‘MAT’ and necessary adjustments. Views earlier expressed by author find support in recent judgment of the Supreme Court.

Earlier article on the same subject:

'MAT' AND NECESSARY ADJUSTMENT IN BOOK PROFIT IN VIEW OF NOTES, OBSERVATION, DISCLOSURES OR QUALIFICATION ON ACCOUNTS.

An Article By: - DEV KUMAR KOTHARI July 31, 2008

'MAT' AND NECESSARY ADJUSTMENT IN BOOK PROFIT IN VIEW OF NOTES, OBSERVATION, DISCLOSURES OR QUALIFICATION ON ACCOUNTS SECOND ARTICLE IN VIEW OF RECENT JUDGMENT OF DELHI HIGH COURT

An Article By: - C.A. DEV KUMAR KOTHARI February 10, 2009

Recent judgment:

2021 (4) TMI 753 - SUPREME COURT  ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED VERSUS BISHAL JAISWAL & ANR.

Thought this judgment is not under provisions of the Income Tax Act, 1961, however, in this judgment it is held that the Balance Sheet and Profit and Loss account are to be read with notes and disclosures. Briefly, according to this judgment, a liability shown in balance sheet, read with notes annexed to it and forming part of balance sheet amount to a written confirmation of liability for the purpose of limitation. However, a liability can be mentioned subject to notes which may amount to denial  of liability or  disputes in relation to liability. This can be by way of notes which form part of financial statements as per provisions of the Companies Act (and also as per generally accepted norms of accounting and disclosures – added by author) .

 Therefore balance sheet and profit and loss accounts are subject to notes thereon.

The honourable Supreme Court considered various provisions of the Companies Act, 2013 (and also corresponding provisions of the companies Act, 1956) and held that notes on financial statements are part of financial statement. 

Therefore, if a note on accounts shows that

1. the profits have been understated then an addition in amount of profit can be made. And
2.  the  profits have been overstated then a reduction can be made.

However, in both situations, the factors having impact on the amount of profits should be ascertainable in a reasonable manner and should be considered as amount of profit or amount of expenditure as per accrual system of accounting.

A liability on account of expenses which is ascertained, which has accrued during the year (accrual basis) or which is pertaining to the period of profit and loss account (based on matching principal) which should have been debited in P & L account but has not been debited but disclosed by way of notes should be deducted from profits as per P & L account.

Similarly if an amount of income or revenue is not credited in P & L Account, can be added to the amount of profit as per P & L account.

 The conservative theory is also to be applied while considering any amount of income which is not credited in the P & L account, therefore, reasons for not accounting the same as a revenue or income need to be taken into account.

For detailed discussion on related aspects readers may refer to earlier articles.