A. Facts of the Case
A listed public sector company was engaged in refining crude oil for production of various petroleum products. Crude oil constituted more than 90% of the total expenditure of the company. Crude oil and petroleum product prices are extremely volatile in the international market. Hence, the company was not in a position to estimate its profits with reasonable accuracy.
As per the requirements of the Income-tax Act, 1961, the company was required to estimate the annual taxable income and remit the advance tax instalments on the due dates. Due to the difficulty in estimation of profits, in most of the years, there was short payment of advance tax instalments.
According to the company, as per the existing provisions of the Income- tax Act, 1961, short payment of advance tax instalments invites automatic levy of interest under section 234C. Interest is levied under section 234B when the total advance tax paid is lower than 90% of the assessed tax. Hence, the company is required to provide for income tax on its income along with interest for short payment of tax in its accounts and the company provided for such interest as part of provision for taxation in the books of account as a regular practice.
B. Issue
The company has sought the opinion on the following issues arising from the above:
(a) Whether interest payable under section 234B and section 234C of the Income-tax Act, 1961, should be considered as part of the tax expense; and
(b) Whether such interest should be considered as an extraordinary item for the purposes of AS 5
C. Opinion
On the basis of the above, the opinion in respect of the issues raised by the company:
(a) Interest payable under section 234B and section 234C of the Income-tax Act, 1961, should not be considered as a part of income tax as per the provisions of Income Tax Act. This may, however, be separately provided for in accordance with the requirements of AS 29. It would not be considered as provision for income tax for the purpose of presentation in the financial statements.
(b) Interest payable under sections 234B and 234C of the Income- tax Act, 1961 should not be considered as an extraordinary item for the purposes of AS 5. [Since the payment of tax in a business arises in the ordinary course of running the business, any interest on shortfall of advance tax payments should be considered in the ordinary course of business]
The above opinion was affirmed by the ICAI-Expert Advisory Committee.
