Income Computation and Disclosure Standards by Rahul Chawla.pdfCA. Rahul Chawla Income Computation...

CA. Rahul Chawla

Income Computation and Disclosure Standards

(as notified under Section 145(2) of The Income Tax Act, 1961)

ICDS VII to X, and Litigation around ICDS

Common Disclaimer

• This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.

• In case of conflict between the provisions of the Income Tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent

ICDS VII – Government Grants


Scope: • Government grants; alias subsidies, cash incentives, duty

drawbacks, waiver, concessions, reimbursements, etc. • Not in case of Government ownership

Grants

Includes: assistance by Government in cash or kind to a person for past or future compliance with certain conditions. Excludes: Assistance which cannot have a value placed upon them, and Transactions with Government which cannot be distinguished from the normal trading transactions of the person


Only Income Approach for accounting – No Capital approach as prescribed under AS-12


Recognition criteria

• AS-12 – To be recognised on achieving reasonable certainty of satisfaction of related conditions & of receipt

• ICDS - Only upon reasonable assurance that:

• Person shall comply with conditions attached to them; &

• Grants shall be received

• Not to be postponed beyond actual date of receipt.

Possible double taxation (MAT)

& Ultra-vires the other provisions

of the Act


Grant for depreciable Fixed Assets

• AS12 – Reduce from gross block or charge to P&L

• ICDS – Reduce from gross block – No outright charge to P&L

Grants for non-depreciable Fixed Assets

• AS12 – Credit to Capital Reserve Account

• ICDS – Charge to income over the same period over which the cost of meeting the relevant obligations is charged to income


Grants not directly relatable to any specific Fixed Asset

• Total grant has to be apportioned over the various assets to reduce their cost proportionately

• In accordance with section 2(24)(xviii) such grants for non-depreciable assets should be concluded as an income and therefore be offered to tax

Applicability of this provision of ICDS VII is thus restricted to Depreciable assets only


Grant for meeting expenses/ losses

• Recognise as income upon receipt

Other grants

• Recognise as income based upon matching principle

Grants in form of non-monetary assets;

Given at a concessional rate

• Accounted at acquisition cost (not FMV or NRV)


Refund of Grant – Non depreciable asset

• Charge to unamortised deferred credit – Subsequently, add to Income

Refund of Grant - Depreciable asset

• increasing the actual cost or written down value of block of assets by the amount refundable


Disclosures

Nature and extent of Government grants recognised during the year:

• By way of deduction from actual cost of the assets or from the WDV of block of assets during the previous year;

• As income;

• By way of deduction from actual cost of assets or from WDV of block of assets and reasons thereof;

• Not recognised as income and reasons thereof.

ICDS VIII – Securities


Scope – PART A:

• Securities held as Stock in Trade – ONLY (not on Investments)

• Not for derivatives

• Not for insurance business, mutual funds, VC funds, banks or public financial institutions

• ICDS on Revenue recognition deals with interest and dividends recognition


Initial Recognition

• At actual cost,

• Including brokerage, fees, tax, duty or cess

If exchanged for another security/ asset

• fair value of the security so acquired shall be its actual cost

STT?

Unpaid Interest? Pre acquisition & Post acquisition


Year end measures • Revalue at cost or NRV whichever is lower, • Bucket approach & not item-by-item:

• Shares, • Debt securities • Convertible securities, and • Others

• Securities not listed on a recognised stock exchange;

or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised.

• FIFO / Weighted Average method


Security Cost NRV Lower of NRV or Cost

ICDS Value

Share 1 100 75 75

Share 2 120 150 120

Share 3 140 120 120

Total 360 345 315 345

Bucket approach - Example

Part B: For Scheduled Banks and Public Financial Institutions

RBI guidelines to be followed


Disclosures?

None prescribed !

ICDS IX – Borrowing Cost


Scope

• Treatment of Borrowing cost

• Does not deal with cost of Equity or preference share capital

Borrowing cost includes

• Commitment charges

• Amortized discounts or premiums

• Ancillary cost for borrowing

• Finance charge for assets acquired under finance lease


Qualifying Assets

Assets taking 12 months or more for

ready to sale

AS 16 ICDS

Inventory – 12 months or more for saleable condition

Tangible/ Intangible Assets


• Capitalization as per this ICDS

• Revenue expenditure as per provisions of the Act

• Funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset – Capitalize

• General borrowing – not for any particular asset – Capitalize the total expense in year based upon the average general qualifying assets acquired

Considering the assets are purchased in

mid-year

General assets – but takes more than 12

months for acquisition, construction or

production


Capitalization commences:

• Specific borrowing – date of borrowing

• General borrowing – date on which funds are utilised

Contradicts the formula in preceding

paragraph


Capitalization ceases:

• Qualifying asset other than Inventory – date of put to use (not ready for use as in AS 23)

• Inventory – when substantially all the activities necessary to prepare such inventory for its intended sale are complete

When construction is completed in Parts?


Disclosures

• Accounting policy adopted

• Amount of borrowing costs capitalised during the previous year

Important:

Alternate investment of Borrowed funds for time being ! (Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315)

Borrowing cost for the period between ready to use and put to use !

(Proviso to Section 36(i)(iii))

ICDS X Provisions, contingent liabilities and contingent assets

ICDS X – Provisions and contingencies

Scope does not cover

• resulting from financial instruments;

• resulting from executory contracts;

• arising in insurance business from contracts with policyholders;

• covered by another ICDS;

• Revenue recognition;

• Items such as Depreciation, doubtful debts, impairment of assets, etc.


• Provision to be recognized when it is reasonably certain (~AS 23; when it is probable) that an outflow of resources embodying economic benefits will be required to settle the obligation.

• Present obligation for past events

• Reliable estimate can be made


• No provision shall be recognised for costs that need to be incurred to operate in the future

• Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is enacted (unlike AS 29 – virtually certain to be enacted)

• Contingent Assets & Liabilities – Not to be recognized


• Contingent Assets to be monitored and recognized upon reasonable certainty

Measurement of provision

• Best estimate

• No discounting for present value

Review & Use of Provision

• Regularly and only for the intended purpose


Disclosures • Brief description of the nature of the asset and

related income; • Carrying amount of asset at the beginning and end

of the year; • Additional amount of asset and related income

recognised during the year, including increases to assets and related income already recognised;

• Amount of asset and related income reversed during the year; and

• the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement

Legal principle

THE HIGH COURT OF DELHI W.P.(C) 5595/2017 & CM APL 23467/2017 Date of decision: November 08, 2017 THE CHAMBER OF TAX CONSULTANTS & ANR versus UNION OF INDIA & ORS Coram:

JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH

Reach me at +91 – 99 999 70454 [email protected]

Thank you !!

Income Computation and Disclosure Standards by Rahul Chawla.pdfCA. Rahul Chawla Income Computation...

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