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1. |
It has been noticed that some companies are
charging certain expenses, which are otherwise required to be charged
to the profit and loss account, directly against reserves and/or
Securities Premium Account pursuant to the court orders. In such a
case, while the expenses are charged to reserves and/or Securities
Premium Account, the tax benefit arising from admissibility of such
expenses for tax purposes is not recognised in the reserves and/or
Securities Premium Account. Such a situation may also arise where an
enterprise adjusts its reserves to give effect to a change, if any, in
accounting policy consequent upon adoption of an Accounting Standard,
in accordance with the transitional provisions contained in the
standard. Further, a company may adjust an expense against the
Securities Premium Account as allowed under the provisions of section
78 of the Companies Act, 1956. A similar situation may arise where,
pursuant to a court order or under transitional provisions prescribed
in an accounting standard, an income, which should have otherwise been
credited to the profit and loss account in accordance with the
requirements of generally accepted accounting principles, may have
been directly credited to a reserve account or a similar account and
the tax effect thereof is not recognised in the reserve account or a
similar account.
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2. |
Not recognising the tax benefit, arising from
admissibility of expense charged to the reserves and/or Securities
Premium Account, in the reserves and/or Securities Premium Account is
contrary to the generally accepted accounting principles because it
results in recognition and presentation of tax effect of an expense in
a manner which is different from the manner in which the expense
itself has been recognised and presented. Similarly, recognising and
presenting the tax effect of an income in a manner which is different
from the manner in which income itself has been recognised and
presented is contrary to the generally accepted accounting principles.
Accordingly, any expense charged directly to reserves and/or
Securities Premium Account should be net of tax benefits expected to
arise from the admissibility of such expenses for tax purposes.
Similarly, any income credited directly to a reserve account or a
similar account should be net of its tax effect.
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