Landmark Judgment by Supreme Court while deciding the matter "Whether Accounting Standard 22 (AS 22) inconsistent with and ultra vires the provisions of the Companies Act, 1956?" - Accounting for Taxes on Income

Honorable Supreme Court has delivered a landmark judgment recently (Reported in 2007 TMI - 2160 - Supreme Court) while deciding the following question:

"Whether Accounting Standard 22 (AS 22) entitled (accounting for taxes on income) insofar as it relates to deferred taxation is inconsistent with and ultra vires the provisions of the Companies Act, 1956 (the Companies Act), the Income-tax Act, 1961 (I.T. Act) and the Constitution of India?"

Before concluding the matter the following issues have bee discussed in details:

- Meaning and purpose of AS

- Reasoning of Introduction of AS - 22

-  Analysis of "Accounts" within the Companies Act, 1956

- Analysis of "Schedule VI" of Companies Act, 1956

- Analysis of "Audit" within the Companies Act, 1956

- Analysis of the Companies (Accounting Standards) Rules, 2006.

-  Analysis of AS-22

- Doctrine of Ultra Vires

- Various concepts of Accounts and Taxes

-  Concept of Timing Difference, Tax Expense, Fair Market Value etc. etc.

After considering the various issues, honorable Supreme Court has upheld the existence of AS 22 by stating:

-  We hold that the impugned Rule which adopts AS 22 neither suffers from the vice of excessive delegation nor is the said Rule incongruous/inconsistent with the provisions of the Companies Act, 1956.

-  deferred tax is nothing but accrual of tax due to divergence between accounting profit and tax profit. This difference arises on two counts, namely, different treatment of items of revenue/expense as per profit and loss account and as per the tax law. It also arises on account of the difference between the amount of revenue/expense as per profit and loss account and the corresponding amount considered for tax purposes, e.g., depreciation

On the Issue of Constitutional Validity, honorable Supreme Court has held that:

-  However, we need to comment on one aspect. Before the Calcutta High Court, the impugned Notification adopting AS 22 was also challenged on the ground that the provisions of AS 22 insofar as it relate to "deferred taxation" is violative of Articles 14 and 19(1)(g) of the Constitution of India. …………. In the circumstances, we do not wish to express any opinion on the constitutional validity of the said AS 22. Whether the said Standard constitutes a restriction on the rights of the appellants to carry on business under Article 19(1)(g) or whether the said Standard is violative of Article 14 are questions on which we express no opinion. We keep those questions open. Suffice it to state that, in the present case, we are of the view that the said AS 22 is neither ultra vires nor inconsistent with the provisions of the Companies Act, including Schedule V 

(For Full Text of Judgment - Please visit 2007 TMI - 2160 - Supreme Court)