# J.K. INDUSTRIES LTD. & ANR v. UNION OF INDIA AND ORS

- **Citation:** [2007] 12 S.C.R. 136
- **Court:** Supreme Court of India
- **Decided:** 2007-11-19
- **Case number:** Civil Appeal No. 3761 of 2007
- **Bench:** S.H. Kapadia, B. Sudershan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/j-k-industries-ltd-anr-v-union-of-india-and-ors-22304
- **Pages:** 171

## Headnote

~ .
Companies (Accounting Standards) Rules, 2006:
c
Accounting for taxes on income-Accounting Standard 22 (AS
22)-Adoption of-By the Rules framed by Central GovernmentChallenged as being ultra vires the provisions of Companies Act so
far as it related to 'deferred taxation; and as being in excess of the
powers conferred upon Central Government-Held: Rule is neither
D ultra vires nor inconsistent with the provisions of the Companies ActRules and the Act form part of the composite scheme-Rules are
;.
supplementary to the Act and constitute a legitimate aid to the
construction of the provisions of the Act-Rules also not suffering from
the vice of excessive delegation-Companies Act, 1956-ss. 209,
E 211 (3A) and (3C), 641, 642, Schedule VI Parts I and II.
Accounting Standard 22-Provisions relating to 'deferred
taxation '-Whether violative of Articles 14 and 19(J)(g) of the
Constitution-Question left open-Constitution of India, 1950Articles 14 and 19(1)(g).
F
Companies Act, 1956-s. 642(1)-Rule making power of Central
Government-Scope of
Delegated Legislation-Scope of-Held: Valid only when it is
confined to legislative policy and guidelines.
G
Doctrines/ Principles-Doctrine of ultra vires-Applicability of
Words and Phrases-- 'delegated legislation '-Meaning of
1-
~
Accounting Standard 22 (AS 22) titled as "Accounting for taxes
H
136
)
J.K. INDUSTRIES LTD. v. UNION OF INDIA
137
on income", issued by Institute of Chartered Accountants in 2001 A
had been made mandatory for all companies listed in stock
Exchanges oflndia in preparation of their accounts for the fmancial
year 2001-02 onwards. Central Government by a Notification dated
7.12.2006 prescribed AS 22 u/s 211 (3Q of the Companies Act, 1956,
in consultation with National Advisory Committee on Accounting B
Standards, by enacting Companies (Accounting Standards) Rules,
2006.
In the present appeals AS 22 was challenged, alleging that it
was inconsistent with and ultra vires the provisions of Companies
Act, 1956, Income Tax Act, 1961 and the Constitution oflndia, 1950, C
insofar as it.relates to deferred taxation.
The questions for determination before this Courtwer_e:
1. Whether Companies (Accounting Standards) Rules, 2006,
-'
adopting AS 22 was in excess of the powers conferred upon Central D
Government u/s 642 (1) of the Companies Act, 1956?
2. Whether AS 22 was inconsistent with the provisions of
Companies Act, 1956?
Dismissing the appeals, the Court
HELD: 1.1. Notification dated 7.12.2006 or Companies
(Accounting Standards) Rules, 2006, does not suffer from the vice
of excessive delegation. [Para 56) (265-C)
E
1.2. On account of globalization and socio-economic problems, F
the power of delegation has become a consituent element of
legislative powers as a whole. Subordinate legislation does not carry
the same degree of immunity which is enjoyed by a statute passed
by a competent Legislature. Subordinate legislation may be
questioned on any of the grounds on which plenary legislation is G
questioned. In addition, it may also be questioned on the ground that
it does not conform to the statute under which it is made. It may
further be questioned on the ground that it is inconsistent with the
provisions of the Act or that it is contrary to some other statute
H
138
SUPREME COURT REPORTS
[2007] 12 S.C.R.
A applicable on the same subject matter. Therefore, it has to yield to
plenary legislation. It can also be questioned on the ground that it is
lllanifestly arbitrary and unjust. That, any inquiry into its vires must
be confined to the grounds on which plenary legislation may be
questioned, to the grounds that it is contrary to the statute under
B which it is made, to the grounds that it is contrary to other statutory
provisions or on the ground that it is so patently arbitrary that it
¢annot be said to be inconformity with the statute. It can also be
¢hallenged on the ground that it violates Article 14 of the
Constitution. Subordinate legislation cannot be questioned on the
C ground o

## Text

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A
J.K. INDUSTRIES LTD. & ANR.
v.
UNION OF INDIA AND ORS.
NOVEMBER 19, 2007
B
(S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.)
~ .
Companies (Accounting Standards) Rules, 2006:
c
Accounting for taxes on income-Accounting Standard 22 (AS
22)-Adoption of-By the Rules framed by Central GovernmentChallenged as being ultra vires the provisions of Companies Act so
far as it related to 'deferred taxation; and as being in excess of the
powers conferred upon Central Government-Held: Rule is neither
D ultra vires nor inconsistent with the provisions of the Companies ActRules and the Act form part of the composite scheme-Rules are
;.
supplementary to the Act and constitute a legitimate aid to the
construction of the provisions of the Act-Rules also not suffering from
the vice of excessive delegation-Companies Act, 1956-ss. 209,
E 211 (3A) and (3C), 641, 642, Schedule VI Parts I and II.
Accounting Standard 22-Provisions relating to 'deferred
taxation '-Whether violative of Articles 14 and 19(J)(g) of the
Constitution-Question left open-Constitution of India, 1950Articles 14 and 19(1)(g).
F
Companies Act, 1956-s. 642(1)-Rule making power of Central
Government-Scope of
Delegated Legislation-Scope of-Held: Valid only when it is
confined to legislative policy and guidelines.
G
Doctrines/ Principles-Doctrine of ultra vires-Applicability of
Words and Phrases-- 'delegated legislation '-Meaning of
1-
~
Accounting Standard 22 (AS 22) titled as "Accounting for taxes
H
136
)
J.K. INDUSTRIES LTD. v. UNION OF INDIA
137
on income", issued by Institute of Chartered Accountants in 2001 A
had been made mandatory for all companies listed in stock
Exchanges oflndia in preparation of their accounts for the fmancial
year 2001-02 onwards. Central Government by a Notification dated
7.12.2006 prescribed AS 22 u/s 211 (3Q of the Companies Act, 1956,
in consultation with National Advisory Committee on Accounting B
Standards, by enacting Companies (Accounting Standards) Rules,
2006.
In the present appeals AS 22 was challenged, alleging that it
was inconsistent with and ultra vires the provisions of Companies
Act, 1956, Income Tax Act, 1961 and the Constitution oflndia, 1950, C
insofar as it.relates to deferred taxation.
The questions for determination before this Courtwer_e:
1. Whether Companies (Accounting Standards) Rules, 2006,
-'
adopting AS 22 was in excess of the powers conferred upon Central D
Government u/s 642 (1) of the Companies Act, 1956?
2. Whether AS 22 was inconsistent with the provisions of
Companies Act, 1956?
Dismissing the appeals, the Court
HELD: 1.1. Notification dated 7.12.2006 or Companies
(Accounting Standards) Rules, 2006, does not suffer from the vice
of excessive delegation. [Para 56) (265-C)
E
1.2. On account of globalization and socio-economic problems, F
the power of delegation has become a consituent element of
legislative powers as a whole. Subordinate legislation does not carry
the same degree of immunity which is enjoyed by a statute passed
by a competent Legislature. Subordinate legislation may be
questioned on any of the grounds on which plenary legislation is G
questioned. In addition, it may also be questioned on the ground that
it does not conform to the statute under which it is made. It may
further be questioned on the ground that it is inconsistent with the
provisions of the Act or that it is contrary to some other statute
H
138
SUPREME COURT REPORTS
[2007] 12 S.C.R.
A applicable on the same subject matter. Therefore, it has to yield to
plenary legislation. It can also be questioned on the ground that it is
lllanifestly arbitrary and unjust. That, any inquiry into its vires must
be confined to the grounds on which plenary legislation may be
questioned, to the grounds that it is contrary to the statute under
B which it is made, to the grounds that it is contrary to other statutory
provisions or on the ground that it is so patently arbitrary that it
¢annot be said to be inconformity with the statute. It can also be
¢hallenged on the ground that it violates Article 14 of the
Constitution. Subordinate legislation cannot be questioned on the
C ground of violation of principles of natural justice on which
administrative action may be questioned. A distinction must,
bowevcr, be made between delegation of a legislative function in
which case the question of reasonableness cannot be gone into and
the investment by the statute to exercise a particular discretionary
D power. In the latter case, the question may be considered on all
grounds on which administrative action may be questioned, such as,
non-application of mind, taking irrelevant matters into consideration,
fltilure to take relevant matters into consideration etc.
[Para 63) [267-E-H; 268-A-C]
E
1.3. A subordinate legislation may be struck down as arbitrary
or contrary to 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. This can be done on the
ground that the subordinate legislation does not conform to the
F statutory or constitutional requirements or that it offends Article 14
or Article 19 of the Constitution. However, it may be noted that, a
notification issued under a Section of the statute which requires it
to be laid before Parliament docs not make any substantial
difference as regards the jurisdiction of the Court to pronounce on
G its validity. [Para 63) [268-D-E)
H
1.4. Where the validity of subordinate legislation is challenged,
the question to be asked is whether the power given to the rule
making authority (in the present case the Central Government under
Section 642(1) of the Companies Act) is exercised for the purpose
J.K. INDUSTRIES LTD. v. UNION OF INDIA
139
for which it is given. Before reaching the conclusion that the Rule is A
intra vires, the court has to examine the nature, object and the scheme
of the legislation as a whole and in that context, the court has to
consider whatis the area over which powers are given by the Section
under which the rule making authority is to act. However, the court
has to start with the presumption that the impugned Rule is intra B
vires. This approach means that, the Rule has to be read down only
to save it from being declared ultra vires if the court finds in a given
case that the above presumption stands rebutted.
[Para 64] [268-F-H; 269-A]
1.5. If the impugned rule is a delegated legislation it would follow C
that the said rule is made in exercise of the power conferred by the
statute. Legislature has wide powers of delegation. This, however,
is subject to one limitation, namely, it cannot delegate uncontrolled
power. Delegation is valid only when it is confined to legislative
policy and guidelines. In the present case, abovementioned guideline D
is provided by Section 211(1), which has brought in a stand-alone
concept of "true and fair" accounting. The said concept is the
controlling consideration. [Paras 65 and 66] [269-B-C]
-
TISCO v. The Workmen and Ors., AIR (1972) SC 1917, relied E
on.
1.6. What is permitted by the concept of "delegation" is
delegation of ancillary or subordinate legislative functions or what
is fictionally called as "power to fill up the details". Power to
supplement the existing law is not abdication of essential legislative F
function. Therefore, power to make subordinate legislation is derived
from the enabling Act and it is fundamental principle oflaw which is
self-evident that the delegate on whom such power is conferred has
to act within the limitations of the authority conferred by the Act. It
is equally well settled that, Rules made on matters permitted by the G
Act in order to supplement the Act and not to supplant the Act, cannot
be held to be in violation of the Act. A delegate cannot override the
Act either by exceeding the authority or by making provisions
inconsistent with the Act. [Para 68] [269-H; 270-A-C]
H
140
SUPREME COURT REPORTS
[2007] 12 S.C.R.
~
'
A
Britnell v. Secretary a/State, (1991) 2 All ER 726, referred to.
,...
1. 7. Power to alter the Schedule as well as power to fill in details
are two distinct powers. However, both the powers are entrusted to
the same delegate, namely, the Central Government. Sections 641
B and 642 form part of the same scheme, hence, it cannot be said that
merely because the impugned Notification has been issued under
Section 642 and not under Section 641 the said Notification is
exhaustive of the powers given to the Central Government to frame
rules under the aforestated two Sections. Section 642(1) begins with
c the expression "in addition to the powers conferred by Section 641 ".
Therefore, one has to read Section 642 as an additional power given
to the Central Government to make Rules, in addition to its power
to alter the schedule by making appropriate Rules under Section 641.
The Companies Act has been enacted to consolidate and amend the
D
law relating to companies and certain other associations. Under
Section 211(3A) Accounting Standards framed by National Advisory
,_
Committee on Accounting Standards constituted under Section 210A
are now made mandatory. Every company has to comply with the
said standards. Similarly, under Section 227(3)( d), every auditor has
to certify whether the P&L a/c and balance-sheet comply with the
E accounting standards referred to in Section 211(3)(c). Similarly,
under Section 211(1) the company accounts have to reflect "true and
fair" view of the state of affairs. [Para 71] [272-A-F]
Banarsi Das v. State of MP., AIR (1958) SC 909, relied on.
F
I
1.8. The object behind insistence on compliance with the A.S.
-
and "true and fair" accrual is the presentation of accounts in a
manner which would reflect the true income/profit. One has,
therefore, to look at the entire scheme of the Companies Act. The
provisions of the Companies Act together with the Rules framed by
G the Central Government, constitute a complete scheme. Without the
Rules, the Companies Act cannot be implemented. The impugned
t.
Rules framed under Section 642 are a legitimate aid to construction
of the Companies Act as contemporanea expositio. Many of the
provisions of the Companies Act, like computation of book profit,
H
J.K. INDUSTRIES LTD. v. UNION OF INDIA
141
net profit etc. cannot be put into operation without the rules.
A
[Para 71) (272-F-H; 273-A)
1.9. In the present case also, even under the Rules impugned
herein viz. AS 22, which is made mandatory, provides an internal
legitimate aid to the meaning of the words in the Companies Act,
including Schedule VI, namely, liability, provision for taxes on B
'
income, book profit, net profit, depreciation, amortization etc .•
Therefore, it cannot be said that the impugned Rules framed under
Section 642(1) constitute an act on the part of the rule making
authority, namely, the Central Government, in excess ofits powers
under Section 642(1) of the Companies Act. The impugned Rule/ C
Notification is valid. It has nexus with the matters entrusted to the
Central Government to be covered by appropriate rules. The power
to regulate a business or profession implies the power to prescribe
and enforce all such proper reasonable rules as may be deemed
_(
necessary to conduct business/profession in a proper and orderly D
,
manner and the power includes the power to prescribe conditions
under which business/profession can be carried on.
>
[Para 74) (276-B-E]
P. Kasilingam and Ors. v. P.S. G. College of Technology and Ors., E
(1995) Suppl 2 SCC 348 and TELCO v. Gram Panchayat, Pimpri
Waghere, (1976) 4SCC177, relied on.
Deepak Theatre, Dhuri v. State of Punjab and Ors., AIR (1992)
SC 1519, referred to.
2.1. The impugned Rule is neither ultra vires nor incongruous/
inconsistent with the provisions of the Companies Act, 1956. It does
not seek to modify the essential features of the Companies Act. Rules
m~de on matters permitted by the Act to supplement the Act, cannot
F
be held to be in violation of the Act.
G
[Paras 126 and 133) [305-C]
Britnell v. Secretary of State, (1991) 2 All ER 726, referred to.
2.2. The object behind enactment of A.S., which are now made
mandatory under section 211(3A) of the Companies Act, is to shift H
142
SUPREME COURT REPORTS
[2007] 12 S.C.R.
A from historical method of accounting (Matching Principle) to fair
valuation principle. In the case of mergers and acquisitions, which
.is common today in the world of globalization, fair valuation principles
have important role to play. Mergers and acquisitions are sometimes
undertaken to defer revenue expenditure over future years by
B invoking the matching concept, which results in putting fictitious
assets on the balance-sheet. This is one reason why fair valuation
principles are accepted. [Para 60) [266-G-H; 267-AJ
2.3. When the power to make rules is limited to particular topics
C and if that rule falls within the ambit of that topic, namely, taxes on
income in the present case, it cannot be said that the rule is
inconsistent with the provisions of the Act. The Act and the Rules
form part of the composite scheme. The provisions of Sections 205,
209 and 211 can be put into operation only ifthe Act and the Rules
ate read together. In the present case, the impugned Rule constitutes
D a legitimate aid to construction of the provisions of the Companies
A~t. Further, the Central Government is the rule making authority
under Section 211(3C). As rule making authority, the Central
G(lvernment is empowered to enact accounting standards in
consultation with NAC which may be at variance with the Standards
E issued by the Institute. [Para 127] [299-B-DJ
2.4. Though the Central Government is vested with both the
powers, namely, to amend the Schedule and to fill in details, the
nafure of the rules framed under Section 641(2) continues to have
F the status of the rules despite the phraseology used in Section 641(2)
which, says that "any alteration notified under sub-section (1) of
Section 641 shall have effect as if enacted in the Companies Act".
[Para 94] [285-E-F)
Chief Inspector of Mines v. Karam Chand Thapar. AIR (1961)
G SC 838, relied on.
2.5. In the present case, measurement and recognition methods
!-
arc not the items under the Companies Act. Methods ofrecognition
and measurements are talked about by the provisions of the
H Companies Act. Recognition and measurement of various items of
•
J
J.K. INDUSTRIES LTD. v. UNION OF INDIA
143
revenue expenses etc. stand covered only by the accounting A
standards. Therefore, it cannot be said that the said standards are
contrary to the provisions of the Companies Act. It also cannot be
said that the impugned Rule does not touch upon maintenance of
books ofaccounts to be kept by the company. Under Section 209(3)(b)
every company is required to keep its books of accounts on accrual B
basis and according to double-entry system of accounting. Under
Section 209(3)(a) every company is required to maintain books of
accounts necessary to provide a true and fair view of the state of
affairs of the company and its accounts. Books of accounts do not
include balance-sheet and P &L a/c. However, there is a difference C
between "true and correct" accrual and "true and fair" accrual. In
the past, what prevailed was true and correct accrual. At that time,
it was noticed in several cases that profits were overstated and,
therefore, the Legislature inserted what is called as "true and fair"
accrual concept. The said concept is wider than the concept of true D
and correct accrual. When Section 209(3) refers to maintenance of
books of accounts on accrual basis it means "true and fair" accrual,
which would include not only matching principles but also fair
valuation principles. These principles do not contravene accrual
system ofaccounting. [Para 128) [300-B-F)
Union of India and Anr. v. Cynamide India Ltd. andAnr., [1987]
2 sec 720, referred to.
E
2.6. Para 9 and para 33 of AS 22 cannot be said to be
inconsistent with the provisions of the Companies Act including F
Schedule VI. Recognition and measurements bring in the concept
of fair value. When a financial instrument is measured at fair value
it brings transparency in financial reporting. Today, companies
undertake multifarious activities which warrants segment reporting.
AS 22 is mandatory; Therefore, it is the duty of the members of the
Institute to examine whether the accounting standard is complied G
with the said standard in the presentation of financial statement.
[Paras 116and118] [292-F, H;.293-A-C]
· 2. 7. With the introduction of the 'timing difference' concept, it
cannot be said that the accrual system of accounting is violated. It H
144
SUPREME COURT REPORTS
[2007] 12 S.C.R.
A is the concept of'timing difference' which obliterates the difference
;-
between accounting and tax incomes. Ultimately, the object is to
obliterate the difference between accounting income and taxable
.income. Accounting income is the real income, therefore, para 9 of
AS 22 is not inconsistent with the provisions of the Companies Act,
B including Schedule Vl [Para 128) (300-H; 301-A-B)
Bharat Hari Singhania and Ors. v. Commissioner a/Wealth-tax
(Central) and Ors., AIR (1994) SC 1355, relied on.
2.8. Para 9 of AS 22 merely represents gap-filling exercise,
C therefore, it is not correct that AS 22 is inconsistent with the
provisions of the Companies Act including Schedule VI. It proceeds
on the principle that every transaction has a tax effect. The words
"true and fair" view in Section 211 (1) connotes the widest law making
powers and, thus the impugned Rule adopting AS 22 is intra vires as
D the said Rule is incidental and/or supplementary to the specific
powers given to the Central Government to make Rules, particularly
when such power is given to fill-in details. The word "supplementary"
means something added to what is there in the Act, to fill-in details
for which the Act itself does not provide. It is something in the sense
E
th~t is required to implement what is there in the Act.
[Para 127) [298-F-H; 299-A)
Daymond v. South West Water Authority, (1976] 1 All ER 39,
referred to.
F
2.9. Para 9 only provides for details which are necessary for
giving effect to the concept of true and fair accrual of accounts
contemplated by Section 211(1). The concept of"true and correct"
accrual is different from the concept of"true and fair'' accrual. Both
the ¢oncepts fall under accrual system of accounting. However, there
G is a difference. Under "true and correct" accrual, the matching
principle was always recognized. However, fair valuation principle
is the concept which brings out the real income of the company. Para
9 has been enacted, to obliterate the difference between the
accounting income and taxable income. Para 9 aims to present the
H real income to the investors, shareholders and stake-holders in the
1-
}
j
J.K. INDUSTRIES LTD. v. UNION OF INDIA
145
•
company. There is also a difference between accounting depreciation A
and tax depreciation. In order to harmonize these differences, para
9 has been enacted. In order to bring out the true income of a
company, one has to read the provisions of the Companies Act with
the accounting standards adopted by the impugned Notification. Para
9 of AS 22 merely provides for details in the matter of provision for B
liability for taxation. [Para 119] [293-D-G; 294-A]
Cl T v. Duncan Brothers and Co. Ltd, [1996] 8 SCC 31; and P.
Kasilingam and Ors. v. P.S. G. College of Technology and Ors., [1995]
Suppl 2 SCC 348, relied on.
2.10. The word "tax expense" in para 9 under conservative
system of accounting was confined to current tax. However, with para
c
9 of AS 22 coming into force, the word "tax expense" now includes
both, current tax and deferred tax. This inclusion became necessary
because of developments not only in concepts but also in accounting D
practices. This inclusion becomes necessary if one has to go by
paratligm shift from historical costs accounting to fair value
principles. With the insertion of the words "true and fair" view in
Section 211, which is the requirement in the matter of presentation
of balance-sheet and P&L ale the rule making authority was entitled E
to include the concept of"deferred tax" in tax expense. It may be
stated that under clause 3(vi) of Part II, Schedule VI, the charge for
tax on profit is contemplated. Provision for liability for taxation is
contemplated by the said clause. Para 9 of AS 22 merely provides
for a liability which arises on account of timing difference. It is known F
as the balance-sheet date. One has to therefore consider matching
principle and fair valuation principles as important concepts in
Accrual Accounting. Further, recognition and measurement is not
covered by the provisions of the Companies Act. Therefore, one has
to read the presentation of balance-sheet and P&L ale together with
recognition and measurements. Therefore, one has to read the G
provisions of the Companies Act along with the impugned Rule which
adopts AS 22 as recommended by the Institute.
[Para 120) (294-A-E)
2.11. The matching principle recognizes cost against revenue H
146
SUPREME COURT REPORTS
[2007] 12 S.C.R.
A or against the relevant time period to determine the periodic income.
Therefore, the said principle constitutes an important component of
the accrual basis of accounting. The concept of accrual, in case of
mergers and acquisition, is not limited to one year. DTL/DT A arises
out of timing differences. Therefore, such differences have got to
B be reflected in Deferred Tax Accounting. DTL in most cases arises
on account of the difference between tax depreciation and accounting
depreciation. When on account of over-charging of depreciation
under the Income-tax Rules, the taxable income falls below the
accounting income, DTL emerges. This is because the rates of tax
C depreciation are incentive rates whereas accounting depreciation is
based on the useful life of the asset. Thus, an asset under Income
tax Act would be charged over a much shorter period as compared
to the useful life of the asset. [Para 120) [294-E-H; 295-A)
2.12. For the purpose of determining accumulated deferred tax
D in the period in which the Standard is applied for the first time, the
opening balances of assets and liabilities for accounting purposes
and for tax purposes are to be compared and the differences, if any,
are to be determined. The tax effect of these differences have got
to be recognized as DTA or DTL, if such differences are timing
E differences. Once it is required to take into account the concept of
opening balance of a fixed asset in para 33, it cannot be said that
the said para is retrospective. In fact, it is a transitional provision.
[Paras 131and132) [304-C-D, G)
F
2.13. Deferred tax is nothing but accrual of tax due to
divergence between accounting profit and tax profit. This difference
arises on two counts, namely, different treatment of items ofrevenue/
expense as per profit and loss account and as per the tax law. It also
arises on account of the difference between the amount ofrevenue/
expense as per profit and loss account and the corresponding amount
G considered for tax purposes, e.g., depreciation.
[Para 134) [305-D)
Commissioner of Income-tax v. Indian Jute Mills Association,
(1982) 134 ITR 68 (Cal) and State Bank of Patiala v. CIT, (1996)
H 219 ITR 706, referred to.
j
/
J.K. INDUSTRIES LTD. v. UNION OF INDIA
[KAPADIA,J.]
147
""'
3. The question that the provisions of AS 22 insofar as it relate A
to "deferred taxation" is violative of Articles 14 and 19(1 )(g) of the
Constitution oflndia is left open. [Para 135) (305-E-F)
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3761 of
2007.
From the Judgment and Order dated 19.04.2007 of the High Court
--\
of Calcutta in W.P. No. 10608 (W) of2002.
WITH
C.A. Nos. 3478-3480 and 3482 of 2007.
A. Sharan, ASG., Dr. Debiprosad Pal, S.K. Bagaria, J.P. Khaitan,
B
c
Arvind P. Datar and N.K. Poddar, Ananda Sen, R.K. Raghavan, K.V.
Mohan, K.V. Balakrishnan, Raj Shekhar Rao, N.P. Agarwalla, P.C.
Sharma, Amit Agarwalla, Dr. Anita Sumanth, V.S. Jay Kumar, Nikhil
Nayyar, Ankit Singhal, T.V.S.R. Sreyas, Gaurav Agrawal, Amit Anand
Tiwari, P. Parmeswaran, Pramod Dayal and Nikunj Dayal for the D
Appearing parties.
The Judgment of the Court was delivered by
KAPADIA, J. 1. A short question which arises for determination
in this batch of civil appeals is :
E
"Whether Accounting Standard 22 (AS 22) entitled "accounting
for taxes on income" insofar as it relates to deferred taxation is
inconsistent with and ultra vires the provisions of the Companies
Act, 1956 (the Companies Act), the Income-tax Act, 1961 (LT. F
Act) and the Constitution of India?"
2. Mis. J.K. Industries Ltd. is a public limited company. It was
incorporated in 1951. It carries on the business of manufacture and sale
of automotive tyres, tubes, sugar and agrigenetics. It has a registered office
at Calcutta. It seeks to challenge AS 22 issued by Institute of Chartered G
Accountants of India (for short, "Institute") which has been made
mandatory for all companies listed in Stock Exchanges in India in
preparation of their accounts for the financial year 2001-02 onwards.
3. On 7.12.06 the Central Government prescribed AS 22 under
Section 211 (3C) of the Companies Act by the Companies (AS) Rules H
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[2007] 12 S.C.R.
A 2006. Before that date, AS 22, when issued in 2001, was challenged in
rwrit petitions filed before Madras, Kamataka, Calcutta and Gujarat High
Cou1ts. On transfer petitions, under Section 139A of the Constitution,
filed by the Institute, this Court vide order dated 17.2.03 was pleased to
transfer the writ petitions filed in various High Courts to the Calcutta High
B Court.
Meaning and purpose of AS:
4. In its origin, Accounting Standard is a policy statement or
document framed by Institute. Accounting Standards establishes rules
C relating to recognition, measurement and disclosures thereby ensuring that
all enterprises that follow them are comparable and that their financial
statements are true, fair and transparent. Accounting Standards ("A.S."
for short) are based on a number of accounting principles. They seek to
arrive at true accounting income. One such principle is the matching
principle. The other is fair value principle. The aim of the Institute is to go
D for paradigm shift from matching to fair value principle.
5. Today the revised Accounting Standards seeks to arrive at true
accounting income. In the age of globalization the attempt is to reconcile
the accounts oflndian companies with their joint venture partners abroad.
E The aim is to harmonise Indian Accounting Standards with International
Accounting Standards. With the object of bridging gap between IAS and
IFRS, the Institute formulated new A.S. and introduced new concepts,
e.g., Deferred Tax Accounting (AS 22 impugned herein), Segment
Reporting (AS 17) etc .. However, as a matter of prudence and
necessary adjustment, to arrive at real iPcome, Accounting Standards
F require provision to be made for liabilities payable in future, provision to
be made for contingencies, provision to be made for diminution, provision
to reflect impairment and so on which have the effect of reducing incomes
and were, therefore, not readily accepted by some enterprises and tax
authorities.
G
6. The core of Accountar1cy is Book-keeping. T11e rules of Bookkeeping are clear. For example, the value of a fixed asset mentioned in a
/-
Balance Sheet is based on cost which may involve subjective estimation
of the amount to be apportioned. Similarly. the quantum of depreciation
H is again an estimate, which can vary depending on the persons preparing
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J.K. INDUSTRIES LTD. v. UNION OF INDIA
[KAP ADIA,J.]
149
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the accounts as to when and at what stage he wants to record the A
depreciation. Accounting Standards are an attempt to overcome some
of these deficiencies of Accountancy. Accounting Standards involve
codification of fundamental accounting rules, rules which explain and
standardiz.e the application of the fundamental rules to a variety of uncertain
situations like-retirement, contingencies, intangibles, consolidation, merger B
etc. Accounting Standards basically attempt to reduce the subjectivity and
lay down rules so as to arrive at the best possible estimates. For example,
net assets refer to the difference between total assets less liabilities but
the value attributable to each asset and each liability is often subjective.
It depends on estimates. This is where the Accounting Standards help. c
They reduce the subjectivity. Therefore, Accounting Standards help to
arrive at the best possible estimates. This estimation/subjectivity is also
on account of the conceptual difference between "accounting incoll.le" and
"taxable income". Accounting income is the real income. Tax laws lay
down rules for valuation of inventories, fixed assets, depreciation, bad D
debts, etc. based on artificial rules and not on the basis of accounting
>
estimates, which results in mismatch between accounting and taxable
incomes: For example, a fixed rate of depreciation may, for some
companies, result in computing lower than the actual income if the actual
erosion in the value of the asset is lower than the depreciation calculated E
at the fixed rate and higher than actual income for others where assets
erode faster. Accounting income is nonnally used as a relevant measure
by most stakeholders. However, on account of artificial set of rules used
in computation of taxable income one finds that accounting income differs
from taxable income. Looking to these problems, the evolution of
:\
Accounting Standards and their greater application is necessary as it results F
in reducing the need for tax laws to depend upon artificial rules. The object
of Accounting Standards is, therefore, to standardize and to narrow down
the options. The object of Accounting Standards is to evolve methods
by which "accounting income" is determined. The object behind the
Accounting Standards is to evolve methods by which accounting income G
is determined, made more transparent and leave less and less room for
subjective selection of methods and provide for more attention to the
quality of estimates used in arriving at accounting income.
7. The main object sought to be achieved by Accounting Standards H
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[2007] 12 S.C.R. ~
A which is now made mandatory is to see that accounting income is adopted
as taxable income and not merely as the basis from which taxable
income is to be cmnputed. Thus, if the rules by which inventories are to
be valued are laid down in the Accounting Standards artd are followed in.
the determination of accounting income, then tax laws do not need to lay
B down the rules and the tax authorities do not need to examine the
computation of the value of inventories and its effect on computation of ·
income. Similarly, if there is an accounting standard on depreciation which
requires estimation of the useful life and prescribes the appropriate method
for apportionment of cost of fixed assets over their useful life, it is
c unnecessary for tax laws to apply an artificial rule to decide the extent of
allowance for depreciation.
D
8. Finally, the adoption of Accounting Standards and of accounting
income as ''taxabl.e income" would avoid distortion of accounting income
which is the real ·income.
Reasons Joi- introducing AS 22:
9. In the ba1;kdrop of globalization and liberalization the world has
become an economic village. Today, the capital market all over the world
knows no barriers. Fiscal distances and barriers have been removed by
E developments in transport, communication and e-commerce. In this
backdrop, Conv1ergence of Accounting Standards is aimed at removing
barriers in the flow of financial information and capital. Ba5ed on the above
developments in the global economy and the Indian economy, the
conceptual differences and consequent deviations in the National
F Accounting Standards and IFRS have got to be eliminated. For example,
exchange difference in respect of unpaid liability for acquisition of an
imported asset has been allowed in the past to be adjusted with the carrying
costs of the fixed assets instead of recognizing the exchange difference in
G
H
the profit and loss account.
10. Lastly, it is important to note that Accounting Standards and
taxation of income are two independent subjects. The object behind AS
is to remove this divergence by making Accounting Income a Taxable
Income. Accounting income can never negate True Income.
J..
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J.K. INDUSTRIES LTD. v. UNION OF INDIA
[KAPADIA, J.]
151
Relevant provisions of the Companies Act, 1956 and Analysis thereof A
11. Before analyzing the provisions of the Companies Act, we quote
hereinbelow the following provisions from the Companies Act which read
as follow:
"PREAMBLE"
B
The Companies Act, 1956 (ACT 1 OF 1956)
[18th January, 1956]
An Act to consolidate and amend the law relating to companies c
and certain other associations.
Be it enacted by Parliament in the 'Sixth Year of the Republic
oflndia as follows:-"
I
"PRELIMINARY
D
Section 2(33) "prescribed" means, as respects the provisions of
this Act relating to the winding up of companies except sub-section
(5) of section 503, sub-section (3) of section 550, section 552
and sub-section (3) of section 555, prescribed by rules made by
the Supreme Comi in consultation with The Tribunal, and as E
respect.;; the other provisions of this Act including sub-section (5)
of section 503, sub-section (3) of section 550, section 552 and
sub-section (3) of section 555, prescribed by rules made by the
Central Government;"
"ACCOUNTS
F
Section 209. Books of account to be kept by company
(1) Every company shall keep at its registered office proper books
of account with respect toG
(a) all sums of money received and expended by the companJ
and the matters in respect of which the receipt and expenditure
take place;
(b) all sales and purchases of goods by the company;
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SUPREME COURT REPORTS
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~
A
( c) the assets and liabilities of the company; and
r- ,,
( d) in the case: of a company pertaining to any class of companies
engaged in production, processing, manufacturing or mining
activities, such particulars relating to utilisation of material or labour
B
or to other items of cost as may be prescribed, if such class of
companies is required by the Central Government to include such
particulars in the books of account:
Provided that all or any of the books of account aforesaid may be
kept at such other place in India as the Board of directors may
c
decide and when the Board of directors so decides, the company
shall, within seven days of the decision, file with the Registrar a
notice in writing giving the full address of that other place.
(2) Where a :ompany has a branch office, whether in or outside
D
India, the company shall be deemed to have complied with the
provisions of sub-section (I), if proper books of account relating
._
to the transactions effected at the branch office are kept at that
office and proper summarised returns, made up to dates at intervals
of not more than three months, are sent by the branch office to
the company at its registered office or the other place referred to
E
in sub-section (1 ).
(3) For the purposes of sub-sections (1) and (2), proper books
of account ~:hall not be deemed to be kept with respect to the
matters specified therein,- (a) if there are not kept such books as
>
F
are necessat)' to give a true and fair view of the state of the affairs
,,
of the company or branch office, as the case may be, and to
explain its transactions; and
(b) If such books are not kept on accrual basis and according to
the double entry system of accounting.
G
( 4) The books of account and other books and papers shall be
\-
open to inspection by any director during business hours.
('
(4A) The books of account of every company relating to a period
of not less than eight years immediately preceding the current year
H
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J.K.INDUSTRIESLTD. v. UNION OF INDIA
153
[KAPADIA,J.]
'"
together with the vouchers relevant to any entry in such books of A
account shall be preserved in good order :
Provided that in the case of a company incorporated less than eight
years before the current year, the books of account for the entire
period preceding the current year together with the vouchers
relevant to any entry in such books of account shall be so B
preserved.
( 5) If any of the persons referred to in sub-section ( 6) fails to take
all reasonable steps to secure compliance by the company with
the requirements of this section, or has by his own wilful act been c
the cause of any default by the company thereunder, he shall, in
respect of each offence, be punishable with imprisonment for a
term which may extend to six months, or with fine which may
extend to ten thousand rupees, or with both :
,_,\
Provided that in any proceedings against a person in respect of D
an offence under this section consisting of a failure to take
reasonable steps to secure compliance by the company with the
requirements of this section, it shall be a defence to prove that a
competent and reliable person was charged with the duty of seeing
that those requirements were complied with and was in a position E
to discharge that duty :
Provided further that no person shall be sentenced to imprisonment
for any such offence, unless it was committed wilfully.
(6) The persons referred to in sub-section (5) are the following F
namely:-
(a) where the company has a managing director or manager, such
managing' director or manager and all officers and other employees
of the company; and;
G
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( d) where the company has neither a managing director nor
manager, every director of the company;
Sect ion 210. Annual accounts and balance sheet
H
)
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SUPREME COURT REPORTS
[2007] 12 S.C.R.
'\ '
A
(1) At every annual general meeting of a company held in pursuance
"'
of section 166, the Board of directors of the company shall lay
before the company-
(a) a balance sheet as at the end of the period specified in subsection (3); and
B
(b) a profit and loss account for that period.
(2) In the case of a company not carrying on business for profit,
an income and expenditure account shall be laid before the
c
company at its annual general meeting instead of a profit and loss
account, and all references to "profit and loss account", "profit"
and "loss" in this section and elsewhere in this Act, shall be
construed, in relation to such a company, as references respectively
to the "income and expenditure account", "the excess of income
over expenditure", and "the excess of expenditure over income".
D
(3) The profit and loss account shall relate-
"'
(a) in the case of the first annual general meeting of the company,
to the period beginning with the incorporation of the company and
ending with a day which shall not precede the day of the meeting
E
by more than nine months; and
(b) in the case of any subsequent annual general meeting of the
company, to the period beginning with the day immediately after
the period for which the account was last submitted and ending
F
with a day which shall not precede the day of the meeting by more
\. ~
than six months, or in cases where an extension of time has been
granted for holding the meeting under the second proviso to subsection (1) of section 166, by more than six months and the
extension so granted.
G
(4) The period to which the account aforesaid relates is referred
to in this Act as a "financial year" and it may be less or more than
I.
a calendar year, but it shall not exceed fifteen months :
Provided that it may extend to eighteen months where special
H
permission has been granted in that behalf by the Registrar.
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J.K. INDUSTRIES LTD. v.