Ind – AS and Prior Period items
Under the current Indian GAAP prior period items have to be disclosed separately in the financial statements of the period in which the error pertaining to a prior period is discovered. However under Ind – AS material prior period errors are to be corrected retrospectively by restating the comparative amounts for prior periods presented in which the error occurred or if the error occurred before the earliest period presented, by restating the opening balance sheet. Under income – tax, though the accounting standard dealing with prior period items issued u/s 145 is scrapped, a prior period item is not be included in the return but is required to be disclosed separately in Clause 27 (b) of Form 3CD . But to call it a prior period item for income-tax purpose, the ICDS should be kept in mind to decide as to which year the income and expenditure belongs and not based on the principles laid down in Ind-AS. The return for the year to which the income / expenditure belongs should be revised. If there is no time for revision of return and you are revising the accounts, it is preferable to intimate the AO so as to avoid penalty, reassessment.
Some of the issues are highlighted in the following paragraphs
Issue 1. The spirit of sub-para (1) of General instructions in Annexure to Companies (Indian Accounting Standards) Rules, 2015 is that if Ind-AS is contrary to provisions of applicable laws, the laws would prevail. Laws that are applicable in case of revenue recognition, inter alia, are Sale of Goods Act, Indian Contract Act, Transfer of Property Act. Is Ind-AS 115 contrary to these laws? Are the principles governing the quantum and timing of recognition of revenue same as that stipulated in these laws? Para 9(e) talks of probability of collection which is unaware of in the Sale of Goods Act and Indian Contract Act. Is the revenue recognized as per Ind-AS same as consideration as defined in Indian Contract Act? Fair value concept if alien to these laws [Income-tax Act cannot influence accounting and the vice versa is true].
View:
The Companies ((Indian Accounting Standards) Rules, 2015 have been made by the Central Government in exercise of the powers conferred by section 133 read with section 469 of the Companies Act, 2013 (18 of 2013) and sub-section (1) of section 210A of the Companies Act, 1956 (1 of 1956), which provide that if a particular Indian Accounting Standard is found to be not in conformity with any applicable law, the provisions of such law will prevail. Even if such subordinate legislation does not state so, only such law will prevail.
A rule is not only required to be made in conformity with the provisions of the Act where under it is made, but the same must be in conformity with the provisions of any other Act, as a subordinate legislation cannot be violative of any plenary legislation made by the Parliament or the State Legislature - Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [AIR 2006 SC 3480].
Issue 2: Section 145(1) states that income shall be computed under the heads PGBP or IOS based on method of accounting regularly followed by the assessee. Ind-AS are meant for preparation of financial statements though they are coined as Accounting Standards [interestingly, globally the standards are referred to as reporting standards Eg; IFRS and not as accounting standards]. If ICDS does not provide for a particular aspect, one should necessarily go by the method of accounting regularly followed. So does it mean that Ind-AS would not trouble the assessee?
View:
Income for income-tax purposes is to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments (plenary or subordinate legislation). This is where Section 145(2) of the Income-tax Act, 1961 comes into play. Under that section, the 13Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, in exercise of powers conferred by section 133 read with section 469 of the Companies Act, 2013 (18 of 2013) and sub-section (1) of section 210A of the Companies Act, 1956 (1 of 1956) the Companies ((Indian Accounting Standards) Rules, 2015 have been made by the Central Government. In other words, ordinary principles of commercial accounting which are to be followed consistently by the assessees have been superseded or modified by Legislative intervention. But for such intervention or in cases falling under Section 145(3) of the Income-tax Act, 1961, the method of accounting undertaken by an assessee continuously is supreme – CIT v. Woodward Governor India P Ltd. [312 ITR 254 SC].
Issue 3: Is the concept of real income given a go by? The concept of real income should prevail for income-tax purpose. This cannot be given a go by, especially, in respect of section 115IB. One cannot read section 115JB pedantically to by-pass the concept of real income. Concept of fair value is alien to income-tax.
View:
The concept of real income is a well-accepted one and must be applied in appropriate cases but with circumspection and must not be called in aid to defeat the fundamental principles of income-tax as developed. An acceptable formula of co-relating the notion of real income in conjunction with the method of accounting for the purpose of computation of income for the purpose of taxation is difficult to evolve. Besides, any straight-jacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together, but once the accrual takes place on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made ‘no income’. Once the accrual takes place and income accrues, the same cannot be defeated by any theory of real income - State Bank of Travancore v. CIT [1986 AIR SC 757].
Issue 4: Can companies who have to compulsorily follow Ind-AS challenge MAT provisions on ground of discrimination? [profits in case of companies who have to follow Ind-AS and profits in case of other companies would vary largely]
View:
The principles which will have to be borne in mind by the court when it is called upon to adjudge the constitutionality of any particular law attacked as discriminatory and violative of the equal protection of the laws have been laid down in Sri Ram Krishna Dalmia v. Sri Justice S.R. Tendolkar [1958 AIR SC 538] and restated in re Special Courts Bill [AIR 1979 SC 478].
The concept of MAT is based on book profits (tax base), which are generally aligned to distributable profits as computed under the Companies Act, 1956. Section 115JB of the Income-tax Act refers to Companies Act, 1956. In the absence of clarity on amendments to the Companies Act, 1956 relating to the impact of the transition to Ind-AS on the computation of distributable profits; the corresponding impact on computation of MAT under the Income-tax Act, 1961 cannot be determined with certainty.
In view of the above, it would be premature to impugn the constitutionality of s.115JB of the Income-tax Act, 1961 on the ground of discrimination under Article 14 of the Constitution.
Conclusion
With the introduction of two new sets of standards, these are exciting times for professionals. Through this article your author has tried to shed some light on the potential challenges ahead. As with any new law with the passing of time our understanding will become stronger, any creases will be ironed out through legislative/regulatory amendments or judicial interpretations. Presently ICAI has released an exposure draft on format of financial statements compliant with Ind – AS and Schedule III, however the Ministry of Corporate Affairs is yet to notify the same. For now it is time for us professionals to huddle together to gain better understanding of these standards by stopping to hit the snooze button and attend that early morning study circle meeting before office hours where our bonds will be strengthened and our understanding enhanced, in order to create value to the client and ensure a smooth transition.
