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An exception to harmonisation

S. Murlidharan

ACCOUNTANTS the world over have displayed a rare unanimity in clamouring for uniform accounting standards to foster comparison and easy consolidation. Further, uniform accounting standards is also desirable to make accounting a universal language of com munication and to deny any leeway for manipulation or window-dressing. Going a step further, both accountants and tax practitioners, especially in India, have often been heard pining for a complete harmony between tax provisions and accounting diktats en shrined in accounting standards though sceptics as well as some fiscal experts dismiss this out of hand, as an idle romanticism.

The truth, however, is that there is a case for bringing about harmony to the extent possible between tax provisions and accounting tenets not only in the interest of simplification but also to quell the need for tax on book profits which is not only ret rograde in nature but also reflective of the confused state of mind of the Government.

But there is at least one area in which an exception has to be made and the accounting standard thereon should not shape the corresponding tax provision. Accounting Standard 11 issued by the Institute of Chartered Accountants of India on accounting for e xchange rate differences as well as the corresponding international accounting standard, require that should there be any increase or decrease in the liability on the balance-sheet date in terms of the reporting currency in respect of a loan taken for pu rchasing a fixed asset or in respect of supplier's credit for that purpose, such liability must, as the case may be, revised upwards or downwards. Any increase in such liability, according to the standards, must be matched by increasing the actual cost o f the fixed asset and any decrease in such liability must be matched by a reduction in the actual cost of the fixed asset.

Section 43A of the Income-tax Act, 1961, which was inserted in the immediate aftermath of the first official devaluation of the rupee in 1966, says, among other things, that should there be any increase or decrease in rupee liability for making payment t owards the whole or a part of the cost of the asset or for repayment of the whole or a part of the monies borrowed from any person, directly or indirectly, in any foreign currency specifically for acquiring the asset, such increase or decrease shall be a dded to, or decreased from, the actual cost of the fixed asset.

The Gujarat High Court, in New India Industries Ltd vs CIT (1993 203 ITR 933), held that Section 43A requires immediate adjustment to the actual cost of a fixed asset financed out of an outstanding loan or liability on rupee liability going up or down. D itto in the Bombay High Court verdict in Padamjee Pulp & Paper Mills Ltd vs CIT (1994 210 ITR 97) as well as in the Calcutta High Court verdict in Bestobell (India) Ltd vs CIT (1979 117 ITR 789).

All these verdicts for good measure set store by the fact that the assessees maintained their accounts on mercantile basis in terms of which a liability or right must be recorded immediately on its happening. It is submitted that these verdicts need reco nsideration though they may all be in keeping with the spirit of the AS-11, nay a little ahead of it. It is significant to note that Section 43A contemplates adjustments being made at the time for making payments, thus consciously departing from the merc antile system of accounting.

The High Court verdicts, it is submitted, necessarily mean chronic and incessant tinkering with the actual cost now that India does not follow the fixed rate of exchange with the exchange rate of rupee being determined by the market. If the dictates of t he mercantile system are followed meticulously an accountant may perhaps have to pass an entry almost daily to reflect the actual cost on the basis of the most up-to-date exchange rate.

Even the AS-11 does not call upon businesses to make immediate adjustments to actual cost; it only calls for year-end adjustments. AS-11's mandate in this regard is unexceptionable -- the rupee liability in respect of transactions entered into in other c urrencies must reflect the value of the rupee on the balance-sheet date. But Section 43A is not concerned with the disclosure aspects of accounting. Its focus instead is on ensuring accurate recording of the actual cost of fixed assets so that depreciati on is charged appropriately and capital gains are computed correctly.

Day-to-day fluctuations in exchange rate may give sleepless nights to the finance manager but not to the accountant and certainly not to the tax manager. While an accountant has to initiate action at the year-end, a tax manager is not called upon to best ir by Section 43A till the increase or decrease in rupee liability has actually concretised. This is as it should be because otherwise the block account to which the asset belongs will be repeatedly mauled each time there is a change in the exchange rate and will have entries more on this account rather than on account of recording real transactions of further acquisition and disposals.

Such knee-jerk reaction is neither called for nor mandated by Section 43A. Surely, a block account for tax purposes is not meant to keep track of day-to-day exchange fluctuations, especially given the fact that an increase one day may be squared off by t he decrease a few days later. At any rate, for the taxman his purpose is served when increase or decrease in rupee liability is recorded when actual payments are made. An accountant, conscious as he is of disclosure norms, is rightly mandated by AS-11 to reflect the position at the balance-sheet date.

There is a view in some quarters that the Supreme Court in CIT vs Arvind Mills Ltd (1992 193 ITR 255) has endorsed the stand that the actual cost for tax purposes must be adjusted on accrual basis and not on payment basis. The apex court in that case onl y said that the adjustments contemplated by Section 43A shall be made even in the same year in which the asset was procured should the liability go up or down in the same year consequent upon change in the exchange rate at the time of actual payment vis- a-vis the one at the time of recording of purchase. Which means, the last word has not been spoken on the subject yet.

But there is no need for amending Section 43A because it is quite categorical that the occasion for adjustments is actual payment and not mere accrual.