J.K. INDUSTRIES LTD. & ANR v. UNION OF INDIA AND ORS

Citation: [2007] 12 S.C.R. 136

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

J.K. INDUSTRIES LTD. & ANR v. UNION OF INDIA AND ORS.pdf

Judgment text

J. K. INDUSTRIES LTD. & ANR. v. UNION OF INDIA AND ORS. NOVEMBER 19, 2007 (S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ. ) . ~ Companies (Accounting Standards) Rules, 2006: Accounting for taxes on income-Accounting Standard 22 (AS 22)-Adoption of-By the Rules framed by Central Government- Challenged as being ultra vires the provisions ofCompanies Act so far as it related to 'deferred taxation; and as being in excess ofthe powers conferred upon Central Government-Held: Rule is neither ultra vires nor inconsistent with the provisions ofthe Companies Act- Rules and the Act form part ofthe composite scheme-Rules are ;. supplementary to the Act and constitute a legitimate aid to the construction ofthe provisions ofthe Act-Rules also not sufferingfrom the vice of excessive delegation-Companies Act, 1956-ss. 209, 211(3A) and (3C), 641, 642, Schedule VI Parts I and II.

Accounting Standard 22-Provisions relating to 'deferred taxation '-Whether violative ofArticles 14 and 19(J)(g) of the Constitution-Question left open-Constitution ofIndia, 1950- Articles 14 and 19(1)(g). Companies Act, 1956-s. 642(1)-Rule makingpower ofCentral Government-Scope of Delegated Legislation-Scope of-Held: Valid only when it is confined to legislative policy and guidelines. Doctrines/Principles-Doctrine ofultra vires-Applicability of Words and Phrases-- 'delegated legislation '-Meaning of 1- ~ Accounting Standard 22 (AS 22) titled as "Accounting for taxes ) on income", issued by Institute ofChartered Accountants in 2001 had been made mandatory for all companies listed in stock Exchanges oflndia in preparation oftheir accounts for the fmancial year 2001-02 onwards. Central Government by a Notification dated 7. 12.

2006 prescribed AS 22 u/s 211 (3Q ofthe Companies Act, 1956, in consultation with National Advisory Committee on Accounting Standards, by enacting Companies (Accounting Standards) Rules, 2006. In the present appeals AS 22 was challenged, alleging that it was inconsistent with and ultra vires the provisions of Companies Act, 1956, Income Tax Act, 1961 and the Constitution oflndia, 1950, insofar as it. relates to deferred taxation. The questions for determination before this Courtwer_e: 1. Whether Companies (Accounting Standards) Rules, 2006, -' adopting AS 22 was in excess ofthe powers conferred upon Central D Government u/s 642 (1) ofthe Companies Act, 1956? 2. Whether AS 22 was inconsistent with the provisions of Companies Act, 1956? Dismissing the appeals, the Court HELD: 1. 1. Notification dated 7. 12. 2006 or Companies (Accounting Standards) Rules, 2006, does not suffer from the vice of excessive delegation. [Para 56) (265-C) 1. 2.

On account ofglobalization and socio-economic problems, the power of delegation has become a consituent element of legislative powers as a whole. Subordinate legislation does not carry the same degree of immunity which is enjoyed by a statute passed by a competent Legislature. Subordinate legislation may be questioned on any of the grounds on which plenary legislation is questioned. In addition, it may also be questioned on the ground that it does not conform to the statute under which it is made. It may further be questioned on the ground that it is inconsistent with the provisions of the Act or that it is contrary to some other statute applicable on the same subject matter. Therefore, it has to yield to plenary legislation. It can also be questioned on the ground that it is lllanifestly arbitrary and unjust.

That, any inquiry into its vires must be confined to the grounds on which plenary legislation may be questioned, to the grounds that it is contrary to the statute under which it is made, to the grounds that it is contrary to other statutory provisions or on the ground that it is so patently arbitrary that it ¢annot be said to be inconformity with the statute. It can also be ¢hallenged on the ground that it violates Article 14 of the Constitution. Subordinate legislation cannot be questioned on the ground of violation of principles of natural justice on which administrative action may be questioned. A distinction must, bowevcr, be made between delegation of a legislative function in which case the question of reasonableness cannot be gone into and the investment by the statute to exercise a particular discretionary power.

In the latter case, the question may be considered on all grounds on which administrative action may be questioned, such as, non-application ofmind, taking irrelevant matters into consideration, fltilure to take relevant matters into consideration etc. [Para 63) [267-E-H; 268-A-C] 1. 3. A subordinate legislation may be struck down as arbitrary or contrary to statute if it fails to take into account vital facts which expressly or by necessary implication are required to be taken into account by the statute or the Constitution. This can be done on the ground that the subordinate legislation does not conform to the statutory or constitutional requirements or that it offends Article 14 or Article 19 of the Constitution. However, it may be noted that, a notification issued under a Section ofthe statute which requires it to be laid before Parliament docs not make any substantial difference as regards the jurisdiction of the Court to pronounce on its validity. [Para 63) [268-D-E) 1. 4.

Where the validity of subordinate legislation is challenged, the question to be asked is whether the power given to the rule making authority (in the present case the Central Government under Section 642(1) of the Companies Act) is exercised for the purpose for which it is given. Before reaching the conclusion that the Rule is intra vires, the court has to examine the nature, object and the scheme of the legislation as a whole and in that context, the court has to consider whatis the area over which powers are given by the Section underwhich the rule making authority is to act. However, the court has to start with the presumption that the impugned Rule is intra vires. This approach means that, the Rule has to be read down only to save it from being declared ultra vires if the court finds in a given case that the above presumption stands rebutted. [Para 64] [268-F-H; 269-A] 1. 5.

Ifthe impugned rule is a delegated legislation it would follow that the said rule is made in exercise ofthe power conferred by the statute. Legislature has wide powers ofdelegation. This, however, is subject to one limitation, namely, it cannot delegate uncontrolled power. Delegation is valid only when it is confined to legislative policy and guidelines. In the present case, abovementioned guideline is provided by Section 211(1), which has brought in a stand-alone concept of "true and fair" accounting. The said concept is the controlling consideration. [Paras 65 and 66] [269-B-C] - TISCO v. The Workmen and Ors. , AIR (1972) SC 1917, relied on. 1. 6. What is permitted by the concept of "delegation" is delegation of ancillary or subordinate legislative functions or what is fictionally called as "power to fill up the details". Power to supplement the existing law is not abdication of essential legislative function.

Therefore, power to make subordinate legislation is derived from the enabling Act and it is fundamental principle oflaw which is self-evident that the delegate on whom such power is conferred has to act within the limitations ofthe authority conferred by the Act. It is equally well settled that, Rules made on matters permitted by the Act in order to supplement the Act and not to supplant the Act, cannot be held to be in violation ofthe Act. A delegate cannot override the Act either by exceeding the authority or by making provisions inconsistent with the Act. [Para 68] [269-H; 270-A-C] ~ ' ,... Britnell v. Secretary a/State, (1991) 2 All ER 726, referred to. 1. 7. Power to alter the Schedule as well as power to fill in details are two distinct powers. However, both the powers are entrusted to the same delegate, namely, the Central Government.

Sections 641 and 642 form part ofthe same scheme, hence, it cannot be said that merely because the impugned Notification has been issued under Section 642 and not under Section 641 the said Notification is exhaustive ofthe powers given to the Central Government to frame rules under the aforestated two Sections. Section 642(1) begins with the expression "in addition to the powers conferred by Section 641". Therefore, one has to read Section 642 as an additional power given to the Central Government to make Rules, in addition to its power to alter the schedule by making appropriate Rules under Section 641. The Companies Act has been enacted to consolidate and amend the law relating to companies and certain other associations. Under ,_ Section 211(3A) Accounting Standards framed by National Advisory Committeeon AccountingStandards constituted under Section 210A are now made mandatory. Every company has to comply with the said standards.

Similarly, under Section 227(3)(d), every auditor has to certify whether the P&L a/c and balance-sheet comply with the accounting standards referred to in Section 211(3)(c). Similarly, under Section 211(1) the company accounts have to reflect "true and fair" view of the state of affairs. [Para 71] [272-A-F] Banarsi Das v. State ofMP. , AIR (1958) SC 909, relied on. I - 1. 8. The object behind insistence on compliance with the A. S. and "true and fair" accrual is the presentation of accounts in a manner which would reflect the true income/profit. One has, therefore, to look at the entire scheme of the Companies Act. The provisions ofthe Companies Act together with the Rules framed by the Central Government, constitute a complete scheme. Without the Rules, the Companies Act cannot be implemented. The impugned t. Rules framed under Section 642 are a legitimate aid to construction of the Companies Act as contemporanea expositio.

Many of the provisions of the Companies Act, like computation of book profit, net profit etc. cannot be put into operation without the rules. [Para 71) (272-F-H; 273-A) 1. 9. In the present case also, even under the Rules impugned herein viz. AS 22, which is made mandatory, provides an internal legitimate aid to the meaning of the words in the Companies Act, including Schedule VI, namely, liability, provision for taxes on ' income, book profit, net profit, depreciation, amortization etc. • Therefore, it cannot be said that the impugned Rules framed under Section 642(1) constitute an act on the part of the rule making authority, namely, the Central Government, in excess ofits powers under Section 642(1) of the Companies Act. The impugned Rule/ Notification is valid. It has nexus with the matters entrusted to the Central Government to be covered by appropriate rules.

The power to regulate a business or profession implies the power to prescribe and enforce all such proper reasonable rules as may be deemed _( necessary to conduct business/profession in a proper and orderly , manner and the power includes the power to prescribe conditions under which business/profession can be carried on. [Para 74) (276-B-E] P. Kasilingam andOrs. v. P. S. G. College ofTechnology and Ors. , (1995) Suppl 2 SCC 348 and TELCO v. Gram Panchayat, Pimpri Waghere, (1976) 4SCC177, relied on. Deepak Theatre, Dhuri v. State ofPunjab and Ors. , AIR (1992) SC 1519, referred to. > 2. 1. The impugned Rule is neither ultra vires nor incongruous/ inconsistent with the provisions ofthe Companies Act, 1956. It does not seek to modify the essential features ofthe Companies Act. Rules m~de on matters permitted by the Act to supplement the Act, cannot be held to be in violation ofthe Act. [Paras 126 and 133) [305-C] Britnell v. Secretary ofState, (1991) 2 All ER 726, referred to. 2. 2.

The object behind enactment ofA. S. , which are now made mandatory under section 211(3A) of the Companies Act, is to shift H from historical method of accounting (Matching Principle) to fair valuation principle. In the case of mergers and acquisitions, which . is common today in the world ofglobalization, fair valuation principles have important role to play. Mergers and acquisitions are sometimes undertaken to defer revenue expenditure over future years by invoking the matching concept, which results in putting fictitious assets on the balance-sheet. This is one reason why fair valuation principles are accepted. [Para 60) [266-G-H; 267-AJ 2. 3. When the power to make rules is limited to particular topics and ifthat rule falls within the ambit ofthat topic, namely, taxes on income in the present case, it cannot be said that the rule is inconsistent with the provisions ofthe Act. The Act and the Rules form part ofthe composite scheme.

The provisions ofSections 205, 209 and 211 can be put into operation only ifthe Act and the Rules ate read together. In the present case, the impugned Rule constitutes a legitimate aid to construction ofthe provisions ofthe Companies A~t. Further, the Central Government is the rule making authority under Section 211(3C). As rule making authority, the Central G(lvernment is empowered to enact accounting standards in consultation with NAC which may be at variance with the Standards issued by the Institute. [Para 127] [299-B-DJ 2. 4. Though the Central Government is vested with both the powers, namely, to amend the Schedule and to fill in details, the nafure ofthe rules framed under Section 641(2) continues to have the status ofthe rules despite the phraseology used in Section 641(2) which, says that "any alteration notified under sub-section (1) of Section 641 shall have effect as if enacted in the Companies Act". [Para 94] [285-E-F) ChiefInspector ofMines v. Karam Chand Thapar.

AIR (1961) SC 838, relied on. 2. 5. In the present case, measurement and recognition methods ! arc not the items under the Companies Act. Methods ofrecognition and measurements are talked about by the provisions of the Companies Act. Recognition and measurement of various items of • J J. K. INDUSTRIES LTD. v. UNION OF INDIA 143 revenue expenses etc. stand covered only by the accounting standards. Therefore, it cannot be said that the said standards are contrary to the provisions ofthe Companies Act. It also cannot be said that the impugned Rule does not touch upon maintenance of books ofaccounts to be kept by the company. Under Section 209(3)(b) every company is required to keep its books of accounts on accrual basis and according to double-entry system of accounting. Under Section 209(3)(a) every company is required to maintain books of accounts necessary to provide a true and fair view of the state of affairs of the company and its accounts.

Books of accounts do not include balance-sheet and P&L a/c. However, there is a difference between "true and correct" accrual and "true and fair" accrual. In the past, what prevailed was true and correct accrual. At that time, it was noticed in several cases that profits were overstated and, therefore, the Legislature inserted what is called as "true and fair" accrual concept. The said concept is wider than the concept oftrue and correct accrual. When Section 209(3) refers to maintenance of books ofaccounts on accrual basis it means "true and fair" accrual, which would include not only matching principles but also fair valuation principles. These principles do not contravene accrual system ofaccounting. [Para 128) [300-B-F) Union ofIndia andAnr. v. Cynamide India Ltd. andAnr. , [1987] 2 sec 720, referred to. 2. 6. Para 9 and para 33 of AS 22 cannot be said to be inconsistent with the provisions of the Companies Act including Schedule VI.

Recognition and measurements bring in the concept offair value. When a financial instrument is measured at fair value it brings transparency in financial reporting. Today, companies undertake multifarious activities which warrants segment reporting. AS 22 is mandatory; Therefore, it is the duty of the members of the Institute to examine whetherthe accounting standard is complied with the said standard in the presentation of financial statement. [Paras 116and118] [292-F, H;. 293-A-C] · 2. 7. With the introduction of the 'timing difference' concept, it cannot be said that the accrual system of accounting is violated. It is the concept of'timing difference' which obliterates the difference ;between accounting and tax incomes. Ultimately, the object is to obliterate the difference between accounting income and taxable . income.

Accounting income is the real income, therefore, para 9 of AS 22 is not inconsistent with the provisions ofthe Companies Act, including Schedule Vl [Para 128) (300-H; 301-A-B) Bharat Hari Singhania and Ors. v. Commissioner a/Wealth-tax (Central) and Ors. , AIR (1994) SC 1355, relied on. 2. 8. Para 9 of AS 22 merely represents gap-filling exercise, therefore, it is not correct that AS 22 is inconsistent with the provisions ofthe Companies Act including Schedule VI. It proceeds on the principle that every transaction has a tax effect. The words "true and fair" view in Section211(1) connotes thewidest law making powers and, thus the impugned Rule adopting AS 22 is intra vires as the said Rule is incidental and/or supplementary to the specific powers given to the Central Government to make Rules, particularly when such poweris given to fill-in details. The word "supplementary" means something added to what is there in the Act, to fill-in details for which the Act itselfdoes not provide.

It is something in the sense th~t is required to implement what is there in the Act. [Para 127) [298-F-H; 299-A) Daymond v. South West Water Authority, (1976] 1 All ER 39, referred to. 2. 9. Para 9 only provides for details which are necessary for giving effect to the concept of true and fair accrual of accounts contemplated by Section 211(1). The concept of"true and correct" accrual is different from the concept of"true and fair'' accrual. Both the ¢oncepts fall under accrual system ofaccounting. However, there is a difference. Under "true and correct" accrual, the matching principle was always recognized. However, fair valuation principle is the concept which brings out the real income ofthe company. Para 1- 9 has been enacted, to obliterate the difference between the accounting income and taxable income. Para 9 aims to present the real income to the investors, shareholders and stake-holders in the j • company.

There is also a difference between accounting depreciation and tax depreciation. In order to harmonize these differences, para 9 has been enacted. In order to bring out the true income of company, one has to read the provisions ofthe Companies Act with the accounting standards adopted by the impugned Notification. Para 9 ofAS 22 merely provides for details in the matter ofprovision for liability for taxation. [Para 119] [293-D-G; 294-A] Cl T v. Duncan Brothers andCo. Ltd, [1996] 8 SCC 31; and P. Kasilingam and Ors. v. P. S. G. College ofTechnology andOrs. , [1995] Suppl 2 SCC 348, relied on. 2. 10. The word "tax expense" in para 9 under conservative system ofaccountingwas confined to current tax. However, with para 9 ofAS 22 coming into force, the word "tax expense" now includes both, current tax and deferred tax. This inclusion became necessary because ofdevelopments not only in concepts but also in accounting D practices.

This inclusion becomes necessary if one has to go by } paratligm shift from historical costs accounting to fair value principles. With the insertion ofthe words "true and fair" view in Section 211, which is the requirement in the matter ofpresentation ofbalance-sheet and P&L ale the rule making authority was entitled to include the concept of"deferred tax" in tax expense. It may be stated that under clause 3(vi) ofPart II, Schedule VI, the charge for tax on profit is contemplated. Provision for liability for taxation is contemplated by the said clause. Para 9 ofAS 22 merely provides for a liability which arises on account oftiming difference. It is known as the balance-sheet date. One has to therefore consider matching principle and fair valuation principles as important concepts in Accrual Accounting. Further, recognition and measurement is not covered by the provisions ofthe Companies Act.

Therefore, one has to read the presentation ofbalance-sheet and P&L ale together with recognition and measurements. Therefore, one has to read the provisions ofthe Companies Act along with the impugned Rule which adopts AS 22 as recommended by the Institute. [Para 120) (294-A-E) 2. 11. The matching principle recognizes cost against revenue H or against the relevant time period to determine the periodic income. Therefore, the said principle constitutes an important component of the accrual basis of accounting. The concept of accrual, in case of mergers and acquisition, is not limited to one year. DTL/DTA arises out of timing differences. Therefore, such differences have got to be reflected in Deferred Tax Accounting. DTL in most cases arises on account ofthe difference between tax depreciation and accounting depreciation. When on account of over-charging of depreciation under the Income-tax Rules, the taxable income falls below the accounting income, DTL emerges.

This is because the rates of tax depreciation are incentive rates whereas accounting depreciation is based on the useful life of the asset. Thus, an asset under Income tax Act would be charged over a much shorter period as compared to the useful life of the asset. [Para 120) [294-E-H; 295-A) 2. 12. For the purpose ofdetermining accumulated deferred tax in the period in which the Standard is applied for the first time, the opening balances of assets and liabilities for accounting purposes and for tax purposes are to be compared and the differences, if any, are to be determined. The tax effect of these differences have got to be recognized as DTA or DTL, if such differences are timing differences. Once it is required to take into account the concept of opening balance of a fixed asset in para 33, it cannot be said that the said para is retrospective. In fact, it is a transitional provision. [Paras 131and132) [304-C-D, G) 2. 13.

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 ofitems ofrevenue/ expense as per profit and loss account and as per the tax law. It also arises on account of the difference between the amount ofrevenue/ expense as per profit and loss account and the corresponding amount considered for tax purposes, e. g. , depreciation. [Para 134) [305-D) Commissioner ofIncome-tax v. Indian Jute Mills Association, (1982) 134 ITR 68 (Cal) and State Bank ofPatiala v. CIT, (1996) 219 ITR 706, referred to. j J. K. INDUSTRIES LTD. v. UNION OF INDIA / ""' 3. The question that the provisions ofAS 22 insofar as it relate to "deferred taxation" is violative ofArticles 14 and 19(1)(g) ofthe Constitution oflndia is left open. [Para 135) (305-E-F) CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3761 of 2007. From the Judgment and Order dated 19. 04. 2007 ofthe High Court --\ of Calcutta in W. P.

No. 10608 (W) of2002. WITH C. A. Nos. 3478-3480 and 3482 of 2007. A. Sharan, ASG. , Dr. Debiprosad Pal, S. K. Bagaria, J. P. Khaitan, Arvind P. Datar and N. K. Poddar, Ananda Sen, R. K. Raghavan, K. V. Mohan, K. V. Balakrishnan, Raj Shekhar Rao, N. P. Agarwalla, P. C. Sharma, Amit Agarwalla, Dr. Anita Sumanth, V. S. Jay Kumar, Nikhil Nayyar, Ankit Singhal, T. V. S. R. Sreyas, Gaurav Agrawal, Amit Anand Tiwari, P. Parmeswaran, Pramod Dayal and Nikunj Dayal for the Appearing parties. The Judgment ofthe Court was delivered by KAPADIA, J. 1. A short question which arises for determination in this batch ofcivil appeals is : "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 ofthe Companies Act, 1956 (the Companies Act), the Income-tax Act, 1961 (LT. Act) and the Constitution ofIndia? " 2. Mis. J. K. Industries Ltd. is a public limited company.

It was incorporated in 1951. It carries on the business ofmanufacture and sale ofautomotive tyres, tubes, sugar and agrigenetics. It has a registered office at Calcutta. It seeks to challenge AS 22 issued by Institute ofChartered Accountants of India (for short, "Institute") which has been made mandatory for all companies listed in Stock Exchanges in India in preparation of their accounts for the financial year 2001-02 onwards. 3. On 7. 12. 06 the Central Government prescribed AS 22 under Section 211 (3C) of the Companies Act by the Companies (AS) Rules 2006. Before that date, AS 22, when issued in 2001, was challenged in rwrit petitions filed before Madras, Kamataka, Calcutta and Gujarat High Cou1ts. On transfer petitions, under Section 139A ofthe Constitution, filed by the Institute, this Court vide order dated 17. 2. 03 was pleased to transfer the writ petitions filed in various High Courts to the Calcutta High Court. Meaning and purpose ofAS: 4.

In its origin, Accounting Standard is a policy statement or document framed by Institute. Accounting Standards establishes rules relating to recognition, measurement and disclosures thereby ensuring that all enterprises that follow them are comparable and that their financial statements are true, fair and transparent. Accounting Standards ("A. S. " for short) are based on a number ofaccounting principles. They seek to arrive at true accounting income. One such principle is the matching principle. The other is fair value principle. The aim ofthe Institute is to go for paradigm shift from matching to fair value principle. 5. Today the revised Accounting Standards seeks to arrive at true accounting income. In the age ofglobalization the attempt is to reconcile the accounts oflndian companies with theirjoint venture partners abroad. The aim is to harmonise Indian Accounting Standards with International Accounting Standards.

With the object ofbridging gap between IAS and IFRS, the Institute formulated new A. S. and introduced new concepts, e. g. , Deferred Tax Accounting (AS 22 impugned herein), Segment Reporting (AS 17) etc.. However, as a matter ofprudence and necessary adjustment, to arrive at real iPcome, Accounting Standards require provision to be made for liabilities payable in future, provision to be made for contingencies, provision to be made for diminution, provision to reflect impairment and so on which have the effect ofreducing incomes and were, therefore, not readily accepted by some enterprises and tax authorities. 6. The core of Accountar1cy is Book-keeping. T11e rules of Bookkeeping are clear. For example, the value of a fixed asset mentioned in a /- Balance Sheet is based on cost which may involve subjective estimation ofthe amount to be apportioned. Similarly. the quantum ofdepreciation is again an estimate, which can vary depending on the persons preparing I J. K. INDUSTRIES LTD. v.

UNION OF INDIA f -\ the accounts as to when and at what stage he wants to record the depreciation. Accounting Standards are an attempt to overcome some of these deficiencies of Accountancy. Accounting Standards involve codification offundamental accounting rules, rules which explain and standardiz. e the application ofthe fundamental rules to a variety ofuncertain situations like-retirement, contingencies, intangibles, consolidation, merger etc. Accounting Standards basically attempt to reduce the subjectivity and lay down rules so as to arrive at the best possible estimates. For example, net assets refer to the difference between total assets less liabilities but the value attributable to each asset and each liability is often subjective. It depends on estimates. This is where the Accounting Standards help. They reduce the subjectivity. Therefore, Accounting Standards help to arrive at the best possible estimates.

This estimation/subjectivity is also on account ofthe conceptual difference between "accounting incoll. le" and "taxable income". Accounting income is the real income. Tax laws lay down rules for valuation of inventories, fixed assets, depreciation, bad debts, etc. based on artificial rules and not on the basis of accounting > estimates, which results in mismatch between accounting and taxable incomes: For example, a fixed rate of depreciation may, for some companies, result in computing lower than the actual income ifthe actual erosion in the value ofthe asset is lower than the depreciation calculated at the fixed rate and higher than actual income for others where assets erode faster. Accounting income is nonnally used as a relevant measure by most stakeholders. However, on account ofartificial set ofrules used in computation oftaxable income one finds that accounting income differs from taxable income.

Looking to these problems, the evolution of :\ Accounting Standards and their greater application is necessary as it results in reducing the need for tax laws to depend upon artificial rules. The object ofAccounting Standards is, therefore, to standardize and to narrow down the options. The object of Accounting Standards is to evolve methods by which "accounting income" is determined. The object behind the Accounting Standards is to evolve methods by which accounting income is determined, made more transparent and leave less and less room for subjective selection of methods and provide for more attention to the quality ofestimates used in arriving at accounting income. 7. The main object sought to be achieved by Accounting Standards which is now made mandatory is to see that accounting income is adopted as taxable income and not merely as the basis from which taxable income is to be cmnputed.

Thus, ifthe rules by which inventories are to be valued are laid down in the Accounting Standards artd are followed in. the determination ofaccounting income, then tax laws do not need to lay down the rules and the tax authorities do not need to examine the computation ofthe value ofinventories and its effect on computation of · income. Similarly, ifthere is an accounting standard on depreciation which requires estimation ofthe useful life and prescribes the appropriate method for apportionment of cost of fixed assets over their useful life, it is unnecessary for tax laws to apply an artificial rule to decide the extent of allowance for depreciation. 8. Finally, the adoption ofAccounting Standards and ofaccounting income as ''taxabl. e income" would avoid distortion ofaccounting income which is the real ·income. ReasonsJoi- introducing AS 22: J.. 9. In the ba1;kdrop ofglobalization and liberalization the world has become an economic village.

Today, the capital market all over the world knows no barriers. Fiscal distances and barriers have been removed by developments in transport, communication and e-commerce. In this backdrop, Conv1ergence ofAccounting Standards is aimed at removing barriers in the flow offinancial information and capital. Ba5ed on the above developments in the global economy and the Indian economy, the conceptual differences and consequent deviations in the National Accounting Standards and IFRS have got to be eliminated. For example, exchange difference in respect of unpaid liability for acquisition of an imported asset has been allowed in the past to be adjusted with the carrying costs ofthe fixed assets instead ofrecognizing the exchange difference in the profit and loss account. 10. Lastly, it is important to note that Accounting Standards and taxation of income are two independent subjects. The object behind AS is to remove this divergence by making Accounting Income a Taxable Income.

Accounting income can never negate True Income. Relevantprovisions ofthe Companies Act, 1956 and Analysis thereof 11. Before analyzing the provisions ofthe Companies Act, we quote hereinbelow the following provisions from the Companies Act which read as follow: "PREAMBLE" The Companies Act, 1956 (ACT 1 OF 1956) [18th January, 1956] An Act to consolidate and amend the law relating to companies and certain other associations. Be it enacted by Parliament in the 'Sixth Year ofthe Republic oflndia as follows:-" I "PRELIMINARY .. --! Section 2(33) "prescribed" means, as respects the provisions of this Act relating to the winding up ofcompanies except sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Supreme Comi in consultation with The Tribunal, and as respect.

;; the other provisions ofthis Act including sub-section (5) of section 503, sub-section (3) of section 550, section 552 and sub-section (3) of section 555, prescribed by rules made by the Central Government;" ~ "ACCOUNTS Section 209. Books ofaccount to be kept by company (1) Every company shall keep at its registered office proper books ofaccount with respect toj (a) all sums of money received and expended by the companJ and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; ' .

~ r- ,, (c) the assets and liabilities ofthe company; and (d) in the case: ofa company pertaining to any class ofcompanies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation ofmaterial or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books ofaccount: Provided that all or any ofthe books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board ofdirectors so decides, the company shall, within seven days ofthe decision, file with the Registrar a notice in writing giving the full address ofthat other place. (2) Where a :ompany has a branch office, whether in or outside India, the company shall be deemed to have complied with the .

_ provisions ofsub-section (I), ifproper books ofaccount relating to the transactions effected at the branch office are kept at that office and proper summarised returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1 ). (3) For the purposes of sub-sections (1) and (2), proper books of account ~:hall not be deemed to be kept with respect to the matters specified therein,- (a) ifthere are not kept such books as ,,> are necessat)' to give a true and fair view ofthe state ofthe affairs of the company or branch office, as the case may be, and to explain its transactions; and (b) Ifsuch books are not kept on accrual basis and according to the double entry system ofaccounting. (4) The books of account and other books and papers shall be \- (' open to inspection by any director during business hours.

(4A) The books of account ofevery company relating to a period of not less than eight years immediately preceding the current year j ) J. K. INDUSTRIESLTD. v. UNION OF INDIA 153 '" together with the vouchers relevant to any entry in such books of account shall be preserved in good order : Provided that in the case ofa company incorporated less than eight years before the current year, the books ofaccount for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved.

(5) Ifany ofthe persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements ofthis section, or has by his own wilful act been the cause ofany default by the company thereunder, he shall, in respect ofeach offence, be punishable with imprisonment for term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : ,_,\ Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements ofthis section, it shall be a defence to prove that a competent and reliable person was charged with the duty ofseeing that those requirements were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence, unless it was committed wilfully.

(6) The persons referred to in sub-section (5) are the following namely:- (a) where the company has a managing director or manager, such managing' director or manager and all officers and other employees of the company; and; .. (d) where the company has neither a managing director nor manager, every director ofthe company; Section 210. Annual accounts and balance sheet ) \ 154 '\ (1) At every annual general meeting ofacompany held in pursuance "' of section 166, the Board of directors ofthe company shall lay before the company- (a) a balance sheet as at the end of the period specified in subsection (3); and (b) a profit and loss account for that period.

(2) In the case ofa company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to "profit and loss account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the "income and expenditure account", "the excess ofincome over expenditure", and "the excess ofexpenditure over income".

(3) The profit and loss account shall relate- "' (a) in the case ofthe first annual general meeting ofthe company, to the period beginning with the incorporation ofthe company and ending with a day which shall not precede the day ofthe meeting by more than nine months; and (b) in the case of any subsequent annual general meeting ofthe company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day ofthe meeting by more \. ~ than six months, or in cases where an extension oftime has been granted for holding the meeting under the second proviso to subsection (1) of section 166, by more than six months and the extension so granted. (4) The period to which the account aforesaid relates is referred to in this Act as a "financial year" and it may be less or more than I.

a calendar year, but it shall not exceed fifteen months : Provided that it may extend to eighteen months where special permission has been granted in that behalfby the Registrar. t· f __, A (5) Ifany person, being a director of a company, fails to take all reasonable steps to comply with the provisions ofthis section, he shall, in respect ofeach offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : Provided that in any proceedings against a person in respect ofan -I offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty ofseeing j that the provisions ofthis section were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.

(6) Ifany person, not being a director ofthe company, having been charged by the Board ofdirectors with the duty ofseeing that the provisions ofthis section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for aterm which may extend to six months, or with fine which may exterid to ten thousand rupees, or with both : Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully. Section 210A. Constitution ofNational Advisory Committee on Accounting Standards \ ,.

, (1) The Central Government may, by notification in the Official Gazette, constitute an Advisory Committee to be called the National Advisory Committee on Accounting Standards (hereafter in this section referred to as the "Advisory Committee") to advise the Central Government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class ofcompanies under this Act. ::) (2) The Advisory Committee shall consist of the following members, namely :- (a) a Chairperson who shall be a person ofeminence well versed - ..

in accountancy, finance, business administration, business law, economics or similar discipline; (b) one member each nominated by the Institute of Chartered Accountants oflndia constituted under the Chartered Accountants Act, 1949, the Institute ofCost and Works Accountants of India constituted under the Cost and Works Accountants Act, 1959 and the Institute ofCompany Secretaries ofIndia constituted under the Company Secretaries Act, 1980; (c) one representative ofthe Central Government to be nominated by it; (d) one representative of the Reserve Bank of India to be nominated by it; (e) one representative ofthe Comptroller and Auditor-General of India to be nominated by him; (f) a person who holds or has held the office of professor in accountancy, finance or business management in any university or deemed university; (g) the Chairman ofthe Central Board ofDirect Taxes constituted under the Central Boards ofRevenue Act, 1963 or his nominee; (h) two members to represent the chambers of commerce and industry to be nominated by the Central Government, and (i) one representative ofthe Securities and Exchange Board oflndia to be nominated by it.

(3) The Advisory Committee shall give its recommendations to the Central Government on such matters ofaccounting policies and standards and auditing as may be referred to it for advice from time to time. (4) The members ofthe Advisory Committee shall hold office for such terms as may be determined by the Central Government at the time oftheir appointment and any vacancy in the membership in the Committee shall be filled by the Central Government in the I f same manner as the member whose vacancy occurred was filled. (5) The non-official members ofthe Advisory Committee shall be entitled to such fees, travelling, conveyance and other allowances as are admissible to the officers ofthe Central Government of the highest rank. Section 211.

Form and contents of balance sheet and profit and loss account ( 1) Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions ofthis section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading "Notes" at the end ofthat Part: Provided that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a forn1 ofbalance sheet has been specified in or under the Act governing such class ofcompany.

(2) Every profit and loss account ofa company shall give true \ and fair view ofthe profit or loss ofthe company for the financial .. year and shall, subject as aforesaid, comply with the requirements of Pm1 II of Schedule VI, so far as they m·e applicable thereto: Provided that nothing contained in this sub-section shall apply to any insurm1ce or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class ofcompany. (3) The Central Government may, by notification in the Official Gazette, exempt any class ofcompanies from compliance with any \ /~ . A ofthe requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.

(3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards. >-- (3B) Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:- (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, ifany, arising due to such deviation. ).

(3C) For the purposes ofthis section, the expression "accounting standards" means the standards ofaccounting recommended by the Institute ofChartered Accountants ofIndia constituted under the Chartered Accountants Act, 1949 as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of section 210A: Provided that the standard ofaccounting specified by the Institute of Chartered Accountants of India shall be deemed to be the . ' Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section. (4) The Central Government may, on the application, or with the consent ofthe Board ofdirectors ofthe company, by order, modify in relation to that company any ofthe requirements ofthis Act as to the matters to be stated in the company's balance sheet or profit and loss account for the purpose of adapting them to the circumstances ofthe company.

(5) The balance sheet and the profit and loss account ofa company shall not be treated as not disclosing a true and fair view ofthe state ofaffairs ofthe company, merely by reason ofthe fact that they do not disclose- (i) in the case ofan insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938; (ii) in the case ofa banking company, any matters which are not required to be disclosed by the Banking Companies Act, 1949; (iii) in the case ofa company engaged in the generation or supply ofelectricity, any matters which are not required to be disclosed by both the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948; (iv) in the case ofa company governed by any other special Act for the time being in force, any matters which are not required to be disclosed by that special Act; or (v) in the case ofany company, any matters which are not required to be disclosed by virtue ofthe provisions contained in Schedule VI or by virttie ofa notification issued under sub-section (3) or an order issued under sub-section (4).

(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form ofsuch notes or documents.

(7) Ifany such person as is referred to in sub-section (6) ofsection 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions ofthis section and with the other requirements ofthis act as to the matters to be stated in the accounts, he shall, in respect ofeach offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both : Provided that in any proceedings against a person in respect ofan offence under this section, it shall be a defence to prove that acompetent and reliable person was charged with the duty ofseeing that the provisions of this section and the other requirements aforesaid were complied with and was in a position to discharge that duty : Provided further that no person shall be sentenced to imprisonment for any such offence, unless it was committed ~- (8) Ifany person, not being a person referred to in sub-section (6) of section 209, having been charged by the managing director or manager, or Board ofdirectors, as the case may be, with the duty ofseeing that the provisions ofthis section and the other requirements aforesaid are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees, or with both: Provided that no person shall be sentenced to imprisonment for any such offence, unless it was committed wilfully.

SCHEDULE VI (See section 21 I) I [PART I Form of Balance-sheet] The balance sheet of a company shall be either in horizontal form or vertical form A. HORIZONTAL FORM] Balance sheet of............ ...... [Here enter the name of the Company] As at....... .......... . [Here enter the date as at which the balance-sheet is made out. ] 1nstructions LIABILITIES ASSETS Instructions in in accordance Figures for Figures Figures for the Figures accordance with with which the for previous year for which assets liabilities previous the Rs. (b) the should be should be year current current made out made out Rs. (b) Rs. (b) Rs. (b) *SHARE *FIXED ASSETS CAPITAL *Tenns of Authorised.... Distinguishing *Under each head the ....... 0\ redemptro11or ... shares ot as raras- ongma-i--rost, and the -0\ N conversion Rs.... each.

possible additions thereto and (if any), or any between deductions therefrom redeemable expenditure during the year, and preference upon (a) total depreciation written capital to be goodwill, (b) off or provided up to stated, together land, (c) the end of the year to be with earliest buildings, (d) stated. date of leaseholds, (e) redemption or railway conversion. sidings, (f) plant and machinery, (g) furniture and fittings, (h) development of property, (i) patents, trade marks and designs, (j) I live-stock and (k) vehicles, etc.

Where the original cost atoresatct ano add1t1ons and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability ofthe company, as expressed in Indian currency, for making payment towards the whole or a part ofthe cost of the asset or for repayment of the whole or a pa1t of moneys borrowed by the company from any person, directly or indirectly in any foreign currency specifically for - -the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability is so increased or reduced during the year, shall be added to, or, as the case may be deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset.

Explanation 1: This paragraph shall apply in relation to all balancesheets that may be made out as at the 6th day of June, 1966, or any day \,_ \. J /· -- ~ \~ thereafter and where, at the date of issue of the ....... notification ofthe ~ Government of India, in ........ the Ministry oflndustrial z 0 Development and c:::: Company Affairs [/J -l (Department ofCompany ~ ........ Affairs), G. S. R. No. 129, ,......... , trl dated the 3rd day of ~~ January, 1968,any >i::J -l :i>o balance sheet, in relation, o· ........ ; c:::: applies, has already been '. - z ............... made out and laid before 0 the company in Annual z General Meeting, the 0 'Tl adjustment referred to in ....... z this paragraph may be 0 ........ made in the first balance- > sheet made out after the issue of the said notification. O'\ Vi \, ' delay, the valuation shown by the books shall be given.

For the purposes of this paragraph, such valuation shall be the net amount at which an asset stood in the company's books at the commencement of this Act after deduction of the amounts previously provided or written offfor depreciation or diminution in value, and where any such asset is sold, the amount of sale proceeds shall be shown as ...... deduction. ] z +Particulars +Issued Where sums have been 0...... of any option (distinguishing written off on a reduction > on un-issued between the of capital or a revaluation share capital various of assets, every balance to be specified. classes of sheet, (after the first capital ana oa1ance sneet) -0\ 00 stating the subsequent to the particulars reduction or revaluation specified shall show the reduced below, in figures and with the date respect of of the reduction in place each class) of the original cost. ... shares of Rs.....

each +Particulars of +Subscribed Each balance sheet for the the different (distinguishing first five years subsequent classes of between the to the date ofthe reduction, preference various shall show also the amount shares to be · classes of of the reduction made. given. Capital and stating the particulars ........ , specified N 0 below in 0 -.. J .......... respect of each class. ) (c) ..... shares Similarly, where sums have of Rs.... each. been added by writing up / /v I' ,~' I ( ,'r' the assets, every t>alancesheet subsequent to such writing up shall show the increased figures with the date of the increase in place of the original cost. Each balance sheet for the first five years subsequent to the date of writing up shall also show the amount of increase made. Rs..... Explanation. - Nothing called up. contained in the preceding two paragraphs shall apply to any adjustment made in accordance with the second paragraph. Of the above shares ... shares are allotted as ,_.

fully paid- -.. J 0 up pursuant to a contract without payments being received in cash. +Specify the Of the source from above which bonus shares shares are ... shares issued, e. g. , are capitalisation allotted as of profits or fully paid- Reserves or up by w from Share way of 0 0 Premium bonus ....... ,-.. J Account. shares+ +Any capital Less: calls profit on unpaid: reissue of /r r \ r forfeited shares should be transferred to Capital Reserve. 1[(i) By managing agent or secretaries and treasurers and where the managing agent or secretaries and treasurers are a firm, by the partners thereof, and where the managing agent or secretaries and treasurers are a pnvate company by the directors or members of that company. ] (ii) By directors. (iii) By others. +Add: Forfeited shares (amount originally paid up)]. ,...... , *Additions *RESERVES INVESTMENTS *Aggregate amount of N 0 and deductions AND company's quoted 0 -. J since last SURPLUS investment and also the ..........

balance sheet market value thereof to be shown shall be shown. under each ! of the ~----- I spec1t1ed heads. The word (I) Capital Showing nature Aggregate amount of "fund" in Reserves. of investments company's unquoted relation to and mode of investments shall also any valuation, for be shown. "Reserve" example, cost should be or market used only value and where such distinguishing Reserve is betweenspecifically represented by earmarked investments. (2) Capital *(1) Investments All unutilised monies Redemption in Government out of the issue must Reserve. or Trust be separately Securities. disclosed in the Balance Sheet of the company indicating the form in which such unutilised funds have been invested. (3) Share *(2) Investments Premium in shares, Account (cc).

debentures or bonds (showing separately shares fully paid-up and partly paid-up and also distinguishing the different classes of shares and showing also in similar details investments in shares, debentures or bonds of subsidiary ,. --, N companies. 0 0 (4) Other (3) Immovable .......... -... J Reserves properties. specifying the nature of each T ) ... Keserve and the amount in respect thereof. Less: Debit (4) Investments balance in in the Capital profit and of partnership loss account firms. (if any) (h). (5) Surplus (5) Balance of i. e. , balance unutilised in profit and monies raised loss account by issue. after providing for proposed allocations, namely:- Dividend, Bonus or Reserves. {<>) Proposed aamttons to Reserves. (7) Sinking Funds. ] SECURED CURRENT ASSETS, LOANS: LOANS AND ADVANCES: Loans from +(I) A. CURRENT +Mode of valuation of Directors, Debentures ASSETS stock shall be stated Manager ++ and the amount in should be respect of raw shown material shall also be separately.

stated separately where practicable. Interest +(2) Loans (1) Interest ++Mode ofvaluation accrued and accrued on of works-in-progress and due Advances Investments shall be stated. ....... , N on Secured from Banks. 0 0 Loans .......... -..... ) should be included under the appropriate / ' \. sub-heads under the head "SECURED LOANS". +The nature +(3) Loans +(2) Stores and @In regard to Sundry of the and spare parts. Debtors particulars security to Advances to be given separately be specified from of- (a) debts in each case. subsidiaries. considered good and in respect of which the company is fully secured; and (b) debts considered good for which the company holds no security other than the debtor's personal security; and (c) debts considered doubtful or bad. When~ loans +(4) Other (3) Loose Debts due by directors have been Loans and Tools. or other officers of the guaranteed Advances. company or any of ........

Ioy managers them enner severauy -l and/or or jointly with any 00 directors, a other person or debts mention due by firms or private thereof shall companies respectively also be made in which any director and the is a partner or a aggregate director or a members amount of to be separately such loans stated. under each head ++Terms of +(4) Stock-in-trade. Debts due from other redemption or companies under the conversion same management (if any) of within the meaning of debentures sub-section (IB) of ,........ , issued to be section 370, to be N 0 stated disclosed with the 0 -l together with names of the .......... earliest date Companies. of redemption or conversion. I )- ++(5) Works-in- The maximum amount Progress. due by directors or other officers of the company at any time during the year to be shown by way of a note.

@(6) Sundry The provisions to be debtors- shown under this head should not exceed the amounts of debts stated to be considered doubtful or bad and any surplus of such provision ifalready created, should be shown at every closing under "Reserves and Surplus" (in the I liabilities side) under a separate sub-head "Reserve for Doubtful or Bad Debts". ...... (a) Debts In regard to bank 00 0 outstanding for balances, particulars a period to be given s. eparately exceeding six ofmonths. (b) Other (a) the balances lying debts. with Scheduled Banks on current acc~unts, call accounts and deposit accounts; Less: Provision (b) the name of the bankers other than Scheduled Banks and the balance lying with ; each such banker on current accounts, call accounts and deposit ,...... , N account the maximum 0 0 -. ) amount outstanding at .......... ~ny time during . the ...... N year from each such · Cl'J , banker; and n \ ' (7A) Cash (c) the nature of the ? o / i - t5a1ance interest, JI.

any, or a11y on hand. director or his relative or the in each of the bankers (other than Scheduled Banks) referred to in (b) above. (7B) Bank All unutilised monies balances- out of the issue must be separately disclosed in the Balance Sheet of the company indicating the form in which such unutilised funds have been invested. (a) with Scheduled Banks, and (b) with others. B. LOANS *The above ,_.. 00 ,_.. ,_. ANlJ mstrucuons regardmg 00 N ADVANCES "Sundry Debtors" apply to "Loans and Advances" also. (8) (a) Advances and loans to subsidiaries. (b) Advances and loans to partnership firms in which the company or any of its subsidiaries is a partner. (9) Bills of Exchange. (10) Advances recoverable in cash or in kind or for value to be ·'"I •.. ). \ recervect, e. g. , Rates, Taxes, Insurance, etc. (11)***] (12) Balances with Customs, Port Trust, etc. (where payable on demand).

UNSECURED MISCELLANEOUS LOANS: EXPENDITURE (to the extent not written off or adjusted): +Loans from (I) Fixed (1) Preliminary directors, Deposits. expenses. manager should be shown separately. Interest accrued -00 w ant ctue on Unsecured Loans should be included under the appropriate sub-heads under the head "Unsecured Loans". ] +Where loans +(2) Loans (2) Expenses have been and including guaranteed Advances commission or by managers from brokerage on and/or subsidiaries. underwriting directors, or subscription a mention , bf shares or thereof shall debentures. be made and also aggregate amount of / ·~' "---I' . \ \'' / \ such loans under each head. *See note (d) +*(3) Short (3) Discount at foot of Tenn Loans allowed on Form and the issue of Advances: shares or debentures. (a) From Banks. (4) Interest paid out of capital during construction (also stating the rate or interest. ) (b) From (5) Development others. expenditure not adjusted. (4) Other (6) Other items Loans and .

(specifying Advances: nature). (a) Froni Banks. 00 V> lbJ trom 00 0\ others. CURRENT +PROFIT AND +Show here the debit LIABILITIES LOSS ACCOUNT. balance of profit and AND loss account carried PROVISIONS: forward after deduction of the uncommitted reserves, ifany. The name (s) A. CURRENT of the small LIABILITIES scale industrial undertaking (s) to whom the Company owe a sum exceeding Rs. I lakh which is outstanding for more than 30 days, / ) are to oe disclosed. (1) Acceptances. (2) Sundry creditors. (i) Total outstanding dues of small scale industrial undertaking(s); and (ii) Total outstanding dues of creditors other than small scale industrial undertakings (s). (3) Subsidiary companies. (4) Advance payments and un~xpired discounts for the portion for which value has still to be given e. g. , in the case of the follo\\'. ing classes of companies:- Newspaper, Fire Insurance, Theatres, Clubs, Banking, Steamship Companies, etc. (5) Unclaimed , Dividends. (6) Other Liabilities (ifany).

(7) Interest 'y 'r \ l >' a~crued but not due on loans. B. PROVISIONS (8) Provisions for taxation. (9) Proposed dividends. (10) For contingencies. (11) For provident fund scheme. (12) For. insurance, pension and similar staff benefit schemes. ( IJ) Other provisions. A foot-note to the balance-sheet may be added to show separately: (1) Claims against the company not acknowledged as debts. (2) Uncalled liability on shares partly paid. The period ++(3) for which the Arrears of . dividends are fixed in arrear of cumulative if there is dividends. r y t' / more than one class of shares, the '- dividends on ~ ......... each such z class are in t:l c: arrear, shall r::/J be stated. >-l :::0 ......... The amount (4) Estimated .......... trl shall be amount of ~~ stated before contracts '"t) >-l deduction of remaining > t:l t:l . income-tax, to be ....... ~ except that executed r c: in the case on capital ........... ~z.........

of tax-free account 0 z dividends the and not 0 amount shall provided >-rj ......... be shown for. z free of t:l ......... income-tax > and the fact that it is so shown '°..... shall be stated. The amount +(5) Other of any money for guarantees which the given by the company is company on contingently behalf of liable Directors or I other officers of the company shall be stated and ; where practicable, the general nature and amount of each such contingent liability, if material, shall also be snecified. r ,r J. K. INDUSTRIESLTD. v. UNION OF INDIA 193 General instructions for preparation of balance sheet. - (a) The information required to be given under any ofthe items or sub-items in this Form, ifit cannot be conveniently included in the balance sheet itself, shall be furnished in a separate Schedule or Schedules to be annexed to and to form part ofthe balance sheet. This is recommended when items are numerous. (b) Naye Paise can also be given in addition to Rupees, ifdesired.

(c) In the case ofsubsidiary companies the number ofshares held by the holding company as well as by the ultimate holding company and its subsidiaries must be separately stated. The auditor is not required to certify the correctness of such shareholdings as certified by the management. (cc) The item "Share Premium Account" shall include details ofits utilisation in the manner provided in section 78 in the year of utilisation. (d) Short Tenn Loans will include those which are due for not more than one year as at the date of the balance-sheet. (e) Depreciation written offor provided shall be allocated under the different asset heads and deducted in arriving at the value of Fixed Assets. (f) Dividends declared by subsidiary companies after the date of the balance sheet should not be included] unless they are in respect ofperiod which closed on or before the date ofthe balance sheet.

(g) Any reference to benefits expected from contracts to the extent not executed shall not be made in the balance sheet but shall be made in the Board's report. [(h) The debit balance in the Profit and Loss Account shall be shown as a deduction from the uncommitted reserves, ifany. (i) As regards Loans and Advances, amounts due by the Managing Agents or Secretaries and Treasurers, either severally orjointly with any other persons to be separately stated; the amounts due from other companies under the san1e management within the meaning of sub-section (lB) of s~ction 370 should also be given with the names ofthe companies the maximtun amount due from every one ofthese at any time during the year must be shown. G) Particulars ofany redeemed debentures which the company has power to issue should be given.

(k) Where any ofthe company's debentures are held by a nominee or a trustee for the company, the nominal amount ofthe debentures and the amount at which they are stated in the books of the company shall be stated.

(1) A statement ofinvestments (whether shown under "Investment" or under "Current Assets" as stock-in-trade) separately classifying trade investments and other investments should be annexed to the balance sheet, showing the names of the bodies corporate (indicating separately the names ofthe bodies corporate under the same management) in whose shares or debentures, investments have been made (including all investments whether existing or not, made subsequent to the date as at which the previous balance sheet was made out) and the nature and extent of the investment ; so made in each such body corporate; provided that in the case of an investment company that is to say, a company whose principal business is the acquisition of shares, stock, debentures or other securities, it shall be sufficient if the statement shows only the investments existing on the date as at which the balance sheet has been made out.

In regard to the investments in the capital of partnership firms, the names ofthe firms (With the names ofall their partners total capital and the shares ofeach partner) shall be given'in the statement. (m) If, in the opinion ofthe Board, any ofthe current assets, loans and advances have not a value on realisation in the ordinary course ofbusiness at least equal to the amount at which they are stated, the fact that the Board is of that opinion . shall be stated. (n) Except in the case of the first balance sheet laid before the company after the commencement ofthe Act, the corresponding amounts for the immediately preceding financial year for all items J. K. INDUSTRIESLTD. v. UNIONOFINDIA 195 shown in the balance sheet shall be also given in the balance sheet The requirement in this behalf shall, in the case of companies preparing quarterly or half-yearly accounts, etc. , relate to the balance sheet for the corresponding date in the previous year.

(o) The amounts to be shown under Sundry Debtors shall include the amounts due in respect ofgoods sold or servi~es rendered or in respect ofother contractual obligations but shall not include the amounts which are in the nature ofloans or advances. (p) Current accounts with directors, and Manager, whether they are in credit or debit, shall be shown separately. (q) A small scale industrial undertaking has the same meaning as assigned to it under clause G) of section 3 of the Industries (Development and Regulation) Act, 1951. B. VERTICAL FORM Name of the Company........... Balance Sheet as at................ Schedule Figures as Figures as No. at the end at the end ofcurrent ofprevious financial year financial year ,. , 1 2 . ) 4 5 I. Sources offunds: (1) Shareholder's funds (a) Capital (b) Reserves and Surplus (2) Loan funds (a) Secured loans (b) Unsecured loans TOTAL: II.

Applications offunds: (I) Fixed assets (a) Gross block (b) Less depreciation (c) Net block (d) Capital work-in-progress (2) Investments (3) Current assets, loans, and advances: (a) Inventories (b) Sundry debtors (c) Cash and bank balances (d) Other current assets (e) Loans and advances Less: Current liabilities and provisions: (a) Liabilities (b) Provisions Net current assets (4) (a) Miscellaneous expenditure to the extent not written off or adjusted (b) Profit and Loss account TOTAL: Notes. - I . Details under each ofthe above items shall be given in separate Schedules. The Schedules shall incorporate all the information required to be given under A-Horizontal Fonn read with notes containing general instructions for preparation ofbalance sheet. 2. The Schedules, referred to above, accounting policies and explanatory notes that may be attached shall fonn an integral part of the balance sheet. · ) J. K. INDUSTRIESLTD. v. UNIONOFINDIA 197 3.

The figures in the balance sheet may be rounded off to the nearest "000" or "00" as may be convenient or may be expressed in terms of decimals of thousands. (TO BE COMPARED) 4. A foot-note to the balance sheet may be added to show separately contingent liabilities. PART II Requirements as to Profit and Loss Account 1. The provisions of this Part shall apply to the income and expenditure account referred to in sub-section (2) ofsection 210 ofthe Act, in like manner as they apply to a profit and loss account, but subject to t~e modification ofreferences as specified in that sub-section. 2. The profit and loss account- (a) shall be so made out as clearly to disclose the result ofthe working of the company during the period covered by the account; and (b) shall disclose every material feature, including credits or receipts and deb its or expenses in respect of non-recurring transactions or transactions ofan exceptional nature. 3.

The profit and loss account shall set out the various items relating to the income and expenditure ofthe company arranged under the most convenient heads; and in particular, shall disclose the following information in respect ofthe period covered by the account:- (i) (a) The turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount ofsales in respect ofeach class ofgoods dealt with by the company, and indicating the quantities ofsuch sales for each class separately. (b) Commission paid to sole selling agents within the meaning of section 294 of the Act. (c) Commission paid to other selling agents. (d) Brokerage and discount on sales, other than the usual trade discount. \ '\, (ii) (a) In the case ofmanufacturing companies,- >-- (1) The value ofthe raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up, as far as possible, all important basic raw materials shall be shown as separate items.

The intermediates or components procured from other manufacturers may, iftheir list is too large to be included in the break-up, be grouped under suitable headings without mentioning the quantities, provided all those items which in value individually account for 10 per cent or more ofthe total value of the raw material consumed shall be shown as separate and distinct items with quantities thereof in the break-up. (2) The opening and closing stocks of goods produced, giving break-up in respect of each class of goods and indicating the quantities thereof. (b) In the case oftrading companies, the purchases made and the opening and closing stocks, giving break-up in respect ofeach class ofgoods trade in by the company and indicating the quantities '. thereof. (c) In the case ofcompanies rendering or supplying services, the gross income derived from services rendered or supplied.

(d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the total amounts are shown in respect ofthe opening and closing stocks, purchases, sales and consumption ofraw material with value and quantitative break-up and the gross income from services rendered is shown. (e) In the case ofother companies, the gross income derived under different heads. Note 1. - The quantities of raw materials purchases, stocks, and the turnover shall be express:ed in quantitative denominations in which these are normally purchased or sold in the market. Note 2.

- For the purpose of items (ii)(a), (ii)(b) and (ii)(d), the items for which the company is holding separate industrial licences, / shall be treated as separate classes ofgoods, but where a company has more than one industrial licence for production ofthe same item at different places or for expansion ofthe licensed capacity, the item covered by all such licences shall be treated as one class. In the case of trading companies, the imported items shall be classified in accordance with the classification adopted by the Chief B Controller ofImports and Exports in granting the import licences. Note 3.

-In giving the break-up ofpurchases, stocks and turnover, items like spare parts and accessories, the list ofwhich is too large to be included in the break-up, may be grouped under suitable headings without quantities, provided all those items, which in value individually account for 10 per-cent or more ofthe total value of the purchases, stocks, or turnover, as the case may be, are shown as separate and distinct items with quantities thereofin the breakup, (iii) In the case of all concerns having works-in-progress, the amounts for which such works have been completed] at the commencement and at the end ofthe accounting period. (iv) The amount provided for depreciation, renewals or diminution in value offixed assets. Ifsuch provision is not made by means of a depreciation charge, the method adopted for making such provision.

Ifno provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with section 205(2) ofthe Act shall be disclosed by way ofa note. (v) The amount ofinterest on the company's debentures and other fixed loans, that is to say, loans for fixed periods, stating separately the amount of interest, if any, paid or payable to the managing director and the manager, ifany. (vi) The amount ofcharge for Indian income-tax and other Indian taxation on profits, including, where practicable, with Indian income-tax any taxation imposed elsewhere to the extent of the \ relief, ifany, from Indian income-tax and distinguishing, where practicable, between income-tax and other taxation. (vii) The amounts reserved for- (a) repayment ofshare capital; and (b) repayment ofloans.

(viii) (a) The aggregate, ifmaterial, ofany amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance-sheet is made up. (b) The aggregate, ifmaterial, ofany amounts withdrawn from such reserves. (ixXa) The aggregate, if material, ofthe amounts to set aside to provisions made for meeting specific liabilities, contingencies or commitments. (b) The aggregate, ifmaterial, ofthe amounts withdrawn from such provisions, as no longer required. (x) Expenditure incurred on each ofthe following items, separately for each item:- (a) Consumption of stores and spare parts. (b) Power and fuel. ,...... _ (c) Rent. (d) Repairs to buildings. (e) Repairs to machinery. (t) (1) Salaries, wages and bonus. (2) Contribution to provident and other funds.

(3) Workmen and staffwelfare expenses to the extent not adjusted ) by all such licences shall be treated as one class. 40. The profit and loss account shall also contain by way ofa note the following infonnation, namely:- (a) value ofimports calculated on C. I. F. basis by the company during the financial year in respect of:- ~ )...

(i) raw materials; (ii) components and spare parts; (iii) capital goods; (b) expenditure in foreign currency during the :financial year on account ofroyalty, know-how, professional, consultation fees, interest, and other matters; (c) value of all imported raw materials, spare parts and ~components consumed during the :financial year and the value ofall indigenous raw materials, spare parts and components similarly consumed and the percentage ofeach to the total consumption; (d) the amount remitted during the year in foreign currencies on account ofdividends, with a specific mention ofthe number of non-resident shareholders, the number of shares held by them on which the dividends related; (e) earnings in foreign exchange classified under the following /-, heads, namely:- (i) export ofgoods calculated on F. O. B. basis; (ii) royalty, know-how, professional and consultation fees; (iii) interest and dividend; (iv) other income, indicating the nature thereof. 1-:-~ 5.

The Central Government may direct that a company ~hall not be obliged to show the amount set aside to provisions other than those relating to depreciation, renewal or diminution in value I j J. K. INDUSTRIESLTD. v. UNIONOFINDIA 205 ofassets, ifthe Central Government is satisfied that the infonnation should not be disclosed in the public interest and would prejudice the company, but subject to the condition that in any heading stating an amount arrived at after taking into account the amount set aside as such, the provision shall be so framed or marked as to indicate that fact. 6. (1) Except in the case of the first profit and loss account laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the profit and loss account shall also be given in the profit and loss account.

(2) The requirement in sub-clause (1) shall, in the case of companies preparing quarterly or half-yearly accounts, relate to the profit and loss account for the period which entered on the corresponding date ofthe previous year. " "AUDIT Section 227. Powers and duties ofauditors (1) Every auditor ofa company shall have a right ofaccess at all times to the books and accounts and vouchers ofthe company, whether kept at the head office ofthe company or elsewhere, and shall be entitled to require from the officers ofthe company such infonnation and explanations as the auditor may think necessary for the perfonnance ofhis duties as auditor.

(IA) Without prejudice to the provisions of sub-section (1 ), the auditor shall inquire- (a) whether loans and advances made by the company on the basis ofsecurity have been properly secured and whether the tenns on which they have been made are not prejudicial to the interest of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; ' '· 206 ~ \ (c) where the company is not an investment company within the rmeaning of section 372 or a banking company, whether so much of the assets ofthe company as consist ofshares, debentures and other securities have been sold at a price less than that at which they were purch