Query- X Limited is not able to estimate its profit with reasonable certainty for a particular year. This results in the payment of lower advance tax vis-à-vis the amount payable under the Income Tax Act, 1961. Consequently, the company is required to pay interest on shortfall in advance tax payment under sections 234B/ 234C of the Income Tax Act. The management believes that since the company needs to pay interest under the Income Tax Act, it can disclose the same as a part of “tax expense” in the statement of profit and loss.
Is the disclosure suggested by the management appropriate?
AS 22 Accounting for Taxes on Income defines the terms “tax expense” and “current tax” as below:
“Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period.
Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.”
Interest payable under the sections 234B/234C does not meet the definition of the term “tax” under AS 22. This seems to indicate that the company may not be able to club “interest payable for shortfall in advance tax” as a part of the tax expense.
Part II of Schedule VI to the Companies Act, 1956, requires the profit and loss account to be drawn in a manner to disclose the result of the working of the company during the period, and it should disclose every material feature in respect of non-recurring transactions or transactions of an exceptional nature. Keeping this in view, the company may disclose the “interest payable under the sections 234B/234C of the Income Tax Act” either under the head “interest expense,” with an appropriate disclosure of its nature or as a separate line item in the statement of profit and loss.