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Corporates challenge accounting standards

The petitioners say the accounting standards are ultra vires as have created a deferred tax liability.

india Updated: Jul 29, 2007 11:17 IST

A few corporates have moved the Supreme Court challenging the new accounting standards issued by the Institute of Chartered Accountants of India on deferred tax liability of listed companies.

A bench headed by Justice SH Kapadia deferred hearing on the plea seeking quashing of the accounting standards AS-22 and posted the matter for consideration on July 30.

Earlier, the Calcutta High Court had upheld these accounting norms.

AS-22 has brought in a new concept called deferred taxation. Under this, a company became liable to provide for deferred tax liability on the first day the company accounted for its income in accordance with the AS-22 even when there was no certainty.

Petitioners Simplex Infrastructure, First Leasing Company of India and Association of Leasing and Financing Services Companies have submitted that accounting standards AS-22 were ultra vires as they created a deferred tax liability.

The petitioners pleaded that deferred tax liability is a notional liability that can be charged to the profit and loss account (PLA).
Deferred tax liability arises when a firm underpays its taxes due to a difference between how it accounts for an asset on its book versus how it accounts for it on tax basis.

The Calcutta High Court while upholding the accounting standards had observed that deferred tax liability was not a notional tax liability but a real liability because it would result in future cash outflow in the form of tax payment to the tax recovering authority.

The deferred tax liability, therefore, was a real liability which existed on the balance sheet date for the financial year in which it originated and the question of liability being contingent in nature did not arise, it had held.

According to KV Mohan, through whom the petition is filed, deferred tax liability due to timing differences can arise only in future years in respect of transactions which had taken place in the earlier period and out of which the difference between the accounting profit and the assessable profit for the purpose of Income Tax Act arises.

First Published: Jul 29, 2007 10:32 IST