1.13 Query:

(i)           Basis of accounting for the purpose of Income-tax Act, 1961.

 (ii)     Whether statutory auditors under the Companies Act can audit the accounts

under the Income-tax Act, if different bases of accounting are followed.

1. The querist have sought the opinion of the Committee in the context of the recent amendment in section 145 of the Income-tax Act, 1961, whereby an assessee is required to maintain books of account either purely on cash basis or on mercantile basis.

2. A company is following two different bases of accounting, i.e., cash basis for Income-tax purposes and mercantile basis for the Companies Act, 1956, purposes and closing its accounts on two different dates, i.e., 31^st March for Income-tax and 31^st May for Companies Act purposes. Now the company wishes to opt 31^st March for Income-tax as well as the Companies Act purposes. In view of the amendment in section 145 of the Income-tax Act, can the company close its accounts under different bases, i.e., cash and mercantile on same date, i.e., 31^st March?

3. The querists have also sought the advice of the Expert Advisory Committee as to whether the statutory auditors appointed under section 224 of the Companies Act, 1956, can conduct the audit of accounts prepared on cash basis of accounting for income-tax purpose for filing the returns with income-tax department and on mercantile basis of accounting for filing the returns with the Registrar of Companies, under the Companies Act, 1956.

4. The querists have sought the advice in the light of the fact that the company is maintaining its accounts on hybrid system of accounting, i.e., cash and mercantile, for preparation of financial statements, which is permitted as per the Income-tax Act for filing of income-tax returns ending on 31^st March and purely on mercantile system of accounting for filing of financial statements for the Companies Act purposes.

                                                                                Opinion                                  May 16, 1997

1. The Committee notes that the Guidance Note on Tax Audit under Section 44 AB of the Income-tax Act, issued by the Institute of Chartered Accountants of India, states as below in para 16.3:

“16.3 It may be noted that in view of amendment made by the Companies (Amendment) Act, 1988 in Section 209 of the Companies Act, every company is required to keep books of account on accrual basis in respect of accounting year ending after 15.6.1988. In other words, a corporate assessee governed by the Companies Act, 1956 can no longer follow cash system of accounting unless exempted under the Companies Act. The provisions of Section 209 (3) of the Companies Act, 1956 are, however, not applicable to non-corporate entities.”

2.  The Committee also notes that there is nothing in the Companies Act, 1956, and the Income-tax Act, 1961, which prohibits a statutory auditor to carry out an audit for the purposes of the Income-tax Act, 1961.

3.  On the basis of the above, the Committee is of the following opinion in respect of various issues raised in the query:

(i)         A corporate assessee governed by the Companies Act, 1956, cannot follow cash system of accounting unless exempted under the Companies Act, 1956.

(ii)        A statutory auditor under the Companies Act, 1956, can also audit the accounts of a company for the purposes of Income-tax Act, 1961; however, accounts for both the purposes have to be prepared on accrual basis of accounting.

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