MINUTES OF THE MEETING OF REPRESENTATIVES OF ASSOCIATIONS OF TAX CONSULTANTS WITH CHIEF COMMISSIONERS OF INCOME TAX

To,
Central Board of Direct Taxes,
New Delhi.
Dear Sir,

Re : Representation on Tax Accounting Standards

With reference to the discussion paper on Tax Accounting Standards and the draft Tax Accounting Standards circulated along with the discussion paper, we enclose herewith our representation in respect thereof.

We trust you will take our suggestions into account.

Thanking you,
Yours faithfully,
For Bombay Chartered Accountants’ Society,

(Pradip K. Thanawala)               (Gautam Nayak)
  President                                     Chairman
                                                   Taxation Committee

In respect thereof, we give hereinbelow our comments/suggestions on the above DP and TAS.

1. At the outset, it is submitted that there is absolutely no need for notifying a different set of Accounting Standards (TAS) for the purpose of computing income under the provisions of the Income-tax Act. Though phased introduction of Ind-AS would mean that some taxpayers would be following Ind-AS while others would be following AS notified under the Company Rules, even today the position is that corporates are following Accounting Standards notified under the Company Rules, while non-corporates are following Accounting Standards issued by ICAI. Each set of taxpayers may be permitted to compute their taxable income as per the relevant accounting standards applicable to each of them.

 2. If an accounting standard is not to be followed for the purposes of maintenance of accounts but only for computation of taxable income, then it is not an accounting standard, and it is an enactment of computation provisions. It can be compared to section 145A which requires an adjustment to the reported profits based on the specific statutory provision.

3. The standards notified under section 145 are required to be followed while maintaining books of account and it is not open to prescribe standards u/s.145 which are not to be followed while maintaining books of account. This amounts to incorporating computational provisions in the garb of accounting standards.

4. Amendments cannot be made in the computation provisions in the guise of introducing an accounting standard without making a specific provision in the statute in that behalf and without requiring the said accounting standard to be followed while maintaining the books of account.

5. By notifying TAS, there is an attempt to nullify the effect of well-settled legal positions that have stood the ground since more than half a century, namely, the pre-eminence of the commercial accounting standards, which yield only to statutory provisions, e.g., distinction between capital and revenue, etc. The effect of the decisions of the Supreme Court would be nullified by a notification of TAS, which ignores the commercial accounting principles and sets its own subjective standards of accounting.

6. The tax accounting standards are now meant to be the basis of computation of taxable income by a mere notification. This will open the door to amendments in the law without requiring amendments in the Act, and thereby the executive will be encroaching on the powers of the Legislature. This is not permissible.

7. The basic premise on which the new TAS are proposed, as laid down in para 3.2 of the DP, does not hold water. The accounting standards are for correctly arriving at commercial profits and cannot be in harmony with the provisions of the Act, since otherwise there can be no scope for provisions such as section 43B, which drastically alter the commercial profits in order to arrive at the taxable income. Again, the question of accounting standards providing for specific rules to enable computation of income with certainty and clarity does not arise since the purpose of accounting standards, even those to be notified u/s.145(2), is not that. The alternatives remaining in the accounting standards, which have drastically reduced, have been retained after much deliberation, and a lot of thought process has gone into it keeping in mind its need in the Indian scenario.

8. In order to even make the reconciliation statement, in some cases, elaborate workings will be required to be prepared, kept and maintained to the satisfaction of the Assessing Officer which would amount to re-writing accounting entries passed in the books of account and may be equivalent to maintaining separate books of account. This itself would cast a substantial burden on taxpayers.

9. The corresponding effects in some cases not having been made in the books of account may lead to disastrous consequences. For instance, an assessee who has written off the amount due in respect of a construction contract, would not have written off the retention amount, since he has not accounted for the same as his income. In the reconciliation statement, he would be required to add the retention amount as his income, but will he be allowed deduction for bad debts in respect thereof if he is unable to recover it, without having written it off in the books of account?

Tax accounting for construction contracts

1. The TAS states that contract revenue shall include retentions; in other words, retentions would become part of the income, even though conditions specified in the contract have not been satisfied. This is clearly against the principle of accrual, where there has to be reasonable certainty of receipt for an income to have accrued.

2.    The TAS does away completely with the provision for recognising expected loss and omits the following words which are present in AS-7 “An expected loss on the construction contract should be recognised as an expense immediately”. This is contrary to the principle of ‘prudence’, which has also been recognised as such in the Accounting Standard I relating to disclosure of accounting policies which has been notified u/s.145(2) at para 4(i) which reads as under:
“Prudence — Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”

3.    The TAS seeks to place an artificial limit of 25% completion beyond which contract cost and revenue should be recognised, even if the outcome of the contract cannot be estimated reliably. It is submitted that costs and revenue should be recognised on 25% completion, only if the outcome of the contract can be estimated reliably.

Tax accounting for government grants
1.    The TAS does not provide for the capital approach method for grants. This seeks to do away with the well-established distinction between capital receipt and revenue receipt and is wholly unwarranted. The well-established concept of capital grant, which is not in the nature of income, cannot be nullified by mere notification of a Tax Accounting Standard, without a specific amendment to the definition of income in section 2(24).

2.    AS-12 provides that mere receipt of grant is not necessarily conclusive evidence that conditions attached to the grants have been or will be fulfilled. The TAS specifically provides that recognition of a government grant shall not be postponed beyond the date of actual receipt. This is also against the basic principle of accounting that income should not be fully recognised if certain obligations are yet to be performed.