Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.30     Query

 

Accounting for Taxes on Income

 

1.The querist has drawn the attention to the Guidance Note on Provision for Expenditure and Expenditure published in The Chartered Accountant of October, 1985. He has sought the opinion of the Expert Advisory Committee on the following issues arising therefrom:

           

(a) In paragraph 4 of the above note it has been stated that un-discharged liability of the nature referred to in Section 43 B, should not be disclosed net of taxes . In the case of accounts signed prior to the issuing of the above Guidance Note, where liabilities were provided net of taxes , what should be the future course of action.

 

(b) In other words, whether the difference (i.e. the tax element) should be accounted for in the current year s financial statements?

 

(c) In the above context, the querist has referred to the Institutes Statement on the Treatment of Retirement Gratuity in the Accounts , para 5.1 of which has suggested that provision for gratuity can be made net of tax where the amount provided for in the Balance Sheet is held to be not allowable as deduction in computing the employer s taxable income the allowance under Income Tax Act would be made when the liability finally emerges, that is, when under the terms governing the payment of gratuity, it actually becomes due to the employee.

 

(d) In the context of (c) above the querist has sought the opinion of the Expert Advisory Committee on whether any contingent liability or future liability can be provided for net of tax.

 

2. The querist is of the view that according to para 6 of the Guidance Note mentioned above, deferred taxation as recommended by IAS 12 can be adopted. In this regard, he has desired the Expert Advisory Committee to give its opinion on the following:

 

(a) Whether deferred taxation can be considered as an accepted accounting principle in India.

 

(b) If deferred taxation is allowed, is it possible for a company to consider only a few of the time differences but not all in the accounts? For example, whether a company can adopt deferred taxation in respect of excise duty liabilities only while ignoring other timing differences.

 

(c) Where deferred taxation is adopted, how the profit for the purpose of distribution of dividend and Transfer of Profits to Reserve Rule should be calculated, i.e., whether adjustment for deferred taxation should be taken into account in arriving at  profit for each of them.

  

                                                               Opinion                                              October 12, 1987

 

The opinion of the Expert Advisory Committee on the various issues raised by the querist in the above paragraphs is as below:

 

1. (a) The entity should change its policy of providing for expenses on net of tax basis to gross of tax basis as recommended by Guidance Note on Provision for Expenditure and Section 43B of the Income-tax Act. As the said change would amount to change in the accounting policy of the company, it should be accounted for as suggested in para 12 of Accounting Standard 5, Prior Period and Extraordinary Items and Changes in Accounting Polices , issued by the Institute of Chartered Accountants of India. The said paragraph is reproduced below:

 

            Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

 

1. (b) Yes.

 

1. (c) The Committee is of the opinion that net of tax basis as recommended in the Institutes Statement on the Treatment of Retirement Gratuity in the Accounts, is applicable only to the specific case of provision for gratuity in accounts.

 

1. (d)    No.

 

2. (a) The amount of charge on account of tax provision to the profit and loss account can be calculated, as recommended in paras 6 of the aforesaid Guidance Note reproduced below:

           

          It may however be clarified that nothing aforesaid precludes a company from adopting a comprehensive inter-period tax allocation method, e.g., as recommended by IAS-12 on Accounting for Taxes on Income.

 

2. (b) In view of 2 (a) above, in case comprehensive inter-period tax allocation method as per IAS 12, Accounting for Taxes on Income , is followed, it is not possible for a company to consider only some of the timing differences.

 

2. (c) The amount of profit for the purpose of Section 205 of the Companies Act, 1956 and Transfer of Profits to Reserve Rules, should be arrived at, after making provision for taxation on the basis of the accounting policy followed by the company in this regard, e.g., tax payable method or deferral method as recommended in IAS-12 on Accounting for Taxes on Income.

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