Controversial Tax Issues in Accounting Standards

[Venkatesh Sagar]

Courts have taken diametrically opposite views in respect of the weightage to be given to the accounting principles in tax matters. One may particularly refer to a series of judgments of the Supreme Court, which have taken the view that “Taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts”.
Reference may be made to -
• CIT v. Mogul Limited 46 ITR 590 (Bom.) = 1961 (9) TMI 65 - BOMBAY HIGH COURT
• Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) = 1971 (8) TMI 10 - SUPREME Court
• CIT v. A. Krishnaswamy Mudliar [1964] 53 ITR 122 (SC) = 1964 (4) TMI 7 - SUPREME Court
• CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (SC) = 1937 (11) TMI 1 - PRIVY COUNCIL
• CIT v. Sugauli Sugar Works Pvt. Ltd. [1999] 236 ITR 518 (SC) = 1999 (2) TMI 5 - SUPREME Court
• Tuticorin Alkali Chemicals & Fertilizers Ltd. V CIT 227 ITR 172 (SC) = 1997 (7) TMI 4 - SUPREME Court

3.2 From the very rigid position earlier, the Courts have come around in to the view that the manner of accounting entries passed though not conclusive may have persuasive value in deciding the correct income.

• Challapalli Sugars Ltd. v CIT 98 ITR 167 (SC) = 1974 (10) TMI 3 - SUPREME Court
• CIT v. Nagarjuna Steels 171 ITR 663. = 1987 (11) TMI 72 - ANDHRA PRADESH High Court
• Madras Industrial Investment Corpn. Ltd. V. CIT (1997) 225 ITR 802 = 1997 (4) TMI 5 - SUPREME Court

• The Commissioner Of Income-tax V. M/s. Aatur Holdings Pvt. Ltd., (2008) 302 ITR 92 (Bom.) = 2008 (3) TMI 112 - BOMBAY HIGH COURT

3.3 Further, the Hon’able Apex Court in the case of Apollo Tyres Ltd. v. CIT [(2002) 255 ITR 273] = 2002 (5) TMI 5 - SUPREME Court has held that the A. O., while computing the profits u/s 115J, does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Sec. 115J, if the same are in accordance with the provisions of the Parts II and III of Schedule VI to the Companies Act, as contemplated in Sec. 115J(1A)

AS 9: Revenue Recognition:
Here also, it gives weightage to consistency. Refer [Citibank’s case – 208 ITR 930 (Bom.)]. = 1994 (4) TMI 72 - BOMBAY High Court Common issues of litigation in this regard are – when the revenue is recognized, what happens when it is in dispute or there is uncertainty, or the fate is not predictable (E.g. goods sent on consignment or approval) or revenue in construction contracts as discussed in AS 7. Interest on doubtful loans and advances is serious matter in respect of banks. IT goes on legality on the ground that a legal debt exists. A useful reference may be made to CBDT circular dtd. 09.10.1984 and Supreme Court decision in UCO Bank’s case (237 ITR 889). = 1999 (5) TMI 3 - SUPREME Court Interest on sticky loans, if not recoverable, cannot be said to accrue.

Further in a recent and interesting case of CIT vs, Elgi Finance Ltd (2007) 293 ITR 357 = 2007 (6) TMI 180 - MADRAS High Court, the Hon’ble Madras High dealt with recognition of interest on “non performing assets” (NPA). It was held that the assessee had not recognized any income from the non performing asset and this treatment was in consonance with the Notification of RBI and AS 9 issued by the ICAI. Therefore the assessee was justified in not recognizing the interest from NPA. Hence, while deciding the issue the Court had very well taken AS – 9 into consideration.