Query No. 9
Subject: Inclusion of certain items under clause 9(c) of Form 3CD of the Income-tax Rules, 1961.[1] A. Facts of the Case
1. A company is engaged in the manufacture and trading of pharmaceuticals and chemicals. It also exports certain bulk drugs and formulations.
2. According to the querist, during the tax audit for the previous year 1997-98 (assessment year 1998-99), the company had a difference of opinion with the auditors on inclusion of certain items under clause 9(c) of Form 3CD of the Income-tax Rules, 1961. The said clause reads as follows:
“Particulars of any liability of a contingent nature debited to the Profit and Loss account.”
3. The company is making, inter alia, the following provisions in its books of account:
(i) The company provides for leave encashment on the basis of actuarial valuation of the leave days outstanding as on the closing date in accordance with the provisions of Accounting Standard (AS) 15, ‘Accounting for Retirement Benefits in the Financial Statements of Employers’. The amount as per the actuarial valuation as at the year-end, less the amount already provided in the previous years, is debited/credited to the profit and loss account, thus bringing the liability to the leave days outstanding as on that date.
(ii) The sales personnel of the company are sent abroad on a business meet in the ensuing year for their performance in the current year. The travel expenditure is provided for in the current year on the basis of the number of persons eligible to attend the meet and the place of the meeting which, according to the querist, are known at the time of accruing this liability. The actual expenditure, when incurred in the next year, may be marginally more or less than the amount accrued.
(iii) Since 1994, the company, though disputing, has been providing for Entry Tax as per the provisions of Karnataka Tax On Entry of Goods, Act, 1979. As per the querist, this matter is now at various stages of appeal in the court, both by the company and by the government.
B. Query
4. The querist has sought the opinion of the Expert Advisory Committee as to whether the provisions mentioned in paragraph 3 above fall under the purview of clause 9(c) of Form 3CD.
C. Points Considered by the Committee
5. The Committee notes that the querist has sought opinion as to whether certain provisions being made by the company fall under the purview of clause 9(c) of Form 3CD. The Committee, in expressing its opinion, is restricting itself only to this issue and is not expressing any opinion on the appropriateness of making these provisions.
6. The Committee notes that paragraphs 43.1 and 43.2 of the ‘Guidance Note on Tax Audit under section 44AB of the Income-tax Act’, issued by the Institute of Chartered Accountants of India, state the following with regard to clause 9(c) aforesaid:
“43.1 The assessee is required to furnish particulars of any liability of a contingent nature debited to the Profit and Loss Account. The auditor may not be able to immediately ascertain the details of contingent liabilities debited to the Profit and Loss Account without a detailed scrutiny of the various account heads, e.g., outstanding liabilities, provisions, etc. The expenses relating to disputed claims will be revealed only on the basis of the scrutiny of records relating to contingent liabilities. The auditor may look into particular items of contingent liabilities of the earlier year in order to determine whether or not any item has been charged to the Profit and Loss Account of the current year and if so, whether the liability continues to be contingent in nature........
43.2 Reference may be made to AS-4, ‘Contingencies and Events Occurring after the Balance Sheet Date’ to determine what should normally be treated as a contingent liability.”
7. The Accounting Standard (AS) 4, to which the aforesaid Guidance Note makes a reference in paragraph 43.2, uses the expression ‘contingencies’ to denote “a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined only on the occurrence, or non-occurrence of one or more uncertain future events.” Paragraph 10 of AS 4 prescribes the accounting treatment of contingencies which may ultimately result in a loss, i.e., in the impairment of an asset or incurrence of a liability. The said paragraph 10 reads as below:
“10. The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
8. The Committee also notes paragraph 4.2 of AS 4 which provides as follows:
“4.2 Estimates are required for determining the amounts to be stated in the financial statements for many on-going and recurring activities of an enterprise. One must, however, distinguish between an event which is certain and one which is uncertain. The fact that an estimate is involved does not, of itself, create the type of uncertainty which characterises a contingency. For example, the fact that estimates of useful life are used to determine depreciation, does not make depreciation a contingency; the eventual expiry of the useful life of the asset is not uncertain...”
9. The query relates to disclosure of the following three items under clause 9(c) of Form 3CD of the Income-tax Rules, 1961:
10. The Committee observes that as far as the provisions for leave encashment and travel expenditure as aforesaid are concerned, they do not involve any contingency. In the case of leave encashment, the liability for encashment has accrued even though estimates may be required for quantifying the amount. Similarly, since as per the practice being followed by the company, sales personnel have become entitled to travel abroad due to their performance in the current year, a liability in this regard has accrued though this also may require estimation of the amount. The provision for entry tax is, however, different in nature. Unlike leave encashment and travel expenditure, it is not certain whether the company would ultimately be liable to pay entry tax or not. Therefore, entry tax represents a contingency within the meaning of this expression as given in AS 4. As such, the provision for entry tax represents a provision for a liability of contingent nature debited to the profit and loss account.
D. Opinion
11.Based on the above, the Expert Advisory Committee is of the opinion that out of the three items mentioned in the query, only the provision for entry tax is covered under clause 9(c) of Form 3CD of the Income-tax Rules, 1961. The provisions for leave encashment and travel expenditure of sales personnel do not represent provisions for
It may be mentioned that Form 3CD of
the Income-tax Rules, 1961, and the ‘Guidance Note on Tax Audit under
section 44AB of the Income-tax Act, have been revised subsequent to the
finalisation of this opinion.
__________
[1] Opinion finalised by the Committee on 4.3.1999.
|