Interrelationship between Accounting & Taxation

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TAXATION ISSUES ARISING FROM

APPPLICATION OF ACCOUNTING STANDARDS

Jayant Gokhale, F.C.A.

A.

CONCEPTUAL APPROACH

A1.

It is well accepted that accounting standards and taxation of income are two
independent subjects operating in their own spheres. However, given the fact
that eventually both seek to prescribe methodologies for quantification of
economic performance and have distinct philosophy and methodology of
determining the quantum of income some overlap is inevitable. Ideally,
overlap should not result in any divergence between the two approaches. But
that is the ideal situation which in reality is not always achieved. As a result
there are areas where the principles of taxation and the accounting standards
supplement and support each other
areas where the two deal with subjects which do not directly affect each
other and
some areas which affect certain common subjects but one sees divergent
approaches between the two.

A.2

The areas where there is some divergence between the taxation of income and
accounting for Income arises due to some conceptual differences which we may
take note of at the outset.

A.3

Accounts are the language of business and accounting standards the grammar
of the language. When one refers to accounts or method of accounting one is
basically referring to the preparation of Financial Statements and the basic
assumptions and principles, underlying the preparation of these Financial
Statements (FS).

A.4

The purpose of FS is stated in the Framework 1 issued in June, 2000:

"12. The objective of financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful to
a wide range of users in making economic decisions."

A.5

The Framework goes on to identify the basic assumptions underlying

preparation of FS: Accrual , Going Concern and Consistency. Since the
assumptions stated above were only broad indicators of the acceptable basis for
preparation of FS; numerous alternative frameworks/ methods were prevalent
and were in fact recognized by various accounting texts. Later even certain
standards recognized alternative approaches. Ideally adopting either of the
alternatives would approximate to the same or similar result. However as the
complexity of commercial transactions increased the gap resulting from
adoption of different methods was significant.

Framework for the Preparation and Presentation of Financial Statements

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A.6

Even this is theoretically acceptable because it has to be recognized that

accounting is not an exact science but rather a process of scientific
approximation. In the long run these deviations would cancel out and therefore
"in the long run" the net result by either method would be the same.

A.7

This is where the conceptual mismatch arises because for accounting theory
(on which accounting standards are based)
Prime objective is to present a true & fair view
The presentation of the state of affairs as at a particular cut-off date is emphasized
rather than determination of income.
Income is determined on a conservative basis

A.8

As against the above; the objectives of determination of income by revenue

officials are different from those entrusted with the task of preparation and
attestation of accounts. AS are intended to lay down consistent methodologies
of treatment of certain items and the ultimate objective is to enable a reflection
of true and fair view. The intention of the tax authorities is to determine
`income' as is understood under the Income-tax Act. This may not necessarily
be the real income. While the income as computed for the purpose of the tax
laws is not entirely divorced from the concept of "true and fair", the following
factors are considered important by the Revenue Authorities:
Need to have a method of computation of income which can be easily verified in most
cases.
A method having least subjectivity and which involves minimum alternatives - thereby
resulting in a single acceptable treatment.
A method which will accelerate revenue collection.
The Draft of Direct Tax Code Bill also shows the mindset that burden of proof that
certain items do not constitute income is being shifted to the assessee. The provisions of
S.56 & GAAR are steps in that direction leading to greater divergence from true &
fair accounting concept of income.

A.9

In arriving at such a concept of taxable income, the concept of "real income"

has on numerous occasions been distorted. This has happened primarily
because the compulsions of raising revenue have overwhelmed the need to
adhere to the basic principles of accountancy and quantification of income.
Even the statute has recognised that this deviation seems to be an unavoidable
consequence of the way in which tax legislation is drafted. The Minimum
Alternate Tax provisions & proposed Tax Accounting Standards (TAS) which in
reality are nothing but rules of Computation are a recognition of this gap. The
application of the provisions such as Sec. 40(a)(ia) and S. 43 B have made the
concept of Taxable income diverge from Real Income more than ever before.

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A.10

It is in this background that one has to see the evolution of judicial thought in
determining the balance between accounting records, AS and tax laws. One
may particularly refer to a series of judgements of the Supreme Court which
have taken the view that Taxability cannot be decided on basis of entries which
the assessee may choose to make in his accounts. Reference may be made to
i)
CIT v. Mogul Limited 46 ITR 590 (Bom.)
ii)
Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)
iii)
CIT v. A. Krishnaswamy Mudliar [1964] 53 ITR 122 (SC)
iv)
CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (SC)
v)
CIT v. Sugauli Sugar Works Pvt. Ltd. [1999] 236 ITR 518 (SC)

A.11

From the very rigid position adopted 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 Sugar 98
ITR 167 (SC), CIT v. Nagarjuna Steels 171 ITR 663.]

A.12

Finally the Courts have increasingly started relying on the Accounting

pronouncements issued by the ICAI for drawing certain conclusions. It would
thus appear that the law is thus evolving in the manner giving increasing
weightage to the standards and guidance provided by the ICAI. It is this trend
which makes the subject matter of the paper important.

A.13

There are recent decisions of two high courts 2 affirming the authority of ICAI to
issue AS which are to be followed by the various entities u/s 211 of the
Companies Act 1956. The Supreme Court has also held in Commissioner Of
Income Tax Vs. Woodward Governor India ( P ) Ltd. ( 2009 ) 312 ITR 254
it is clear that profits and gains of the previous year are required to be computed
in accordance with the relevant Accounting Standard. In other cases the Apex
Court has refused to entertain appeal against such judgments and this is a
further indication of the growing confidence the judiciary reposes in the AS as
prescribed by ICAI.

SOME OTHER FEATURES RELEVANT TO OUR DISCUSSION

For the purpose of maintaining Accounts & Preparation of Financial Statements

B.1

Different methods of accounting are recognized in accounting theory including

cash, accrual/mercantile & mixed. In contrast I.T. Act only cash/accrual is
permitted u/s 145. However, the I.T. Act itself provides for statutory variants
or mixed system by sections such as 43B, Salary is brought to tax on a concept
of earlier of receipt or accrual etc.

B.2

For Corporates - accrual is the only permitted method under the Companies Act
although a different method is permitted for tax purposes.

B.3

Maintenance of Books - which is fundamental to any system of accounting, is

Refer Decision of Delhi HC in CIT v Insilco Ltd 179 Taxman 55

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technically not necessary in all cases where assessee has taxable income. All
that is required is that the income can be properly deduced from the records
maintained.
B.4

The trend of bringing to tax various receipts irrespective of whether or not there
exists any income is also gaining ground. In equity, certain receipts cannot be
taxed under any head and yet are treated as income. No amount of effort at
harmonization with standards can work in the following situations. Some
examples of this sort of deliberate and absolute departure from accounting
concepts of income are the provisions contained in
S.50C - where amount is taxed on notional value even though income may
not actually arise.
S.115JB - Set off restricted to lower of loss or depreciation irrespective of
real loss existing and being carried forward.
Sec. 40(a)(ia) Which does not recognise certain expenses unless there is
compliance with TDS law.
S.56 which brings to tax even receipts which are capital in nature

Having given the broad overview/framework which gives rise to certain

divergences in approach and results we can proceed to look at some of the
specific areas which have an impact in the normal areas of computation of
taxable income.

1.

CONCEPT OF ACCRUAL - REVENUE RECOGNITION (AS - 9)

1.1

The year of accrual is important for determination of income, both under the
true and fair view concept as well as for arriving at taxable income. The AS
based on concepts of prudence exclude from income certain items not certain of
realisation.

1.2

The relevant paragraphs of AS 9 are as under

9.1
9.2

1.3

Recognition of revenue requires that revenue is measurable and that at the

time of sale or the rendering of the service it would not be unreasonable to
expect ultimate collection.
Where the ability to assess the ultimate collection with reasonable
certainty is lacking at the time of raising any claim, e.g., for escalation of
price, export incentives, interest etc., revenue recognition is postponed to
the extent of uncertainty involved. In such cases, it may be appropriate to
recognise revenue only when it is reasonably certain that the ultimate
collection will be made.

However, when an issue of this nature arose under the Act in State Bank of
Travancore 158 ITR 102, the Hon'ble Supreme Court (by majority view) held
that the amount credited to the interest suspense account also accrued to the
assessee and is, therefore, chargeable to tax. While holding so the SC observed
that the method of accounting followed by the assessee was a well recognised
and correct method of accounting. However, the method of accounting
cannot enlarge or restrict the content of the taxable income or it does not
determine the range of taxable income or ambit of taxation. (emphasis

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supplied). While holding so, the minority view (of Justice Tulzapurkar) was that
crediting the sum to the "Interest Suspense Account" the assessee showed
clearly that in reality, the Income has not accrued. However, the Majority View
held that by debiting the respective customer's account, the assessee
recognised that the income has accrued and therefore, after recognising in the
Books that the income has accrued, recourse cannot be had to the concept of
real income and not offer the same to taxation. While so holding, the majority
view also expressed that the conduct of the parties in treating the income in a
particular manner is material evidence of the fact whether income has accrued
or not. However, merely treating the amount in a particular manner cannot
independently determine whether real income has accrued to the assessee.
1.4

In contrast to this decision, the Apex Court in UCO Banks case 237 ITR 889
held that the amount so credited to interest suspense account was not taxable.
In arriving at this decision, the court relied on a circular of the CBDT and
referred to the fact that such hybrid system was acceptable in determination of
income.

1.5

The Supreme Court tacitly recognised that merely because certain amount was
debited to a party as receivable from it; this did not necessarily result in the
accrual of income considering the fact that whether the said amount was in fact
going to be received was highly debatable. In this context, it would be
appropriate to refer to this fundamental principle having been laid down by the
Supreme Court in CIT Vs. Shapoorji Vallabhadas & Co. 46 ITR 144 (SC). In
this case, the Supreme Court had held that in order to levy tax, the assessee
must receive income in the real sense. Even though an entry is passed in the
books of account to the effect that income has accrued to the assessee, if
income has not resulted at all, there is neither accrual nor receipt and he is not
liable to pay tax on the sum so entered in the books of account.

1.6

In this context, reference may also be made to the decision of the Supreme
Court in Godhra Electricity Co. Ltd. Vs. CIT 225 ITR 746.

2.

CONCEPTS OF INCOME, EXPENDITURE AND CAPITALISAITON

2.1

A feature of whether expenditure has accrued / incurred is at the heart of

disallowance of numerous items of expenditure. The primary issue under the
Income Tax Act is whether the expenditure has been incurred during the year.

2.2

The issue has been considered as one of conservatism and prudence in the
accounting concept. However, in matters such as demands raised for customs
penalties etc. there was considerable debate about the year of allowability until
the matter has been largely settled by the introduction of S. 43B.

2.3

However, the point of time when the expenditure can be considered to have
been "incurred" in a particular year as distinct from a mere provision is still a
considerable area of litigation. Reference may be made to decision in Standard
Triumph Motor Co. Ltd. v. CIT [1993] 201 ITR 391.

2.8

To add to the above area of conflict, there is a clear divergence in regard to

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deferred revenue expenditure - a concept which is technically non-existent in

the Income tax Act. I use the word technically because over the years,
numerous sections have been introduced such as

Section 35AB
Expenditure on Know-how

Section 35ABB
Expenditure for licence in telecom services

Section 35D
Amortisation of preliminary expenses

Section 35E
Expenditure for prospecting for minerals.
Thus, although there is no formal concept of Deferred Revenue Expenditure in
the Income Tax Act, effectively, the provisions of these sections achieve the
same result of deferral.
2.9

In any case, this concept has also received judicial recognition as the Courts
after considering the decision of the Supreme Court in CIT Vs. Bombay Dyeing
& Manufacturing Co. Ltd. 219 ITR 521 have gradually moved away from such a
rigid interpretation of the law. The later decisions tend to follow the decision in
Hindustan Aluminium Corporation Ltd. (allowing the expenditure over a period
of 12 years over which the benefit of the expenditure flowed even though in a
strict legal sense the expenditure had been incurred and liability crystalised in
the first year itself). This was based on the accounting concept of matching of
cost with the resultant economic benefit. In the case of M.P. Financial
Corporation Vs. CIT 165 ITR 785 the court once again laid emphasises on this
aspect rather than the strict legal concept of "Expenditure incurred during the
year."

2.10

The ratio of this decision was subsequently confirmed by the decision in Madras
Industrial Development Corporation 225 ITR 802 (SC) which also noted that
"allowing the expenditure in one year might give a very distorted picture of
profits of a particular year.

2.11

It is important to note (as observed in the above referred decision) in order to

allow certain expenditure, all that the Income Tax Act requires is that the
expenditure
should be incurred during the year
should not be of capital nature
should not be of a personal nature
All items of expenditure meeting the above tests (unless specifically prohibited/
disallowed) would be allowable under the Income Tax Act. In fact, there are
numerous decisions which have held that if the said expenditure meets the
above tests, the same shall be allowed in determining the taxable income even if
not entered in the books. In this context, reference may be made to the
decision in CIT Vs. Gujarat Minerals Development Corporation 132 ITR 377
which relied on the Supreme Court decision in Empire Jute Co. Ltd.'s case 124
ITR 1 (SC).

Income and Expenditure in pre-commencement period

2.12

The Guidance Note of ICAI on "Expenditure during Construction Period"

provides for deduction of incidental income such as, proceeds on sale during
trial run, from the cost of construction. If construction is done out of borrowed
funds, AS-16 would apply. This AS requires adjustment of interest on short

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term deposits of such funds against interest expenditure and capitalisation of

only the net interest expenditure. However, the treatment of interest income
during construction period for tax purposes is different.
2.13

Interest income earned on deposits made out of surplus funds before

commencement of business is taxable as "Income from other sources." The
interest income so derived from investment in the nature of deposit cannot be
reduced from the cost of construction as it has no nexus with the construction
of the plant (Tuticorin Alkali Chemicals and Fertilisers Ltd. Vs. CIT (SC), 227 ITR
172, CIT Vs. Coromanded Cement Ltd. (SC) 234 ITR 412). Similarly, if a sum is
borrowed from IDBI and placed in short term deposits till the money is paid to
supplier of plant and machinery, the interest earned thereon cannot go to
reduce the cost of plant and machinery, but will be charged under "income from
other sources" CIT Vs. Autokast Ltd. 248 ITR 110 (SC). A divergent view from the
above is taken in Challapalli Sugar 98 ITR 167 (SC) 3

3.

NET PROFIT FOR THE PERIOD, PRIOR PERIOD ITEMS .. ETC.

[AS 5]

3.1

The said standard as it originally stood was one of the two standards notified
u/s 145 of the Income Tax Act. The notified standard was almost identical to
AS5 and therefore the position in tax and accounting in this regard would be
expected to coincide. However after Income Tax department issued Notification
No. S.O. 69(E) dt. 25th January, 1996 , the Institute has revised AS5. Similar
revision in the notified standard under S. 145 not having been made there
arises a slight divergence. I may only mention that the standard notified under
the Act significantly omits the phrase In view of the uncertainty attached to
future events, profits are not anticipated, but recognised only when realised,
though not necessarily in cash. This statement which embodies the very core of
what would be considered to be a prudent approach reflects the mismatch
caused by the eagerness of the tax authorities to include in the taxable income
what may not be considered to have accrued under the accounting standards
and accounting concepts.

4.

CONTINGENCIES AND EVENTS OCCURING AFER THE BALANCE

SHEET DATE AS 4 & AS 29

4.1

As per accounting principles, contingent gains should not be accounted for but
contingent loss should be provided for on the basis of the nature of probability
of occurrence and possibility of reasonable estimate. However, under the tax
laws, provision for contingencies are not allowable as deduction. Provision
made on the basis of notice is not deductible 32 ITD 406 4. However, if the
liability is enforceable on the date on which demand is raised it qualifies for

These views could undergo a substantial change once IFRS / AS 30 were to be adopted as
the application of Effective interest concept would change the quantum of interest
charged.
4
32 ITD 406 (Hyd.) Instrumentation Engineers (P) Ltd. Vs. ITO

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deduction even if disputed in Courts 105 ITR 335 5 and 164 ITR 774 6. Similarly
though provision based on mere claims do not assume the character of
deductible liability 38 ITD 504 7 and 43 ITD 25 8, provision for product warranty
claims based on assessees past experience merits deduction 5 ITD 102 9. This
approach of the ITAT appears to be more progressive than even the present
Standards and more in tune with the IFRS concept of recognizing a provision on
the basis of either legal or constructive obligation as against AS 29 taking into
consideration only legally enforceable present obligation. (AS 29 does not deal
with constructive obligation). Similarly liability on delay in delivery as per
agreement with customers has been treated as a liability in praesenti and
deductible despite plea for waiver made by the assessee. 43 ITD 527 10.
4.2

On the other hand IAS 37 defines a constructive obligation as an obligation

deriving from an entitys actions where By an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
As a result, the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities

4.3

As mentioned above, despite there being no conflict between the standard and
the provision of the Income Tax Act, issues of interpretation often arise in
regard to the point of time when the liability has actually crystalised or one can
say that the expenditure is incurred. An example is the case of directors who
are paid commission based at a percentage of profit. It would appear that
although the accounts of the company would be finalised after the end of the
year, issue arises in regard to point of time when the directors' remuneration
crystallises.

105 ITR 335 Luxmi Devi Sugar Mills Vs. CIT (All.)
164 ITR 774 CIT Vs. Guranditta Mal Shanti Prakash Zira (P&H)
7
38 ITR 504 (Hyd.) ITO Vs. Vamet Industries
8
43 ITD 125 (Mad.) International Services Vs. ITO
9
5 ITD 102 (Pune) ITO Vs. Wanson (India) Ltd.
10
43 ITD 527) (Mad.) Kaveri Engg. Industries Vs. Dy. CIT
6

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METHOD OF ACCOUNTING IN CASE OF CONSTRUCTION CONTRACTS

5.

(AS7- REVISED 2002)

5.1.

Under the percentage of completion method, contract revenue is recognised as

revenue in the statement of profit and loss in the accounting periods in which
the work is performed. Contract costs are usually recognised as an expense in
the statement of profit and loss in the accounting periods in which the work to
which they relate is performed 11. However, any expected excess of total contract
costs over total contract revenue for the contract is recognised as an expense
immediately in accordance with paragraph 35. (Paragraph 25 of AS 7). In such
a situation it seems unlikely that such a conservative view (relying on the
revised AS 7) may be acceptable to Tax authorities.

INVENTORY VALUATION AS 2

6.1

The divergence between the method of valuation of inventory as prescribed

under AS-2 and the valuation prescribed by Section 145A is well known. The
complexities arising therefrom and the concept of making adjustments outside
the books give rise to a host of problems which cannot be visualised under AS.

6.2

There is a view that irrespective of whether one follows the inclusive or the
exclusive method the same are tax neutral. This has been very well explained in
the example given in the Study material and therefore S.145A is not dealt with
further in the paper.

6.3

Another interesting issue is that the Supreme Court has upheld that held that
no profit arises out of valuation of closing stock. (Chainrup Sampatram vs. CIT
(1953) 24 ITR 481 (SC)) and therefore stock can be valued at cost or market
value, whichever is lower. (CIT vs. British Paints India Ltd. (1991) 188 ITR 44
(SC)).

6.4

In Allied Photographics India Ltd v Deputy Commissioner of Income Tax, Special

Range 16, Mumbai, 15 SOT 174 (Mum) the Department objected to a change in
method of valuation. The assessee had hitherto been valuing closing stock
adopting FIFO method. He had made a change to adoption of weighted average
method (which is one of the methods prescribed in AS2). Department did not
accept such a change on the ground that it resulted in a lower valuation. The
Hon ITAT after considering the ratio of decision in British Paints India Ltd
(supra) and in Melmould Corpn v CIT [1993] 202 ITR 789 (Bom) concluded that
the assessee was entitled to make such change to an accepted and recognized
method of stock valuation. Even if such method resulted in a reduced valuation
of inventory, thereby lowering taxable profit, such right could not be interfered
with by the Assessing Officer.

11

Deputy Commissioner Of Income Tax Vs. Rajgir Builders, 70 ITD 226 (Mumbai )

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DEPRECIATION AND FIXED ASSETS, ACCOUNTING TREATMENT

UNDER IT ACT & IN AS-6 , AS-10

7.1

The differing practices in regard to these two vital aspects of the financial
statements are numerous and have far-reaching impact. These arise from the
divergence between certain fundamental concepts. The most basic conceptual
difference is that while accounting theory treats depreciation as an essential
charge on the profits of a particular period, the Income Tax Act has by and large
proceeded on the basis that depreciation is an allowance / benefit granted to
the assessee. It is only with the introduction of explanation to Section 32 that
the mandatory nature of depreciation is now being emphasised. However,
merely by introducing this explanation the underlying concepts have not
undergone a change. Thus the concept of block of assets which finds no
recognition in the AS continues to find a place in the Income Tax Act and leads
to considerable divergence in the results.

7.2

Other such divergences which may be mentioned briefly are as under.

a.

The use of assets is to be tested qua each asset as per the AS. The position
in this regard under the IT Act once an asset enters the block is debatable.

b.

The commencement of applicability of depreciation on assets first put to

use is different in regard to income-tax and accounting standards. The
concept of "ready to use" as a cut-off point is not acceptable under the IT
Act, but finds reference in AS-10.

c.

Cost for the purposes of the IT Act includes costs capitalised up to the point
when the asset was first put to use. As against this the standard states
"any attributable cost of bringing the asset to its working condition for its
intended use". Similar approach is also adopted in AS-16, Borrowing
Costs.

d.

Revaluation of assets is a concept linked to reflection of true and fair view

and is therefore tax neutral. However under AS the treatment consequent
upon such revaluation is elaborately considered. Normally, this may have no
bearing but when considered in conjunction with the provisions relating to
amalgamations, mergers and demergers the accounting treatment given
could have some impact for taxation of the merged/ demerged entity and
also under section 115 JB.

e.

Profits on sale of assets as reflected in the books in compliance with AS are

significantly at variance with the profit as computed as per the provisions of
Section 46 and Section 50 of the IT Act.

f.

Concept of written down value in the case of assets acquired by inheritance,

succession, gift etc. is substantially different under the Income-tax.

g.

Adjustment of cost/WDV in case of Government subsidies as compared to

treatment prescribed by AS-10 is also different.

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BORROWING COSTS - AS 16

8.1

The related issues that arise in the treatment of borrowing cost especially when
it relates to acquisition of assets which take substantial time to complete or
acquire. The intention in introducing the Proviso in Section 36 (1) (iii) seems to
be two fold:
a)
To limit the allowance of expenditure in regard to borrowings for
acquisition of assets only from the date that such assets are put to use.
b)
To prevent situations where interest was capitalised in the books, but
claimed as revenue expenditure for computation of income.

8.2

Although the intention seems to be to bring the tax treatment of interest in line
with the principles prescribed in AS 16 divergence arises because of the
following reasons.
(a)
(b)
(c)

The concept of qualifying asset as referred to AS 16 is not recognised

under the Income Tax Act.
The cut offs for the period upto which capitalisation is to take place are
different under AS and Income Tax Act.
While AS recognise suspending capitalisation during the periods when
development of the assets is interrupted; there is no such provision in the
Income Tax Act.

ACCOUNTING FOR THE EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES - AS11

9.1

In an era of increasing international trade and where Indian rupee could move
in either direction compared to the Dollar or Euro; the determination of the
exchange fluctuation impact acquires great significance. The Income Tax Act
with a view to provide simple and definite rules has prescribed Rule 115 to
determine the value of transaction in a particular Financial Year. The exchange
rates adopted, based on the date of the transaction is used for this computation
and the procedure prescribed under AS 11 is entirely different from Rule
prescribed under the Income Tax Act.

9.2

NACAS has also introduced para 46 in AS 11 as a consequence of which under

certain circumstances, companies are permitted to amortise their notional gains
/ losses over a period of five years.

9.3

Where the notional loss on exchange fluctuation is debited to profit and loss in
accordance with the requirements of the standard, the same should be
allowable even though subsequent to the balance sheet date, the currency
fluctuation may have reversed. CIT Vs. Woodward Governor India ( P ) Ltd.
( 2009 ) 312 ITR 254 :

10.

ACCOUNTING FOR RETIREMENT BENEFITS - AS 15

10.1

The standard (AS 15) treats such items as revenue expenditure. The related

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cost based on actuarial valuation. Every variation in the estimated liability as

on cut off date is required to be charged as a revenue expenditure of the
respective year in which such liability is determined.
10.2

This concept received judicial affirmation in regard to leave encashment benefit

in the decision of the Supreme Court in Bharat Earth Movers case 245 ITR 428.
However, subsequent amendment to the Income Tax Act has ensured that the
payment basis continues to apply resulting in a mismatch with the AS.

11.

ACCOUNTING FOR INVESTMENTS - AS 13

11.1

As the nature of financial instruments become more varied and innovative, the
problems of accounting for the same become more complex. While AS have
gone by concepts of prudence and conservatism, the treatment under the
Income Tax Act takes into account only crystalised losses.

12.

CONCLUSION

12.1

I have made an attempt to deal with some of the important areas of overlap and
divergence between the two perspectives of accounting and taxation. Such areas
are numerous especially when one considers other accounting pronouncements
such as Guidance notes, Expert advisory opinions etc. Each side (accounting
and taxation) and each perspective is appropriate in its own place. What is
important is that as students of the subject, we must understand not just the
differences and their impact and consequences but also the rationale and
divergent objectives which make such divergences inevitable. Undoubtedly, this
is not simple, but I hope that this detailed note will help you in understanding
the intricacies of the subject by giving a conceptual overview. Once the concepts
are clear doing well in the examination will automatically follow. I wish you all
the best for the same.

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