Section 211, read with sections 209 and 642, of the Companies Act, 1956

Court :
HIGH COURT OF CALCUTTA

Brief :
Section 211, read with sections 209 and 642, of the Companies Act, 1956 - Accounts - Form and contents of - Whether since Act nowhere deals with recognition and measurement of various items of income and expenses, assets and liabilities and it only deals with presentation thereof, there can never be any conflict with provisions of Act on one hand and Accounting Standard and Guidance Notes issued by Institute of Chartered Accountants, on other hand, in discharge of its statutory obligation under Chartered Accountants Act, 1949, read with Companies Act, which clearly requires that every corporate enterprise must maintain such books for purpose of giving true and fair view of state of affairs of company, and that every balance sheet of company shall give a true and fair view of state of affairs at end of financial year - Held, yes - Whether, therefore, AS-22 is no way contradictory to and/or in conflict with Schedule VI of the 1956 Act, having regard to overall statutory requirement/consideration of reflecting true and fair view as laid down in section 211 - Held, yes - Whether AS-22 cannot be challenged on ground that it acts retrospectively, as it does not make anything retrospective - Held, yes - Whether deferred tax liability is not a notional tax liability, but a real liability because it would result in future cash outflow in form of tax payment to tax recovering authorities - Held, yes - Whether charge of deferred tax expense in profit and loss account is in respect of a known liability, which is definitely payable in future and, therefore, is fully covered by definition of expression ‘provision’ as contained in Part III of Schedule VI - Held, yes - Whether object of rules framed by Central Government under section 642 by adopting AS-22 is to enable not only bank and other financial institution to discover ‘real health’ of company to whom it proposes to lend money but also to give true and fair view of affairs of company to those persons who are investors in said company; thus, rules framed by Central Government are quite in conformity with intention reflected in Act - Held, yes Facts The question that arose for consideration in the instant writ petitions was whether the AS-22 formulated by the Institute of Chartered Accountants and particularly, the paragraphs 9 and 33 thereof, which have now been incorporated in the form of the rules framed by the Central Government under section 642 are ultra vires the statute, viz., sections 209(1)(3) and 211 and, consequently, void, inoperative and in excess of the statutory provisions of the Act or the Constitution of India. The petitioners pointed out that the paragraph 9 of AS-22 lays down that tax expense for the period comprising the current tax and deferred tax should be included in the determination of the net profit or loss for the relevant financial year, while according to the petitioners, deferred tax liability is a notional or contingent liability, which may or may not arise in the future years, and, therefore, the said liability cannot accrue nor can the same be ascertained as a present legal liability and cannot be charged to the profit and loss account for current year and if the same is directed to be charged, it would be contrary to and inconsistent with the mandatory provisions of section 209, read with section 211 and, therefore, such a direction embodied in paragraph 9 of AS-22, as incorporated in the prescribed rules, will be in excess of, and inconsistant with the provision of the Act. The writ petitioners also attacked the paragraph 33 of the AS-22 as unconstitutional on the ground that by this paragraph, the AS-22 appears to act retrospectively, which is not permitted, this being a subordinate legislation.

Citation :
Simplex Concrete Piles (India) Ltd. v. Union of India