3.13     Query

Interpretation of some provisions of Schedule VI

To the Companies Act, 1956-3

 The querist is a Company which is an Export House and which, under a Letter of intent from the Ministry off Commerce, is entitled to obtain import licences on the basis of exports meet by the said Company. The right to these licences arises immediately upon export of the goods, though the actual licences are received only on production of the required evidence of the fact of export.

In respect of exports made before the close of the accounting year, some of the licences will be issued during the accounting year, while some will be issued in the succeeding accounting year. In any event, the goods imported under these licences will be sold by the Company before the accounts of the financial year are prepared and audited. If the profits on these sales are not taken in the accounting year, the accounts for that year will not show a true and fair view since they would include a loss made on exports forming part of a single, continuous business transaction entered into with a view to earning valuable import entitlements but would not include the profit made on imports. If, on the other hand, the profit made on the sales of these imports in the succeeding year is taken credit for in the financial year, would it amount to inclusion of a ‘reference to benefits expected from contracts to the extent not executed’, in contravention of the specific prohibition by paragraph (g) in the Notes to Part I of Schedule VI to the Companies Act, 1956?  I shall be grateful, therefore, if the Expert Advisory Committee would kindly advise whether, in view of the aforesaid paragraph (g), it would be in order to take credit for the profit on the sales of imports.

                                                                 Opinion                                              March 18 ,1966

The querist enquires whether, in view of paragraph (g) of the notes (being general instructions for preparation of Balance Sheet) to Part I of Schedule VI to the Companies Act, 1956, it would be in order to take credit for the profit on sale of imported goods obtained on import entitlements under export promotion schemes, where such sales of imported goods have taken place after the close of the accounting year, but before the date of signature of the Balance Sheet, the imports being made under entitlements earned for exports effected in the accounting period.

Note (g) reads: “ Any reference to benefits expected from contracts to the extent not executed shall not be made in the Balance Sheet, but shall be made in the Board’s Report”.

This note must be read in the context of the whole scheme of the Act, as regards preparation and presentation of accounts, and not in isolation. In particular, the note is to be read along with the statutory requirement that the accounts should show a true and fair view of the affairs of the company. As has been made clear in the Advisory Committee’s opinion at page 635 of the June 1965 issue of “The Chartered Accountant”, the accounts may not show a true and fair view, if only the loss on exports made specially in order to obtain profit on the related import entitlement is shown in the accounts and the profit made after the close of the year on the sale of imported goods is not taken into account. Viewed in this light, it would appear that the inclusion of the profits in the accounts is not “a reference to benefits from contracts to the extent not executed”. As the querist himself states, the export of goods at a loss, the obtaining of the import entitlements, and the profit to be made on the sale of goods imported thereunder, is a single continuous and integrated transaction. The sale of imported goods is not a separate unrelated contract, but is a part and parcel of the single, integrated transaction. If these circumstances exist, there is no contravention of the provisions of note (g). It is emphasised that the above opinion is limited to the facts of this particular case.

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