Under section 145 of the Income-tax Act, 1961, certain accounting standards have been made mandatory while computing the taxable income. However, this has been challenged by certain Companies on the ground that the mandatory provision is unconstitutional. One of the standards which have been attacked is accounting standard 22 which relates to deferred tax liability pertaining to the timing difference arising on account of depreciation to be charged under the tax law and the depreciation to be debited to the profit and loss account under the Companies Act, 1956.
Taxes on income are treated as expenses which are recognized in the same period as revenue is recognised as an expense. This is called the ‘matching principle’. Such matching results in what is called the ‘timing difference’. The tax effect of timing differences is included as tax expense in the statement of the profit and loss and as deferred tax asset or as deferred tax liability in the balance-sheet. In short, deferred tax should be recognized for timing differences. This is the basic mandate of Accounting Standard 22.
It may be struck down as arbitrary or contrary to the 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. Therefore, it has to yield primary legislation. Subordinate legislation can also be questioned on the ground that it is manifestly arbitrary and unjust.
It can also be questioned on the ground that it violates article 14 of the Constitution of India. But subordinate legislation cannot be questioned on the ground of violation of the principles of natural justice on which administrative action may be questioned. Coming to this conclusion, the Supreme Court followed the judgment in Indian Express Newspapers (Bombay) P. Ltd. v. Union of India (1 SCC 641).
To conclude, accounting is considered to be a service activity. Its primary function is to provide quantitative information, primarily of financial nature about economic entities. The primary role of accounting is to provide an effective measurement and reporting system.
Accounting at present includes several branches, e.g., financial accounting, management accounting and government accounting.
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