1.14   Query:  

Accounting treatment of penalty and interest

payable under the Income-tax Act, 1961.

1. A government company, registered under the Companies Act, 1956, had estimated its income at Rs. 14 lakhs for the financial year 1985-86, relevant to the assessment year 1986-1987. It had accordingly paid advance tax. The company's audit for the financial year 1985-1986 was completed in February 1990. The audited accounts showed a profit of Rs. 70 lakhs instead of Rs. 14 lakhs as estimated originally. The provision for income-tax was made in accounts for the income of Rs. 70 lakhs. The income-tax assessment of the company for the assessment year 1986-1987 was completed in March 1990, in which the assessing officer had levied interest under sections 139(8) and 215 of the Income-tax Act, 1961, to the tune of Rs. 44 lakhs, for which no provision was made in accounts.

2. The querist has sought the opinion of the Expert Advisory Committee as to whether the interest and penalty paid under the Income-tax Act, 1961, should be treated, in accounts, as part of income-tax, or should be shown separately.

                                                              Opinion                             February 3, 1994

1. The Committee notes that clause 3(vi) of Part II of Schedule VI to the Companies Act, 1956, requires that the profit and loss account of a company shall, in particular, disclose "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, income-tax and other taxation."

2. The Committee is of the view that income-tax is a tax on annual earnings and profits. However, interest and penalties under section 139(8) and 215 of the Income-tax Act, are levied by the tax authorities for default/delay in the payment of tax. In the view of the Committee, such interest and penalties do not form part of the income-tax charge and hence should not be clubbed with the income-tax.

3. The Committee also notes paras 3.2 and 10 of Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the  Institute of Chartered Accountants of India, which read as follows:

“3.2      ‘Extraordinary items’ are gains or losses which arise form events or transactions that are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. These would also include material adjustments necessitated by circumstances, which though related to previous periods are determined in the current period.”

“10.      Extraordinary items of the enterprise during the period should be disclosed in the statement of profit and loss as part of net income. The nature and amount of each such item should be separately disclosed in a manner that their relative significance and effect on the current operating results of the period can be perceived.”

4. The Committee is of the opinion, on the basis of the above and the facts of the query, that the interest in the nature of penalty, and penalties levied under sections 139 (8) and 215 of the Income-tax Act, 1961, are extraordinary items. Such interest and penalties, if material, should be separately disclosed in the statement of profit and loss, as part of the net income of the period during which these are determined, as required in AS 5.

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