CHAPTER 18
MINISTRY OF RAILWAYS

18.1.1    Avoidable payment of additional tax and interest of Rs. 7.60 crore

The Company paid additional tax and interest of Rs 7.60 crore due to erroneous computation of taxable income and short and deferred payment of advance tax.

Section 115 JA, introduced in the Income Tax Act, 1961 through Finance Act 1996, envisaged the payment of minimum tax in case of a Company by deeming 30 per cent of the book profits as taxable income where the total income as computed under the provisions of the Income Tax Act is less than 30 per cent of the book profit. For the purpose of section 115 JA, ‘book profit’ means net profit as shown in the profit and loss account of the Company prepared in accordance with Schedule VI of the Companies Act, 1956 subject to certain adjustments. For computing ‘book profit’ the net profit as shown in the profit and loss account of the Company will be increased inter alia by the amounts set aside for provisions made for meeting unascertained liabilities. Where the total income of a Company is less than 30 per cent of the book profit, the Company is under a legal obligation to disclose in its return the deemed income equivalent to 30 per cent of the book profit and to pay advance tax thereon on stipulated dates.

Audit scrutiny in the case of Indian Railway Finance Corporation Limited (Company) for the assessment year (AY) 1997-98 revealed that while calculating the book profits, amounts of Rs.60.83 crore and Rs.3.63 crore on account of provisions made for bad and doubtful debts and diminution in the value of investments respectively during the Financial Year 1996-97 were not added to the net profit as required under the provisions of Income Tax Act and consequently the taxable income under section 115 JA as shown in the return of income was understated by Rs.19.34 crore. The Company also failed to pay correct amount of advance tax on the due dates. The Assessing Officer (AO) while processing and assessing the return made prima facie adjustment and added an amount of Rs.64.46 crore to the net profit on account of provisions for bad and doubtful debts and diminution in value of investments while calculating the book profit and determined the income at Rs.54.52 crore (being 30 per cent of book profit) as against the income returned at Rs.35.18 crore). The AO levied tax of Rs.23.44 crore and further charged additional tax of Rs.1.66 crore on account of prima facie adjustment made as above. The AO also charged interest under section 234 B and 234 C amounting to Rs.5.94 crore on account of short and deferred payment of advance tax. Thus, on account of incorrect disclosure of income and short and deferred payment of advance tax, the Company had to pay additional tax and interest aggregating Rs.7.60 crore.

The appeal filed by the Company against the order of the AO was dismissed by the Commissioner of Income Tax (Appeal) in October 2000. The Company had, however, preferred an appeal before the Income Tax Appellate Tribunal against the order of the Commissioner of Income Tax (Appeal). The appeal was yet to be heard by the Tribunal (July 2001).

The Management stated (June 2001) that the aforesaid provisions were made for ascertained liabilities and that this plea was not accepted by the AO. The Management’s reply that the Company had considered the provisions of Rs. 64.46 crore as ascertained liabilities is not tenable in view of provisions of Section 115JA of Income Tax Act which clearly provide that amount set aside for provisions for unascertained liability will be added to the net profit for purpose of computation of book profit. Thus the Company incurred avoidable payment of additional income tax and interest of Rs 7.60 crore due to erroneous computation of income and failure to pay correct amount of advance tax on the due dates.

The matter was referred to the Ministry in July 2001; their reply was awaited (October 2001).

RITES Limited

With a view to bring about economy in expenditure on foreign travel by the officers of Public Sector Undertakings (PSUs), the Department of Public Enterprises (DPE) issued (20 September 1995) instructions to all PSUs that the consolidated amount paid as per the guidelines of the Reserve Bank of India would cover room rent, taxi charges, entertainment (if any), official telephone calls, other contingent expenditure and daily allowance. The instructions further provided that PSU employees should render accounts on return from tour for all items, other than daily allowance which normally covered food etc., as per rates of Ministry of External Affairs. Any surplus after calculation of the expenditure incurred was to be refunded. It also envisaged to bring the above guidelines to the notice of all the PSUs for adoption by their Board of Directors.

RITES Limited (Company) placed the DPE instructions before the Board of Directors in June 1996. However, the Board of Directors decided (June 1996) to wait for response of DPE to the request made by the Standing Conference on Public Enterprises (SCOPE) in April 1996 for reviewing the instructions. In July 1998, the Company decided to split the composite allowance into daily allowance, hotel allowance and entertainment allowance on actual basis.

Audit scrutiny of 201 foreign travel cases of the officials of the Company for the period from April 1996 to July 1998 revealed that the expenses other than daily allowances were paid to the officials without insisting for submission of requisite vouchers. An analysis of these cases further revealed that in 188 cases claims were admitted against production of vouchers for less than 50 per cent of the expenses and in 21 cases vouchers for even less than 25 per cent of the expenses were obtained. Admitting the claim without production of supporting vouchers was against the DPE instructions and led to an inadmissible payment of Rs. 95.02 lakh. This included Rs.28.70 lakh paid to the Chairman/Managing Directors and Directors of the Company in 13 and 38 cases respectively.

The Management stated (April 2001) that a reference was made by the SCOPE to DPE in April 1996 to reconsider the instructions as it was problematic to keep and maintain proper accountal by the executives. While accepting that payment of allowance for the foreign visits prior to July 1998 was not strictly in line with the DPE’s guidelines, the Management contended that the economy in expenditure was ensured by adopting lower rates than that of the RBI. They also started taking vouchers for expenses other than daily allowances and tax charges from August 1998.

However, the fact remains that the Company had not insisted on rendering of vouchers on return from tour during the period from April 1996 to July 1998, which was against the spirit of the DPE’s instructions as well as established accounting principles. Further, the basic objective of DPE’s instructions for bringing about transparency in expenditure stood defeated, even if the rates were lower as compared to the rates of RBI.

The matter was referred to the Ministry in August 2001; their reply was awaited (October 2001).