4. According to the querist, pursuant to the issuance of Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, by the Institute of Chartered Accountants of India, all listed companies are mandatorily required to account for deferred tax assets and liabilities from the accounting period commencing on or after 1st April, 2001. The Accounting Standard envisages the creation of deferred tax assets/liabilities in respect of the tax effect of timing differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods. The Accounting Standard also requires that the charge/ credit for the deferred tax balance accumulated prior to adoption of AS 22 should be made to revenue reserves.

(a) The resultant charge arising from the accounting of deferred tax liabilities as at 1st April, 2001 has been debited to the Deferred Taxation Reserve to the extent of the tax impact calculated at the Income-tax rates applicable for the financial year 2000-01, on the excess of the written down value of the block of assets as per Income-tax Act, 1961 as at 1st April, 2001 over the corresponding written down value as per the books after providing depreciation as per the Electricity (Supply) Act, 1948.

(b) The balance remaining after charging of the amount referred to in (a) has been transferred to General Reserve, pending approval from Government of West Bengal, Department of Power.

(a) Whether Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, is applicable to the company since section 211 of the Companies Act, 1956, makes it mandatory on the company to comply with the Accounting Standards issued by the Institute of Chartered Accountants of India?

(b) How should the company recognise the opening deferred tax liability as on 1.4.2001 in its financial statements? Whether the resultant charge arising from the accounting of deferred tax liabilities as at 1st April, 2001, can be debited to deferred taxation reserve to the extent of the tax impact calculated at the Income- tax rates applicable for the financial year 2000-01 on the excess of the written down value of the block of assets as per the Income- tax Act, 1961, as at 1st April, 2001, over the corresponding written down value as per the books after providing depreciation as per the Electricity (Supply) Act, 1948.

(c) Whether any balance remaining after charging of the amount referred to in (b) above, can be transferred to General Reserve as the surplus amount is pertaining to the shareholders only or the same should be refunded to the consumers.

(d) What should be the method of adjustment of the Deferred Tax Reserve or deferred tax liability which represents the tax impact on the differential amount of depreciation on the block of assets as per the Electricity (Supply) Act, 1948 and the Income-tax Act,1961, under the circumstances when written down value of the different block of assets as per the Act have not become nil?

(e) Whether in computation of ‘Clear Profit/Loss’ as per the Electricity (Supply) Act, 1948, the charge/credit on creation of deferred tax assets/liabilities during the respective accounting years can be included as there are no specific provisions in the Indian Electricity Act, 1910, or the Electricity (Supply) Act, 1948, in view of implementation of AS 22 from 01.04.2001.

 

8. The Committee notes that the querist has, inter alia, sought the opinion on computation of clear profit /loss as per the Electricity (Supply) Act, 1948, considering the charge/credit on creation of deferred tax assets/liabilities.In this context, the Committee notes Rule 2 of the Advisory Service Rules, which provides that the Committee will deal with queries relating to accounting and/or auditing principles and allied matters and as a general rule will not answer queries which involve any legal interpretation of various enactments. Since computation of clear profit/loss as per the Sixth Schedule to the Electricity (Supply) Act, 1948, involves interpretation of law only, the Committee does not offer any opinion on this issue. The Committee’s opinion, therefore, is restricted to the accounting issues raised in the query.

9. The Committee notes that Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, is mandatory in nature in respect of accounting periods commencing on or after 1.4.2001 for the following:

".....

i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India and enterprises that are in the process of issuing equity or debt securities that will be listed on a recognised stock exchange in India as evidenced by the board of directors’ resolution in this regard.

....."

The Committee notes that the querist has stated that the company is listed on the Calcutta Stock Exchange. Hence, the company has to comply with the requirements of AS 22.

10. The Committee also notes that AS 22 is also required to be followed by the company by virtue of the requirements of sub-section (3A) and (3C) of section 211 of the Companies Act, 1956, which are reproduced as below:

"(3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards."

"(3C) For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A:

Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section."

11. The Committee also notes paragraph 33 of AS 22 as reproduced below:

"33. On the first occasion that the taxes on income are accounted for in accordance with this Statement, the enterprise should recognise, in the financial statements, the deferred tax balance that has accumulated prior to the adoption of this Statement as deferred tax asset/liability with a corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in case of deferred tax assets (see paragraphs 15-18). The amount so credited/charged to the revenue reserves should be the same as that which would have resulted if this Statement had been in effect from the beginning."

12. The Committee further notes that Accounting Standards Board of the Institute has issued a clarification on AS 22, published in October 2001 issue of the Institute’s Journal, ‘The Chartered Accountant’, which provides the following:

"... it is clarified that an enterprise, which applies AS 22 for the first time in respect of accounting period commencing on 1st April, 2001, should determine the amount of the opening balance of the accumulated deferred tax by using the rate of income tax applicable as on 1st April,2001."

13. The Committee notes that the company in question had a balance in a Deferred Tax Reserve which was created in past years by appropriation of profit. In the view of the Committee, this Deferred Tax Reserve is a revenue reserve which can be used for the purpose of creating a deferred tax liability on the first occasion that AS 22 is applied by the company, by making a corresponding charge to the said reserve. The deferred tax liability as on 1st April, 2001, should be computed by applying the rate of income tax as applicable on 1stApril, 2001. The balance remaining in the Deferred Tax Reserve can be transferred to general reserve since the Deferred Tax Reserve is of the nature of a revenue reserve in the view of the Committee.

14. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 7 above:

(a) Yes, AS 22 is applicable to the company.

(b) The company can recognise the opening balance of deferred tax liability, computed as per the requirements of paragraph 33 of AS 22, as on April 1, 2001, in its financial statements, by debiting the Deferred Tax Reserve. However, the rate of tax as prevailing on April 1, 2001, should be used for this purpose.

(c) The balance remaining after charging the amount referred to in

(b) above can be transferred to general reserve from the accounting point of view. Whether or not the amount should be returned to consumers is a legal issue, which the Committee has not addressed for reasons discussed in paragraph 8 above.

(d) Same as (b) above

(e) The Committee does not offer any opinion on this issue as discussed in paragraph 8 above.

1 Opinion finalised by the Committee on 28.5.2003.

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