1.55 Query
Different Accounting Periods for Head Office and A New Branch Office. A company closes its accounts on 31st March every year. It sets up a new manufacturing unit—a branch—w.e.f. 1st October, 1978. U/s 3 (3) of the Income-tax Act the assessee can have a different previous year in respect of this new unit i.e. from 1st October to 30th September every year. It the accounts of this new unit are closed on 31st March, 1979, then income for the period of six months from 1st October to31st March will be assessable along with the income of the head office. If the assessee wants to avail of the benefit of Section 3 (3) of the Income-tax Act and has a different accounting year for the new unit, then a consolidated balance sheet as at 31st March, as required under Sections 210 & 211 of the Companies Act cannot be prepared unless a number of closing adjustment entries are passed besides valuing stocks of the branch as on 31st March. In that case the Income-tax Department can argue that the assessee had once exercised his option of preparing the accounts of the newly set up branch as on 31st March and thus he would not be entitled to change the accounting period ending on 30th September.
In view of the above mentioned possible objections of the Income-tax Department and the provisions of the Companies Act, it is suggested that the totals of the branch revenue expenditure and revenue income be shown separately in the Balance Sheet of the company instead of amalgamating the branch profit with the head office profit as on 31st March, 1979.
This method of presentation of final accounts will not include provision for depreciation on branch assets, and thereby creating further difficulties in complying with the provisions of the Companies Act, 1956, relating to declaration of dividends etc. According to this method the profit/loss of the branch will be shown separately under Suspense Account.
Please advise whether under the above circumstances the company can take the advantage of getting the profit/loss of the branch assessed in the relevant assessment year keeping in view the provisions of the Companies Act?
Opinion September 6, 1979
Section 3 of the Income-tax Act permits a tax payer (including a company) to have as many accounting years as it has sources of income. While theoretically, a company can have different previous years for the different sources of its income, it would be difficult in practice for a company having different accounting years for its different sources of income to comply with the statutory requirements of the Company Law in the matter of holding its Annual General Meetings, closing its accounts, getting them audited and furnishing the necessary reports and documents to the Registrar of Companies. Under Sections 210 and 211 of the Companies Act, a company cannot have more than one Profit and Loss Account and Balance Sheet for a particular “financial year” and consequently the Profit and Loss Account and Balance sheet of a company which is prepared for the “financial year” adopted by the company as defined under the Companies Act must reflect the result of all its transactions and all its assets and liabilities. If the accounts of a company are maintained with different accounting periods for the different sources of income, it would be difficult for the company to consolidate all the accounts for different accounting periods into one final account.
In the Committee’s opinion, it would not be proper, to take into account only the totals of the revenue expenses and income for the different units in the preparation of the company’s Balance Sheet to be shown separately therein. The accounts of a company which are not closed as on a particular date i.e. the date of the Balance Sheet would not reflect the true and fair view of the company’s financial position and wherever different accounting years are followed by a company for its different sources of income, the Auditor will have no option but to qualify his report.
A company having to close its accounts for all its units or sources of income on one particular date to comply with the formalities of Company Law and the concept of having different accounting periods as previous years for the different sources of income appear to be irreconcilable ideas. ______________________ |