The Hindu Business Line : At a loss to understand how a loss can be an asset

This may appear bizarre given the fact that losses by no stretch of imagination can be termed as assets. By the same token, you should also wonder why accumulated profits figure, of all the places, under the liabilities side. But then this is the upshot of double entry accounting — credit balances of the trial balance, which do not belong to the P/L account, fit into the liability side and debit balances into the asset side.

Moreover, a company is different from its shareholders. The profits belong to the shareholders and, hence, they are liabilities of the company. Likewise, losses too belong to the shareholders and, therefore, are not the liabilities of the company. What is not a liability is an asset as per the double-entry system of accounting if it is not a revenue item.

The issue can be looked at from another angle. Suppose, share capital is Rs 100 crore and the accumulated losses are Rs 10 crore. The net amount owed to the shareholders is Rs 90 crore. This is precisely what is brought out by the entry on the liability side for Rs 100 crore and a Rs 10-crore entry on the asset side.

Audit of futures

I TRADE in stock futures and my turnover is in excess of Rs 100 crore. I have no other source income. I am assessed under income from business and profession. Do I come under the purview of tax audit? There is no delivery of shares involved.

Sudha, e-mail

Yes you do. Section 44AB, while talking about business, refers both to `turnover' and `gross receipts'. While the former may have the unstated assumption of goods changing hands, no such assumption underpins the latter. In other words, you are sucked into the tax audit requirement under Section 44AB on the ground that your gross receipts are in excess of Rs 40 lakh.

Apollo rule

WHILE computing the adjusted book-profit for the purpose of finding out whether minimum book-profit tax is on or not, can the assessing officer disallow expenses that are not allowable while computing business income?

Nitin Deshmukh, Bhopal

The Supreme Court has, in Apollo Tyres Ltd vs CIT (2002 255 ITR 273), held that the assessing officer's power to redraw the accounts are circumscribed by Section 115JB itself. Accordingly, he cannot make adjustments which are not spelt out by the section.

If the profit and loss (P&L) account has not been made in keeping with Schedule VI of the Companies Act, he can by all means redraw the accounts so as to comply with its mandate. Likewise, if the accounting standards, rates and method of depreciation are different from the one adopted for accounts submitted to members at the AGM, he can redraw the accounts to prevent such duplicity. But he cannot go beyond.

Penalty is frowned upon by income-tax law. But Schedule VI does not. All that it requires is proper disclosure. Similarly, cash payments in excess of Rs 20,000 are disallowed to the extent of 20 per cent of the expenditure. But this provision cannot be imported into Section 115JB.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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