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Century move to draw down on reserves raises eyebrows

Calcutta, Aug. 26: Century Textiles and Industries Ltd, the B.K. Birla group flagship, will be seeking shareholders’ approval at its annual general meeting on September 24 to adjust deferred tax liabilities of Rs 154.35 crore against the company’s share premium account.

The share premium account holds the premium collected by the company at the time of issuing shares. The concept of a deferred tax came into effect from April 1 this year with the introduction of Accounting Standard 22 (AS 22) which “recognises that there are differences between items of revenue and expenditure as appearing in the statement of profit and loss and the items which are considered as revenue, expenses or deductions for tax purposes.”

In its notice convening the meeting, Century Textiles says the amount of Rs 154.35 crore has already been withdrawn from the general reserve, but the management now wants to adjust the deferred tax liability against its share premium account.

Explaining the move, the Century Textiles management says: “It is desirable in the interest of the company to debit deferred tax liability to securities premium account and credit back to general reserves the amount of deferred tax liability already debited, so that the general reserves of the company remain intact.

“It is also proposed that future debits in respect of deferred tax liability can continue to be charged to securities premium account to the extent of its availability.”

The company says the move is legally valid and aimed at enhancing shareholder value. “The proposal aims to truly reflect the healthy position of the balance sheet of the company,” the Century management added.

The company says such utilisation of the share premium account is valid under section 100 of the Companies Act 1956. However, it will still seek confirmation of the Mumbai High Court.

Although legal, accounting experts believe that such drawdown from the reserves isn’t a true reflection of the company’s financial situation.

Last month, Global Data Services, a wholly-owned subsidiary of credit rating agency Crisil, blew the whistle on profit padding practices in India Inc.

GDS found that 139 corporates had resorted to perfectly legit window-dressing methods to overstate profits. It discovered that several Indian companies had been merrily dipping ito their general and special reserves to conceal expenses that would have otherwise shown up in the profit and loss account. The result: they were able to keep these expenses out of the ken and state higher profits than they might have otherwise reported.

The gambit that Century Textiles is using now was used last year by Tata Steel and Hindustan Motors. Tata Steel had written off against its share premium reserve expenses related to premium on the redemption of its special promissory notes (SPN) and non-convertible debentures amounting to Rs 24.86 crore in 1998-99 and Rs 6.71 crore in 1999-2000.

Hindustan Motors had also dipped into the share premium reserve to write off expenses amounting to Rs 9.46 crore arising from the redemption of debentures. GDS claimed that if the loss had been written off against the profit and loss account, HM’s loss would have risen from Rs 62.28 crore to Rs 71.74 crore.

GDS had also remarked against Century Textiles for understating its profits by taking into account prior period adjustments amounting to Rs 14.28 crore in 2000-01. The expenses related to adjustments of Rs 1.84 crore, depreciation arrears of Rs 6.87 crore, and provision for leave encashment liability of Rs 5.57 crore. It claimed that these adjustments had reduced its declared profits to Rs 53.95 crore from Rs 68.23 crore.

But this time Century Textiles is dipping into its share premium reserves to set off its deferred tax liability. Justifying its action, Century Textiles says, “The deferred tax is the tax effect of timing differences between taxable income and accounting income for a period that originates in one period and are capable of reversal in one or more subsequent periods. The timing differences do not result in actual payment of deferred tax liability which under Accounting Standard 22 is merely an accounting entry.”

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