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DEFERRED TAX

Pooja..... (company secretary) (41 Points)

24 February 2009

My query is:

in one of my group co. we are converting 8 lac Preference Shares (Rs. 100/-) into equity shares (RS. 10/- + 90/- Premium).

in Form 5 :

Authorised Capital(7 Cr Eq Cap + 8 Cr Pref Cap) will be same as earliar=15 crore.

but now break up of Authorised has reduced ={(7 Cr + 80 lac) Eq Cap + 0 Pref Cap}

guide me how to fill the Form 5.

Early reply will be appreciated.

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4 Replies

Pratik K (Student) (3406 Points)
Replied 24 February 2009

thanks for info

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 24 February 2009

As per AS22, the question recognising deferred tax arises if there is difference between accounting profit and IT profit and the difference is due to reversal timing differences.

As per you explanation, the accounting profit has increased because of recognition of WIP as per AS 7 which is not shown as income under the IT Act. This is purely a reversal timing differences and requires recognition of deferred tax liability in the books of accounts.

I think the accounting treatment prescribed in AS 7 is strictly from the point of view of presenting the FS. It does not govern the computation of Income U/C IVD of Income Tax Act. But the AS prescribed under Income Tax Act is similar to AS 1 prescribed by the ICAI. Accordingly, the 'MATCHING' concept has to be given due consideration while computing the business profits under IT Act.

I am confused as regards manner of computing profits for construction business under the IT Act.

Sujith (Chartered Accountant) (83 Points)
Replied 25 February 2009

@ PAVAN JAIN S

AS 1 is the most general accounting standard which uphelds the mercentile system of book keeping and preaches the matching concept as the soul of accounting. But AS 7 is the specific accounting standard that prescribes the accounting for Construction contracts.

You believe that as AS 1, which is prescribed by the IT Act, prescribes the matching concept you will have to compute the PGBP under IT Act in the similar manner as it is done under AS 7. If this was the case then why would you need a specific accounting standard like AS 7. Hum log AS 1 se hi kaam chala sakte the, na ???

If this is followed then there can be no timing differences arising under the constructions contracts. But this is not the case.

Both IAS 12 and IFRS 19 dealing with Income Taxes clearly prescribes that the difference arising due to the percentage-completion method under accounts and completed-contract method under income taxes are timing differences which needs to be given deferred tax effect.

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 27 February 2009

AS 1 is a FUNDAMENTAL AS and any specific AS cannot override the principles of AS 1. AS 7 is based upon AS1 itself since the percentage completion method prescribed by AS 7 recognises the MATCHING concept [of AS 1]. So yeh to mat bolo ki agar AS 1 hai toh AS 7 ki kya zaroorat hai !

AS 7 lays down in detail the accounting treatment of construction contracts. But it is solely based on the principles laid down in AS 1.

As far as IAS 12 and IFRS 19 is concerned, none of these standards specifically provides that the construction contracts has to be recognised on completed contract method basis for the purposes of Income Tax. These standards only lay down the recognition criteria of Deferred Taxes. There is no sense in applying these standards for the purposes of computing PGBP under Income Tax Act, 1961. When I referred to matching concept of AS 1, it was with reference to section 145A of Income Tax Act.

The issue is regarding the method of computing PGBP for the purposes of Income Tax Act and not as to whether RTD has to be recognised or not. Which provision of Income Tax Act says that the construction contracts has to be recognised on Completed Contract method? If you can show me any such provision, then RTD and, therefore, DTL will automatically arise.

Since Income Tax Act recognises AS 1 [thru section 145A], view presented by me is prima facie correct as far as Income Tax treatment is concerned

So, kindly clarify the issue as to how the PGBP has to be computed under the INDIAN Income Tax Act, 1961 as far as construction business is concerned.