Differences in values of securities submitted to banks and per books of account. Income-tax and Company Law implications.

It has been a while since the amendments to Schedule III of The Companies Act, 2013 was notified subsequently made effective and applicable for preparation of financial statements. For those who are unfamiliar with "Schedule III", quite simply, it is the document that lays down the rules and the formats for preparation of annual financial statements of companies under The Companies Act, 2013.

What is evident now is the concerted efforts by regulators in India to make financial statements more transparent by disclosing information which would otherwise have stayed within the company. The amendments to Schedule III?now require a vast amount of information to be disclosed which will definitely managements under pressure. For example, now, the financial statements are required to disclose ageing analysis of accounts receivable and payable. Correspondingly, there is an enlarged questionnaire to be answered by the auditors annexed to the auditors' report. The is colloquially referred to as the "CARO Report".

One of the disclosures required is as follows:

" (ix) where the Company has borrowings from banks or financial institutions on the basis of security of current assets, it shall disclose the following:- (a) whether quarterly returns or statements of current assets filed by the Company with banks or financial institutions are in agreement with the books of accounts; (b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately disclosed.". What it means is that if there is any variation between the values of security such as inventory disclosed in the books of account and values certified to banks, the differences have to be explained in the financial statements thus making it a public record. The amendments appear to be an attempt at?"cleansing" the financial statements, some unethical practices and so on.

Be that as it may, there are going to be some unintended side-effects to these disclosures in addition to the regulatory action that will be invited should there be a variation between these figures. Companies follow several practices in submitting figures of inventory to banks purely guided by the fact that they operate within a very narrow time-frame. The valuation is prone to some adhocism. What every company must ensure is that, while there can be some variation in values on account of difference in valuation methodology and the adhocism, there should not be any variation in quantities of inventory.?The tax authorities tend to look at any excess value declared to banks over the book values as concealed income and levy tax on it not to mention the invocation of penal provisions. In such cases, the remedy for the company concerned would be to prove the correctness of the quantities and explain the valuation methodology. This outcome is not just a possibility, rather, should be considered probable.

Please refer to my published at pskumarsite.wordpress.com?viz. Blog.255.Differences in values of inventories submitted to banks and recorded in books of account. Income-tax and Company Law?implications. The Blog deals with a recent High Court?decision that went against the assessee. One should note that the assessee concerned was not very forthcoming in its dealings with the Revenue authorities thus inviting their wrath. One would think that in a well-run company such things will not happen unless there has been negligence in preparing the information. One should note that winning a tax case ultimately after a prolonged battle is a victory with a high unacceptable cost and that prevention is always better than the cure. It is hoped that the Blog will alert?managements to the risks involved.?Please consider the contents of the Blog carefully.