The Hindu Business Line : Tax maze in the Satyam case

The present chaos and confusion about Satyam Computers are a result of the admission made by its promoter and the interim management not confirming as yet the correctness of the revelations.

Four major manipulations have been admitted by the promoter carried out over the years. The tax implications of the manipulations can be listed as follows:

If the unrecorded or understated liability of Rs 1,230 crore represents mere borrowal not recorded in the books, then the taxman may use this lead for taxing those lenders to verify whether such lending has been recorded in their books of account.

If the understated liability represents expenditures not booked in the books of account, then the beleaguered assessee might seek reduction from the taxable income.

The income alleged to have been inflated in the preceding years might also require downward correction and recasting of financial statements. It might provide a cushion against future tax liability if strategised quickly, based on the actual facts of the case.

Overstated cash and bank balance could be tested to know whether there is actual siphoning/diversion of funds. If the cash and bank balance at any point of time in the earlier years is confirmed or affirmed by external evidence, then from that point of time verification may be made to ascertain siphoning of funds, if any.

However, such diversion will not provide any tax burden or relief to the entity. But if it could be fitted within the expression ‘embezzlement’, then such sum being detected in the current fiscal could be claimed as business loss (Badridas Daga vs CIT 34 ITR 10 (SC); Circular No.35 of November 24, 1965).

If the overstated cash and bank balance is innocuously matched by inflated gross receipts, then the cash and bank balance when reduced to the actual figure, the reserves too, will be reduced by an equivalent amount.

The taxpayer might seek the inflated profit declared in the preceding years and held currently in ‘reserves and surplus’ — to be eligible for tax relief by way of refund of tax already paid on such bogus inflated profits. Similar claim of overstated income matched by bogus debtors could be made for reduction in total income taxed in the preceding years.

The fudged figures for the half year ended September 2008 might not provide any extra relief or burden to the assessee as any error in accounting is eligible for rectification before the books of account are closed in March 2009.

This applies to inflated profit of Rs 588 crore and bogus accrued interest of Rs 376 crore.

In this context, it would be apt to quote Warren Buffet, who said: “You would be amazed how compliant auditors have been in the past decade, not only cooperating but suggesting techniques for making numbers less useful — less truthful — to investors.”

(The author is an Erode-based chartered accountant. blfeedback@thehindu.co.in)

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