Accounting standards of the institute cover a variety of subjects. Though these standards narrow down the choice of accounting practices, some flexibility is also provided to suit individual circumstances. Differences between best accounting practices and the accepted treatment under the I-T Act have arisen right since inception of income-tax. Assessees, however, have, in many cases, preferred to follow, for obvious reasons, accounting practices acceptedunder income-tax law. In some cases, it is possible to recompute the book profits to arrive at the taxable profits. In many cases, an assessee may not be able to follow one method for income-tax and another for his books of accounts and he may have to choose the one which is mandatory but which is disadvantageous to him for tax purposes.

Such differences are often so fundamental that even the concept of "accrual" is understood differently. Accounting principles recognise an income as having accrued when there is a reasonable certainty that it will be received (see AS 9 on revenue recognition). Tax laws say that an income has accrued as soon as the right to receive arises and the question of recoverability of the income, generally speaking, is not relevant (Keshav Mills 23 ITR 230 (SC)). Similar differences arise in accrual of expenses/losses. Needless to say, of course, differences also arise due to incentives (income exempt, higher deductions, etc) or disincentives (disallowances, etc) in tax law. The I-Tdepartment has attempted to deal with this issue, albeit, in its favour, by introducing the minimum alternative tax.

However, when two statutes require an assessee to follow opposite set of practices, serious difficulties are bound to follow. It is not possible to list all the cases of practices prescribed by the mandatory accounting standards which are different from the practices accepted under income-tax. To take an example, however, AS 13 requires that in case there is a permanent diminution in value of long-term investments, it should be written off. However, it is unlikely that such loss will be allowable under income-tax. More instances can be given in the fields of construction accounting, inventory valuation and gratuity and other retirement benefits.

Complicated consequences arise. E.g., for years altogether, the assessee will have to maintain two sets of figures of such transactions--one for tax and the other for accounts. This was already being done for depreciation but will now have toextended to numerous more areas. These issues could be addressed in many ways. Wherever possible, of course, the assessee could follow that policy which is acceptable under the mandatory accounting standards and for income-tax.

One could also look at the concept of deferred taxation in accounting. This is already being done in advanced countries where such differences between tax and accounting treatment are accepted as an inevitability. Under this system, the tax effect of a transaction which is so treated differently is taken into account in a deferred tax provision. If, e.g., an item is shown as income of a year but is not to be taxed in that year, the tax that would arise in a later year when it would be taxed is provided in the year of accounting of that income itself. A similar change that can be made in tax law is for providing of carry backward of losses. If tax is levied without permitting an expense/loss and which accrue in a subsequent year even for tax purposes, then, if there is a net loss inthe subsequent year, this should be permitted to be carried backward and refund of tax obtained. Otherwise, what happens is that, while income is taxed in one year, the loss relating to that income in a following year may not be allowable in any manner unless the assessee earns additional income from a different source or from further unrelated efforts. If he cannot, the loss would never be allowed.

A long-term strategy would, of course, be to strive for eliminating those areas where such differences arise, particularly as regards mandatory accounting standards. One suggestion could be that a change in tax law could also be made whereby whenever a mandatory accounting practice requires following of a certain method, the tax department will accept this method. Interestingly, note that the income-tax department is well represented in the Committee on Accounting Standards under the Companies (Amendment) Ordinance--in fact, it was well represented earlier also.

What is also important, however, is perhaps afundamental change in attitude. Accounting principles, by definition, have a conservative approach. There is an eagerness, however, under tax law and practice, to raise revenue at the earliest extent by preponing the recognition of income and postponing the recognition of expenses, wherever possible.The forthcoming Finance Bill provides an opportunity for taking bold decisions in this area. It is only when a balanced and co-ordinated approach is taken that reforms, such as those in company and other laws, would be effective and fair.

The author is a Mumbai-based CA