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692 Accounting Standards Interpretation (ASI) 61 Accounting for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961 Accounting Standard (AS) 22, Accounting for Taxes on Income ISSUES 1. The issue is how AS 22 is applied in a situation where a company pays tax under section 115JB (commonly referred to as Minimum Alternative Tax) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’). 2. Another issue is how deferred tax is measured on the timing differences originating during the current year if the enterprise expects that these differences would reverse in a period in which it may pay tax under section 115JB of the Act. CONSENSUS 3. The payment of tax under section 115JB of the Act is a current tax for the period. 4. In a period in which a company pays tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act. 5. In case an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, the deferred tax assets and liabilities in respect Published in ‘The Chartered Accountant’, December 2002, pp. 611-612. The authority of this ASI is the same as that of the Accounting Standard to which it relates. The contents of this ASI are intended for the limited purpose of the Accounting Standard to which it relates. ASI is intended to apply only to material items. 1 ASI 6 693 of timing differences arising during the current period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act. BASIS FOR CONCLUSIONS 6. Sub-section (1) of Section 115JB of the Act provides that “Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of incometax at the rate of seven and one-half per cent.” Tax paid/payable under section 115JB is the current tax and does not, in itself, give rise to any deferred tax since this payment of tax is pursuant to the special provision of the Act. This section only prescribes the mode of computation of tax payable for the current year. 7. Paragraph 20 of AS 22 requires that current tax should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the applicable tax rates and tax laws. Paragraph 21 of AS 22 provides that deferred tax assets and liabilities should be measured using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. In a period in which an enterprise pays tax under section 115JB of the Act, the rate of seven and one-half percent is relevant for the purpose of measurement of current tax and not for the purpose of measurement of deferred tax. 8. There are two methods for recognition and measurement of tax effects of timing differences, viz., the “full provision method” and “partial provision method”. Under the “full provision method”, the deferred tax is recognised and measured in respect of all timing differences(subject to consideration of prudence in case of deferred tax assets) without considering assumptions regarding future profitability, future capital expenditure etc. On the other hand, the ‘partial provision method’ excludes the tax effects of certain timing differences which will not reverse for some considerable period ahead. Thus, this method is based on many subjective judgements involving assumptions regarding future profitability, future capital expenditure etc. In other words, partial provision method is based on an assessment of what would be the 694 Compendium of Accounting Standards position in future. Keeping in view the elements of subjectivity, the ‘partial provision method’ under which deferred tax is recognised on the basis of assessment as to what would be the expected position, has generally been discarded the world-over. AS 22 also does not consider the above assumptions and, therefore, is based on ‘full provision method’. The expectation that the timing differences arising in the current period would reverse in a period in which the enterprise may pay tax under section 115JB of the Act, also involves assessment of the future taxable income and accounting income and therefore, is considerably subjective. It can not be known beforehand, with a reasonable degree of certainty, whether in future an enterprise would pay tax under section 115JB of the Act because that determination can only be made after the fact. Recognition and measurement of deferred tax using the rate under section 115JB of the Act, i.e., seven and one-half percent, on the basis of an assessment that the timing differences would reverse in a period in which the enterprise may pay tax under section 115JB of the Act, would be a situation analogous to the adoption of the ‘partial provision method’ which has already been rejected. In view of the above, this Interpretation requires that even if an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the current period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.