected in the corporate accounts. There should be a reasonable matching of cost and benefit, if the accounts are to disclose a true and fair view. ( 23 ) AS-22 is an Accounting Standard intended to ensure that a true and fair view of the profit earned during a particular financial year, and the taxes payable thereto, is presented in the corporate accounts. The timing difference is a difference, which arises in one period and is capable of being reversed in a subsequent period. For example, if the book profits are Rs. 10 lakh after charging book depreciation of Rs. 4 lakh, as the taxable profits are only Rs. 6 lakh, because of higher depreciation of Rs. 8 lakh, the difference of Rs. 4 lakh would be reversed in a subsequent year, when the tax depreciation is less than the book depreciation. The difference originates in the first financial year, and if deferred tax-liability is not provided in that period as a deferred tax account, the company would be in danger of distributing the profits beyond the commercial or real measurement of those profits and it is possible that in the financial year in which the timing difference reverses,. e. the year in which a higher tax is payable because of lower charge of tax depreciation, it may not have funds.
e. the year in which a higher tax is payable because of lower charge of tax depreciation, it may not have funds. Deferred tax accounting, therefore, ensures that profits are measured in a real and the actual manner. It also ensures that the advantage obtained in one year, which would be reversed a subsequent year, is duly recognized as a liability. ( 24 ) BY making the aforesaid submissions, the learned Counsel appearing on behalf of the Institute concluded by pointing out that the Institute was established by the Act of the Parliament in order to regulate the profession of accounting and by formulating Accounting Standard, the Institute has done nothing more than to fulfil its statutory obligation in furthering the legislative intent of the Parliament which requires that the account should be true and fair. The long and short of their submission is that the Parliament required that the accounts of the companies should be true and fair but it has not defined what is true and fair and in such circumstances, the Parliament has assigned the task of certifying the truth and fairness to the Auditor of the companies who by law are the Chartered Accountants. The Parliament has also established a Statutory Institute of the Chartered Accountants to fulfil the function of regulating the profession and, therefore, no fault can be found from the accounting Standard fixed by the Institute, which has since been adopted in the rules framed by the Central Government. ( 25 ) THE learned Counsel for the Institute, therefore, prayed for dismissal of all these writ applications. ( 26 ) MR. Chatterjee, the learned Counsel appearing on behalf of the Union of india has adopted the argument advanced by the learned Counsel for the institute and has supplemented those by contending that the Accounting standards which have been adopted by the Central Government has in no way affected any of the rights of the writ petitioners conferred under the Companies act, 1956 and at the same time, those are also not in conflict with any other provision of the said Act. Mr.
Mr. Chatterjee further contends that the provisions contained in the Act have conferred power upon the Central Government to take the help of the Institute for the purpose of implementing the intention of the Parliament and particularly, the amended provisions of the Companies act, 1956, for the purpose of giving effect to its mandate that the accounts of the companies really reflect the true and fair view of their affairs. Mr. Chatterjee. thus, prays for dismissal of all these writ applications. ( 27 ) AFTER hearing the learned Counsel for the parties and after going through the materials on record, we find that the learned Counsel have unnecessarily dealt with the various provisions of the income-tax Act and the decisions given by various Courts dealing with the provisions contained in the said Act. As pointed out earlier, the question before us is very simple. e. whether the AS-22 formulated by the Institute, which has since been adopted by the Central government by virtue of the provision contained in the Companies Act by framing the rules are ultra vires either the Constitution of India or any other provisions of the Companies Act itself. ( 28 ) THERE is no dispute that under the provisions of the Companies Act, the central Government is authorised to make rules for the implementation of the directions contained in sections 209-211 thereof and at the same time, the institute is also the appropriate authority to give guidelines to the Central government. None of the Counsel for the petitioners raised any objection as regards the legislative competence of the Central Government or the authority of the Institute in guiding the Central Government in the matter. ( 29 ) WE are, therefore, called upon to decide whether the rules framed by the central Government after adopting the suggestion given by the Institute through the AS-22 are inconsistent with any of the provisions of the Companies act or any of the provisions of the Constitution of India. ( 30 ) BEFORE we proceed to answer the question, we must bear in mind the limitation of a Writ Court in the matter of interfering with the matters concerning accounting policies and practices as laid down, by the expert body like the Institute. The fact that the Institute is an expert recognised under the law is without any doubt.
( 30 ) BEFORE we proceed to answer the question, we must bear in mind the limitation of a Writ Court in the matter of interfering with the matters concerning accounting policies and practices as laid down, by the expert body like the Institute. The fact that the Institute is an expert recognised under the law is without any doubt. As laid down by the Supreme Court in the case of peerless General Finance and Investment company Limited vs. Reserve Bank of india, reported in 1992 (2) SCC 343 , the function of the Court is to see that lawful authority is not abused but at the same time, the Court is not to appropriate itself the task entrusted to that authority. According to the Supreme court, a public body vested with the statutory power must take care not to exceed or abuse its power. It must act in good faith and reasonably. The Courts are not to interfere with economic policy, which is the function of the experts. It is not the function of the Court to sit in judgment over the matters of economic policy and those matters should be left to the expert bodies. The Supreme Court further pointed out that in those matters, even the experts seriously and doubtlessly can defer and the Court is not expected to decide them even without the aid of the experts. ( 31 ) WE repeatedly asked the learned Counsel for the writ petitioners to point out those provisions of the Companies Act, which, according to them, are in conflict with the rules framed by the Central Government by adopting the as-22, but none of them could clearly give any direct answer. All of them, however, in one word asserted that the rules are in conflict with Schedule VI of the Companies Act. We, therefore, proceed to deal with the provisions contained in Schedule VI of the Act. ( 32 ) BEFORE going into the Schedule VI of the Act. we should bear in mind that sub-section (1) of section 211 of the Companies Act requires that every balance Sheet of the company shall give a ''true and fair view" of the state of affairs of the company as at the end of the financial year and shall be in the form set out in Part I of Schedule VI of the Act.
Similarly, the sub-section (2) of section 211 of the Act demands that every Profit and Loss Account of a company shall give the true and fair view of the profit or loss of the company for the financial year and shall also comply with the requirements of Part II of Schedule vi of the Act. ( 33 ) SCHEDULE VI of the Act, however, deals with the manner of presentation of financial data in the annual financial statements, viz. , the Balance Sheet and the Profit and Loss Account to be drawn by a corporate enterprise at the end of each financial year. Part I of Schedule VI lays down the forms of the balance Sheet. Part II of Schedule VI describes the requirement as to the presentation of the various financial statistics in the Profit and Loss Account. Part III of Schedule VI, on the other hand, deals with the interpretation of some of the expressions viz. provisions, reserve, capital reserve, liability, quoted investment etc. used in Part I and Part II of Schedule. ( 34 ) HOWEVER, save and except the case of depreciation, which is to be provided by every corporate enterprise in accordance with the rates laid down in Schedule xiv of the Act having regard to the provisions contained in sections 205 and 350 of the said Act, the same does not lay down the procedure for recognition and measurement of ether the income or the expenses and/or the assets and liabilities. This fact would be evident from the following illustration: 1. Part I of Schedule VI lays down that investments are to be reflected in the corporate balance sheet in the manner indicated therein. However, the Schedule VI does not point out any item of assets, which should be recognised as investments. The said provision also does not indicate the method of valuing the investments. This aspect had been dealt with by the Institute in its Accounting Standard AS-13 by describing the same is "accounting for Investments". 2. Part I of Schedule VI directs that current assets, loans and advances are required to be reflected in the corporate Balance Sheet in the manner laid down therein in which the current assets, which includes inter alia, "stock-in-trade" should be valued. This aspect had been dealt with by the Institute in its Accounting Standard AS-2 titled "valuation of inventories". 3.
Part I of Schedule VI directs that current assets, loans and advances are required to be reflected in the corporate Balance Sheet in the manner laid down therein in which the current assets, which includes inter alia, "stock-in-trade" should be valued. This aspect had been dealt with by the Institute in its Accounting Standard AS-2 titled "valuation of inventories". 3. Save and except the statutory fixed rates of depreciation as laid down in schedule XIV of the Act, all other aspects relating to recognition and measurement of the depreciation, which have not been provided in the act, are all dealt with in the Accounting Standard AS-6. 4. Part II of Schedule VI of the Act lays down the manner of presentation of various items of income and expenses in the Profit and Loss Account. However, in the said Act there is no provision pointing out how and when expenditure should be measured and/or recognised. This aspect had been considered by the institutes in various Accounting Standards. Similarly, the Institute has also issued various guidance notes on accounting and other aspect. ( 35 ) SINCE the Companies Act nowhere deals with the recognition and measurement of various items of income and expenses, assets and liabilities and it only deals with the presentation thereof, there can never be any conflict with the provisions of the Act on one hand and the Accounting Standard and guidance Notes issued by the Institute, on the other, in discharge of its statutory obligation under the Chartered Accountants Act read with the Companies Act which clearly requires that every corporate enterprise must maintain such books for the purpose of giving the true and fair view of the state of affairs of the company and to explain its transaction and that every Balance Sheet of the company shall give a true and fair view of the state of affairs at the end of the financial year. ( 36 ) IN course of the argument before us, it was sought to be argued on behalf of the petitioners that Part I of Schedule VI of the Act deals with recognition and measurement in respect of foreign exchange transactions. In this respect, particular reference was made to the "instruction in accordance with which assets should be made out" appearing against the heading "fixed assets" in Part I of Schedule VI of the Act.
In this respect, particular reference was made to the "instruction in accordance with which assets should be made out" appearing against the heading "fixed assets" in Part I of Schedule VI of the Act. The instruction indicated above says that where the original cost of a fixed asset, including additions and deductions thereto, relate to any fixed asset acquired from a country outside india, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, as expressed in Indian Currency, for making payment towards the whole or part of the cost of such asset, either by way of borrowing or otherwise, the amount by which the liability so increased or reduced during the year, shall be added to, or, as the case may be, deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset. Explanation (2) under the said instruction refers to the provisions of section 43a of the Income-tax Act, 1961 in respect of such matters. ( 37 ) IT is. therefore, clear that the said instructions appearing under the heading 'fixed Assets' in Part I of Schedule VI to the Companies Act. 1956, deal with presentation of fixed assets, which had been acquired from countries overseas, and the cost whereof undergoes a change consequent to a change in the rate of foreign currency. This reflection/presentation in the accounts is clearly based on the provisions of section 43a of the Income-tax Act, 1961, which lay down the special pro visions consequential to the changes in the rate of exchange of currency. Further, the Accounting Standard in AS-22, in our opinion, is in no way contrary dictory to and/or in conflict with Schedule VI of the Companies Act, 1956, having regard to the overall statutory requirement/consideration of reflecting true and fair view, as laid down in section 211 (1) and (2) of the said act.
Further, the Accounting Standard in AS-22, in our opinion, is in no way contrary dictory to and/or in conflict with Schedule VI of the Companies Act, 1956, having regard to the overall statutory requirement/consideration of reflecting true and fair view, as laid down in section 211 (1) and (2) of the said act. Clause (vi) under paragraph 3 of Part II of Schedule VI to the said Act deals with the amount of charge for the Indian Income-tax Act and other Indian taxation on profits, including where practicable with Indian Income-tax any taxation imposed elsewhere to the extent of the relief, if any, from Indian income-tax and distinguishing, where practicable, between income-tax and other taxation. Therefore, the said clause (vi) also talks only about presentation of income-tax liability in the Profit and Loss Account. It does not speak of the methods of its recognition and/or measurement, which aspects are dealt with only by the Accounting Standard, the AS-22. ( 38 ) THEREFORE, there is no contradiction and the contention of the learned counsel for the petitioners in this regard is devoid of any substance. ( 39 ) THE learned Advocates appearing on behalf of the writ petitioners have next attacked the paragraph 33 of the AS-22 as unconstitutional on the ground that by this paragraph, the Accounting Standard AS-22 appears to act retrospectively, which is not permitted, this being a subordinate legislation. Reliance in this respect has been placed on the decision of the Honble Supreme court in the K. S. Poripooran vs. State of Kerala, reported in AIR 1995 SC 1012 (Para 44) where the Apex Court made the following observations: "a statute dealing with substantive rights differs from a statute which relates to procedure or evidence or is declaratory in nature inasmuch as while a statute dealing with substantive rights is prima facie prospective unless it is expressly or by necessary implication made to have retrospective effect a statute concerned mainly with matters of procedure or evidence or which is declaratory in nature has to be construed as retrospective unless there is a clear indication that such was not the intention of the legislature.
A statute is regarded as retrospective if it operates on cases or facts coming into existence before its commencement in the sense that it affects, even if for the future only, the character of consequences of transactions previously entered into or of other past conduct. By virtue of the presumption against retrospective applicability of laws dealing with substantive rights transactions are neither invalidated by reason of their failure to comply with formal requirements subsequently imposed, nor open to attack under powers of avoidance subsequently conferred. They are also not rendered valid by subsequent relaxations of the law, whether relating to form or to substance. Similarly, provision in which a contrary does not appear neither impose new liabilities in respect of events taking place before their commencement, nor relieve persons from liabilities then existing, and the view that existing obligations were not intended to be affected has been taken in varying degrees even of provisions expressly prohibiting proceedings. [see Halsbury's Laws of England, 4th Edn. , vol. 44, paras 921, 922. 925 and 9261. " ( 40 ) IN our view, however, there is nothing wrong with paragraph 33. It does not make anything retrospective. This can best be explained by the following two simple illustrations given by the learned Counsel for the Institute. ( 41 ) IT appears that section 209 (3) (b) of the Companies Act, 1956. as inserted in the statute book by the Companies (Amendment) Act, 1988 with effect from june 15, 1988 requires that the books of accounts of every corporate undertaking must be kept on accrual basis, and according to the double entry system of accounting. In other words, if a company, prior to the said amendment carried out in the year 1988, was maintaining its accounts on "cash basis", it is required to convert the same to mercantile/ accrual basis with effect from June 15, 1988. Therefore, the question is whether even after such amendment, a company can for the period between April 1, 1988 and June 15, 1988, still maintain its accounts on cash basis. Further question is whether it can be legitimately contended on behalf of a company that while maintaining accounts on mercantile basis, it would not record the opening balances of its assets and liabilities, since section 209 (3) (b) does not specifically talk about retrospective application.
Further question is whether it can be legitimately contended on behalf of a company that while maintaining accounts on mercantile basis, it would not record the opening balances of its assets and liabilities, since section 209 (3) (b) does not specifically talk about retrospective application. If we answer those questions in favour of the company, the result will be that the accounts cannot be said to have been maintained on mercantile/accrual basis; and the Balance Sheet and the Profit and Loss Account drawn as at the end of the relevant financial year viz. March 31, 1989, cannot be said to represent true and fair view of the affairs unless, the company records all opening balances of its assets and liabilities, as existing, at least on April 1, 1988. In such cases, it cannot be said that section 209 (3) (b) operates retrospectively, although the statute specifically talks about its operation only with effect from June 15, 1988. ( 42 ) THIS can also be explained by the following illustration: an enterprise is following cash basis of accounting up to the year ending march 31, 2007. From 1st April, 2007, it decides to follow the accrual basis of accounting. Accordingly, it has to determine on 1st April, 2007 what are the assets and liabilities of the enterprise existing on that day. For instance, if the enterprise has not paid salary to its employees for the last six months, it has to recognise this as a liability. This liability is worked down by multiplying the salary per month with the number of months in past. e. 1st September, 2006 to 31st March. 2007 for which the salary has not been paid. This does not tantamount to retrospective application of accrual basis of accounting because it is determining the liability towards salaries payable and existing on 1st April, 2007. Similarly paragraph 33 requires determination of deferred tax liabilities and/or deferred tax assets as on the date when the standard is first applied. As explained earlier, the reference to the past period is only for the purpose of computing the outstanding liability/assets. ( 43 ) IT is, therefore, clear that there is no merit in the submissions made on behalf of the petitioners that paragraph 33 is ultra vires.
As explained earlier, the reference to the past period is only for the purpose of computing the outstanding liability/assets. ( 43 ) IT is, therefore, clear that there is no merit in the submissions made on behalf of the petitioners that paragraph 33 is ultra vires. ( 44 ) WE now propose to deal with the question whether the provisions of the deferred tax-liability under the AS-22 is notional or contingent in nature as laboriously contended by the learned Counsel for the writ petitioners. ( 45 ) ACCORDING to the learned Counsel for the writ petitioners, the deferred tax-liability is a notional and contingent liability and. therefore, it is not required to be charged to the Profit and Loss Account as per the requirements of the companies Act, 1956. In support of their contention, they have argued that the deferred tax-liability is a future liability and, therefore, it does not exist on the balance Sheet date. They have also argued that it is a contingent liability it may or may not arise in future. According, they contend that the deferred tax- liability is not in accordance with the requirement of section 209 (3) (b) of the companies Act, 1956 as it does not amount to keeping the books of account on accrual basis. ( 46 ) IN our opinion, the deferred tax-liability is not a notional tax liability but a real liability because it will result in future cash outflow in the form of tax payment to the tax recovering authorities. This aspect is rightly highlighted in the example given by the learned Counsel for the Institute as mentioned in the following paragraphs. ( 47 ) AS stated earlier, the depreciation on a fixed asset for the tax purposes is higher in comparison with the accounting depreciation under the Schedule xiv of the Companies Act in the initial years in which the asset is used. This is because the rates of tax depreciation are primarily the incentive-rates and are not based on the useful life of the assets, which is the concept, broadly followed in Schedule XIV. Thus, an asset under the Income Tax Act would be charged over a much shorter period as compared to the useful life of the asset.
This is because the rates of tax depreciation are primarily the incentive-rates and are not based on the useful life of the assets, which is the concept, broadly followed in Schedule XIV. Thus, an asset under the Income Tax Act would be charged over a much shorter period as compared to the useful life of the asset. For instances, if the functional life of the asset is, say 10 years, for taxation purposes, it may be written off fully over a period of say 4 years. Thus, in the first year in which the tax depreciation is higher than the accounting depreciation, the deferred tax-liability on the difference between the amounts of depreciation,. e. the timing difference, arises as it relates to the depreciation amounts for the year. It would become payable in future years when the timing differences reverses. e. the accounting depreciation becomes higher than the tax depreciation. It is, thus, important to keep in mind that a liability which arises in the current year (. e. , the year in which timing difference arises) and is payable in a future year is not a future liability. A future liability arises in a future period whereas the deferred tax-liability arises in the current year, in which the timing difference originates,. e. , during the year the difference in the tax depreciation and accounting depreciation arise. The deferred tax-liability, therefore, exists on the Balance-Sheet date of the financial year in which it originates. The deferred tax-liability is, therefore, a real liability and not a notional liability. A notional liability is not payable in future, whereas the deferred tax-liability arises in current financial year but is payable in a future financial year. This is the crux of the accrual basis of accounting as defined in the Accounting Standard 1, Disclosure of Accounting Policies, issued by the institute of Chartered Accountants of India and notified by the Government as follows: "accrual: revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Standard)" .
(The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Standard)" . ( 48 ) REGARDING the contention of the petitioners that the deferred tax-liability is a contingent liability because it may or may not arise in future, it may be noted from the above that the deferred tax liability actually arises in the financial year in which the timing difference originates. Therefore, the question of liability being contingent in nature does not arise. A 'contingent' liability becomes a liability on happening or not happening of an uncertain event in future. Deferred tax-liability is not contingent, as it does not arise in future on the happening or not happening of a future event. There is, thus, a difference in a liability arising in future or contingent on a future event and a liability, which exists today but in payment in respect of which is to be made in future. Any existing liability which is payable in future is not a future liability or a contingent liability. Deferred tax-liability is of this nature as it is an existing liability on the Balance-Sheet date. ( 49 ) THE argument of the petitioners that the liability may or may not arise in fviture on the basis that it may not reverse in future is also not correct because the reversal of the timing difference in respect of an asset is definite over the life of the asset. In view of this, there is no uncertainty with regard to the reversal of the timing difference in future. Regarding the contention of the petitioners that the asset may be destroyed or disposed of before the timing difference reverses, the answer is that the accounts of a company are prepared under the fundamental accounting assumption of 'going concern', which is defined in Accounting Standard 1, Disclosure of Accounting Policies, issued by the Institute of Chartered Accountants of India, and notified by the Government as follows: "going Concern - the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. " ( 50 ) THE deferred tax-liability is, therefore, a liability for the current year.
It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. " ( 50 ) THE deferred tax-liability is, therefore, a liability for the current year. e. for the period in which the timing difference originates, on the basis of the matching concept, (which is very much a part of accrual basis of accounting), as discussed earlier. ( 51 ) IN the light of the aforesaid discussions, it follows, therefore, that the charge of deferred tax expenses in the Profit and Loss Account is in respect of a known liability, which is definitely payable in future; and, therefore, it is fully covered by the definition of the expression 'provision' as contained in Part iii of Schedule VI to the Companies Act, 1956. ( 52 ) THE submission made on behalf of the petitioners to the effect that if the provision for deferred taxes is made and reflected in the final accounts, the banks and financial institutions would start recalling their loans, in our view, is inconsequential for our purpose as the sole object of the Rule is to implement the object of the Statute that the true and fair view of the affairs of the company should be reflected from their Balance Sheet lest anybody is deceived by the apparent Balance Sheet of the company which does not show the true and fair view. The object of the rules is to enable not only the Bank and other financial institution to discover the "real health" of the company to whom it proposes to lend money but also to give the true and fair view of the affairs of the company to those persons who wish to invest money in the said company or to enter the business relationship with the same. ( 53 ) WE now propose to deal with the decisions cited on behalf of the writ petitioners. ( 54 ) IN the case of Commissioner of Income Tax vs. Jai Prakash Om Prakash company Ltd. (supra), the Supreme Court was dealing with the provisions of income-tax Act for the purpose of deciding the question whether on the facts as ascertained, certain income could be said to have accrued to the assessee, and whether the same was a question of law.
We fail to appreciate how the said decision can be of any help to the petitioners for the purpose of deciding the question whether the rules framed by the Central Government in exercise of powers conferred under the Act is in conflict with any of the provisions of the act. ( 55 ) IN the case of Commissioner of Income Tax, Tamil Nadu vs. P. Mariappa gounder (supra), the Madras High Court was dealing with a case under the income-tax Act where the question was whether the mesne profits awarded by a Court for wrongful possession could be liable to be assessed as income. In that context, it was held that a claim of mesne profits is usually directed against one who has deprived the true owner of the possession of his property and has thereby prevented the true owner from enjoying the income there from or the usufruct of the property. According to the Madras High Court, when in such a suit or proceeding the Court awards mcsnc profits to the true owner which presents a just recompense to the true owner for the deprivation of the income which ought to have come into his hands but for the interference of the person in wrongful possession of the property, it is in reversion of the position that the true owner is entitled to the income from the property and the person who is in wrongful possession is to compensate the true owner by paying either the actual income from the property or a reasonable estimate of that income. The Madras high Court held that the question of accrual or non-accrual of income and the subsidiary question of the time of accrual of income are required to be decided only on fiscal principles and not on the basis of any given accounting method which is in vogue or which might be practised by the assessee. According to the madras High Court, the concept of accrual of income for the purposes of income- tax is a concrete concept and the Income-tax Act does not deal with abstractions. It deals with the income and, therefore, when for the purpose of income-tax, the accrual of income is spoken of, it is not accrual in the abstract or of income in the abstract.
It deals with the income and, therefore, when for the purpose of income-tax, the accrual of income is spoken of, it is not accrual in the abstract or of income in the abstract. In our opinion, such interpretation of Income-tax Act is insignificant for our purpose as we are concerned with the question whether a company for the purpose of showing the true and fair view of its affairs is required to comply with AS-22 since incorporated by the rules although those requirements may not be necessary for the purpose of the Income-tax Act and we, therefore, find no relevance of the said decision. The said decision of the madras High Court was affirmed by the Supreme Court in the case of P. Mariappa gounder vs. Commissioner of Income-Tax, reported in 232 ITR page 2. ( 56 ) IN the case of Tuticorin Alkali Chemicals and Fertilizers vs. Commissioner of Income Tax (supra), the Supreme Court in the similar way while construing the provision of the Income-Tax Act, 1961 held that the income-tax is attracted at the point when the income is earned and taxability of income is not dependent upon its destination or the manner of its utilisation. According to the Supreme court, it has to be seen whether at the point of the accrual, the amount is of a revenue nature and if so, the amount will have to be taxed. The Supreme Court further held that the question whether a particular receipt is of the nature of income and falls within the charge of section 4 of the Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term "income" given in a large number of decisions of the High Courts, the Privy Council and the Supreme Court. We fail to appreciate how the said decision can be of any help to the writ petitioners when the question is whether the Rules provided under the Companies Act can ask a company to disclose something in its Balance Sheet which may be irrelevant for the computation of its income-tax under the provisions of the Income tax Act and our answer is in the affirmative provided those requirements are for the purpose of showing the true and fair view of the affairs of the company.
We, thus, find that the said decision is not pertinent for our purpose. ( 57 ) IN the case of Vazir Sultan Tobacco Ltd. vs. Commissioner of Income tax (supra), the Supreme Court was dealing with the three items of appropriation being (a) provision for taxation, (b) provision for retirement gratuity and (c) provision for proposed dividends in the case of concerned assessee Companies in several Appeals and Tax Reference Cases. In those contexts, the Court made the following observations: "under section 210 of the Companies Act, 1956 it is incumbent upon the board of Directors of every company to lay before the annual general meeting of its shareholders (a) the annual balance-sheet and (b) the profit and loss account pertaining to the previous financial year. Section 211 (1) provides that every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of schedule VI, or near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case, while section 211 (2) provides that every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. In other words the preparation of balance-sheet as well as profit and loss account in the prescribed forms and laying the same before the shareholders at the annual general meeting are statutory requirements which the company has to observe. The form of balance-sheet as given in part I of Schedule VI contains separate heads of 'reserves and surpluses' and 'current liabilities and provisions' and under the sub-head 'reserves' different kinds of reserves are indicated and under sub-head 'provisions' different types of provisions are indicated; Part III is the interpretation clause setting out the definitions of various expressions occurring in Parts I and II and the expressions 'reserve', 'provision' and 'liability' have been defined in Clause 7 thereof.
Material portion of Clause 7 of Part III runs as under: " (1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires, - (a) the expression 'provision' shall, subject to sub-clause (2) of this Clause mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability; (c) x x x and in this sub-clause the expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. (2) Where - (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of as sets, not being an amount written off in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability; is in excess of the amount which, in the opinion of the directors, is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a 'reserve' and not a 'provision'. On a plain reading of Clause 7 (1) (a) and (b) and Clause 7 (2) above it will appear clear that though the term 'provision' is defined positively by specifying what it means the definition of 'reserve' is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term 'reserve'.
In other words the effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of 'provision' it can never be a reserve but it does not follow that if the retention or appropriation is not a provision it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriate has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term 'reserve' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability the same is not necessarily a reserve. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assesses strenuously contended before us that once it was shown or became clear that the retention or appropriation of a sum out of profits and surpluses was for an unknown liability or for a liability which did not exist on the relevant date it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition of reserve are borne in mind. Having regard to type of definitions of the two concepts which are to be found in Clause 7 of Part III the proper approach in our view would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression 'provision and if it does then clearly the concerned section 11 have to be excluded from the computation of a capital, but in case the retention or appropriation of the sum is not a provision as defined the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital.
" ( 58 ) IN our view, the said decision cannot be of any help for resolving the question whether the impugned Rules framed under the Companies Act can lawfully compel a company to disclose something which is irrelevant for the purpose of computation of income-tax if the same is necessary for the purpose of showing a true and fair view of its affairs. ( 59 ) IN the case of Bakul Cashew Co. vs. Sales Tax Officer, Quilon (supra), the Supreme Court was considering the question whether a subordinate legislation can be given retrospective in operation in the light of Kerala General sales Tax Act, 1963. According to the Supreme Court, the power of the government to grant exemption could not be exercised retrospectively unless the Government is specifically empowered. We have already discussed the similar decision of the Supreme Court in the case of K. S. Paripooran vs. State of Kerala (supra) earlier and have held that in this case, no question of giving any retrospective operation of the Rules arises. Therefore, we do not propose to further deal with the present decision. ( 60 ) IN the case of Commissioner of Income Tax vs. A. Gajapathy Naidu (supra), the Supreme Court was dealing with the provision contained in section 4 (1) (b) (i) of the Indian Income-Tax Act, 1922 for the purpose of deciding the question as to the exact time when income accrues or arises. According to the supreme Court, the provision of the Indian Income-Tax Act, 1922 had to be construed on their own terms without drawing any analogy from English Statute whose terms may superficially appear to be similar. According to the Supreme court, the meaning of the word "accrue" or "arise" in section 4 (1) (b) (i) of the Act could not be extended so as to take in amounts received in a later year though the receipt was not on the basis of right accrued in earlier year. The Supreme court further held that such amounts are, in law, received by the assessee only in the year in which they are paid. In our opinion, the interpretation of the provision of Income-tax Act by the Supreme Court cannot help Dr.
The Supreme court further held that such amounts are, in law, received by the assessee only in the year in which they are paid. In our opinion, the interpretation of the provision of Income-tax Act by the Supreme Court cannot help Dr. Pal's client in anyway for the purpose of deciding a question whether the Rules framed by the Central Government in exercise of the power conferred under the Companies act was ultra vires or not. For the purpose of showing the true and fair view of the affairs of the company, in our view, the Rules may require the company to disclose something more than what is required under the Income-tax Act or that may not be at all required for the purpose of Income-tax Act. We, therefore, find that the said decision cannot help the petitioners in anyway. ( 61 ) IN the case of B. S. C. Footwear Ltd. vs. Ridgway (Inspector of Taxes), (supra) the taxpayers carried on the trade of shoe retailers. Most of the goods sold by them were bought wholesale. They maintained very large stocks, and the amount unsold at the end of a trading year was generally about a third of the amount sold in that year. The price paid by the taxpayers to wholesalers was calculated by reference to a "mark-up" fixed periodically by the directors, which was the percentage margin between the wholesale-buying price and the retail-selling price, which would produce the net rate of profit considered appropriate. A substantial part of the stock-in-hand at the end of a year would be sold either at reduced prices in the January sales, or at still lower prices in later sales. Those reduced gross prices were sometimes lower than the wholesale prices, sometimes the net price was lower, and sometimes the sales resulted in a reduced profit. For some 30 years, the taxpayers had valued the unsold stock-in-hand at the replacement value,. e. the price that they would pay for that type of stock in the wholesale market. Until 1959, that method had been accepted by the Inland Revenue.
For some 30 years, the taxpayers had valued the unsold stock-in-hand at the replacement value,. e. the price that they would pay for that type of stock in the wholesale market. Until 1959, that method had been accepted by the Inland Revenue. For the year 1960-61, the taxpayers were assessed to income-tax on the basis that their stock-in-hand at the beginning and the end of the relevant accounting period, January 1 and December 31, 1959, ought to be valued either at cost or at the market value, whichever was the less, the market value being the price obtainable on a retail sale less selling expenses. The taxpayers appealed to the special commissioners, who decided in favour of the Revenue. On appeal, the same was dismissed on the ground that the words "market value" in the formula accepted by the law from the practice of accountants for valuation of stock-in-trade - "cost or market value, whichever is the less" prima facie connoted the price obtainable in the market which offered the best price and that the evidence did not support the existence of an invariable accountancy practice of interpreting "market value" in such a way as to give the trader an option of valuing his stock at the wholesale market price even though that was less than the cost. On appeal by taxpayers, Russell L. J. held that in the phrase "cost or market value whichever is the lower", "market value" meant the price at which the stock could be expected to be sold in the market in which the trader sells; in the case of a retail trade, that market must be the retail market. It was further held that if a method had been consistently applied in the past, it should not be changed unless there were good reasons sufficient to outweigh any difficulties and in that case, there was such a reason, namely, that the method consistently' applied prior to the year 1959, however commercially sensible, did not reproduce the profits and gains for a particular year taken in isolation.
( 62 ) IN the case before us, by virtue of the provision contained in the companies Act, the Central Government is invested with the power to frame rules for the purpose of giving effect to the amendment of the Companies Act to the effect that the account of the company should disclose a true and fair view of the affairs of the company and while framing Rules, the Central government was authorized to take the assistance and guidance of the Institute. The Institute being an expert in the field framed the AS-22 and the same was adopted by the Central Government. By incorporation of the Rules, the Central government did not commit any illegality nor has in infringed any of the legal or fundamental rights of the writ petitioners justifying interference. We, therefore, find that the principle laid down in the case of B. S. C. Footwear limited (supra) cannot have any application to our case. ( 63 ) IN the case of Income Tax Officer, Alleppey vs. M. C. Ponnoseetc and Ors. (supra), by issuing notification in exercise of power conferred under section 2 (44) (ii) of the Income-tax Act, the State Government invested the Tahsildar with the power of Tax Recovery Officer. In such a situation, the Supreme Court held that retrospective legislation by delegated authority can be permissible if it is apparent from the language employed in the statutory provision that such power is given either expressly or by necessary implications; but, according to the Supreme Court, where no such language is to be found, it is to be held that the person or authority exercising subordinate legislative functions cannot make a Rule, Regulation or Bye-law which can operate with retrospective effect. We have already pointed out that in this case, framing of the Rules was, not in reality, given any retrospective operation. Therefore, the principle laid down in the said decision cannot have any application to the fact of the present case. ( 64 ) ALL the decisions relied upon by the learned Counsel for the petitioners are, therefore, of no avail to the writ petitioners. ( 65 ) ON consideration of the entire materials on record, we find no merit in these writ applications and we are of the firm view that the Rules framed by the Central Government were quite in conformity with the intention reflected in the Companies Act.
( 65 ) ON consideration of the entire materials on record, we find no merit in these writ applications and we are of the firm view that the Rules framed by the Central Government were quite in conformity with the intention reflected in the Companies Act. ( 66 ) ALL these writ applications are, therefore, dismissed. In the facts and circumstances, there will be, however, no order as to costs. Applications dismissed.