Reliance Charges Prior-Period Depreciation To Reserves

Reliance Industries has charged Rs 942 crore worth depreciation for an undisclosed number of prior years to its reserves, instead of the profit and loss account. The company also plans to claim tax credit on the charge, necessitated by the company changing its depreciation policy from the straight line method (SLM) to written down value (WDV) method in 1996-97.

At its annual post-results presentation to analysts on Wednesday night in Mumbai, Anil Ambani, managing director, said he had sought opinion from its local as well as international auditors and the move was considered legally valid by them.

The move means that Reliance can claim tax credit for future years and, thereby, pay lower tax.

 

This charge of Rs 942 crore to reserves has surprised chartered accountants who say the routine practice is to charge prior-period depreciation to the profit and loss account.

Addressing a gathering of over 300 analysts and bankers, Ambani said, As a policy, we believe in paying lesser tax as it enhances shareholder value. Some freedom is given to us by the laws and we acquire some benefit through our creativity.

While details of my tax planning is confidential between myself and my consultant, the details of calculating MAT can be shared if you are interested, he told the gathering.

Reliance changed the depreciation policy on only a specified number of its assets, not on all of them. The change resulted in two things: excess depreciation for the current year and for the previous year.

While current years depreciation was charged to the profit and loss account resulting in higher depreciation and lower taxable income. For 1996-97, RILs depreciation rose to Rs 410 crore from Rs 337 crore.

The excess depreciation of Rs 942 crore was charged to reserves. Ambani said the company will be claiming tax credits on them in the coming years.

Next year, Reliance may not need to resort to these steps. It will not only have a higher profit, but be able to claim exemptions under the new concessions provided under MAT, said an analyst.

The move has evoked scepticism among accountants and analysts.

A partner of a leading multinational firm said it is not a good accounting policy.

However, under Section 115 (j) a of the Income Tax Act, a company can write off its prior-period depreciation to its reserves and claim tax credit. Prior-period depreciation usually results in a change in depreciation policy.

A company is allowed to change its policy provided it fulfils certain conditions laid down by the law. Once that is done, excess depreciation can be written off to the reserves.

It enables the company to report lower book profits though its accounting profit will remain the same.

An income tax man is only interested in the book profit. It is a simple tax planning device to pay less MAT.

Many companies are now doing it, said another leading chartered accountant.

Reliance paid tax of Rs 45 crore for the first time in its history in the 1996-97 results.

The charge of Rs 942 crore has also resulted in low growth of reserves.

Against Rs 8,405 crore in 1995-96, reserves have grown only by one per cent to Rs 8,471 crore, whereas it should have grown to Rs 9,400 crore with the addition of balance net profit after accounting for dividend and dividend tax.