2007 (4) TMI 374 - HC - Companies Law

Summary

Issues Involved:
1. Whether Accounting Standard 22 (AS-22), particularly paragraphs 9 and 33, is ultra vires the Companies Act, 1956, and the Constitution of India.
2. Whether the provisions of AS-22 are in conflict with sections 209(1)/(3) and 211 of the Companies Act, 1956.
3. Whether the provisions of AS-22 are inconsistent with Schedule VI of the Companies Act.
4. Whether paragraph 33 of AS-22 is unconstitutional due to its retrospective application.
5. Whether the deferred tax liability under AS-22 is a notional or contingent liability.

Detailed Analysis:

1. Ultra Vires Nature of AS-22:
The primary issue was whether AS-22, particularly paragraphs 9 and 33, is ultra vires the Companies Act, 1956, and the Constitution of India. The court held that the Central Government is authorized to make rules for implementing sections 209-211 of the Companies Act. The court emphasized that the Institute of Chartered Accountants of India (ICAI) is the appropriate authority to provide guidelines to the Central Government. The court concluded that AS-22 is not ultra vires the Companies Act or the Constitution.

2. Conflict with Sections 209(1)/(3) and 211:
The petitioners argued that AS-22 conflicts with sections 209(1)/(3) and 211 of the Companies Act, as it mandates accounting for deferred tax liabilities, which they claimed are notional or contingent. The court held that the deferred tax liability is a real liability that will result in future cash outflow and is not merely notional or contingent. The court found no conflict between AS-22 and sections 209(1)/(3) and 211, as AS-22 ensures that the accounts present a true and fair view of the company's state of affairs.

3. Inconsistency with Schedule VI:
The petitioners contended that AS-22 is inconsistent with Schedule VI of the Companies Act. The court examined Schedule VI and found that it deals with the presentation of financial data but does not lay down procedures for recognition and measurement of income, expenses, assets, and liabilities. The court concluded that there is no conflict between Schedule VI and AS-22, as the latter deals with recognition and measurement, ensuring a true and fair view of the company's financial state.

4. Retrospective Application of Paragraph 33:
The petitioners argued that paragraph 33 of AS-22 is unconstitutional as it operates retrospectively. The court clarified that paragraph 33 does not make anything retrospective. It requires determining deferred tax liabilities and assets as on the date when the standard is first applied, which is a common practice in accounting transitions. The court found no merit in the argument that paragraph 33 is ultra vires.

5. Nature of Deferred Tax Liability:
The petitioners claimed that deferred tax liability is a notional or contingent liability and should not be charged to the profit and loss account. The court held that deferred tax liability is a real liability that arises in the current year and is payable in future years when timing differences reverse. The court emphasized that deferred tax liability is not contingent as it does not depend on uncertain future events. It is an existing liability on the balance sheet date, ensuring the accounts reflect a true and fair view.

Conclusion:
The court dismissed all writ applications, upholding the validity of AS-22. It ruled that the Accounting Standard is consistent with the Companies Act and the Constitution, and it ensures that the company's financial statements present a true and fair view. The court found no merit in the petitioners' arguments regarding the ultra vires nature, conflict with statutory provisions, inconsistency with Schedule VI, retrospective application, or the nature of deferred tax liability.