SEMINAR ON - Association of Corporate Adviser & … Computation and Disclosure Standards ( ICDS )...

SEMINAR ON

Detailed discussion on Income Computation and Disclosure Standards (ICDS)

20th September, 2017

At

ACAE, Emami Conference Hall

6, Lyons Range, 3rd Floor, Unit-2

Kolkata-700 001

Organized by

ACAE Chartered Accountants Study Circle-EIRC

Income Computation and Disclosure Standards ( ICDS )

Income Computation and Disclosure Standards

1.1 Original and Need

The Apex Court in the case of J.K.Industries Ltd Vs UOI(2008) 297 ITR 176(SC) in a long judgement

while considering the question as to “whether AS 22 entitled “accounting for taxes on income” in so

far as it relates to deferred taxation is inconsistent with and ultra vires the provisions of the

Companies Act,1956(“the Companies Act”) , the Income-tax Act,1961 (“the I.T.Act”) and the

constitution of India, While rejecting the arguments of the appellants, the supreme court observed in a

long judgement as follows:-

a) Meaning and purpose of Accounting Standards(AS)

In its origin, AS is a policy statement or document framed by the Institute. AS establish rules

relating to recognition, measurement and disclosures thereby ensuring that all enterprises that

follow them are comparable and that their financial statements are true, fair and transparent. AS

are based on a number of accounting principles. They seek to arrive at the true accounting income.

One such principle is matching principle. The other is the fair value principle. The aim of the

Institute is to go for a paradigm shift from the matching to the fair view principle.

The main object sought to be achieved by Accounting Standards which is now made mandatory is

to see that accounting income is adopted as taxable income and not merely as the basis from which

taxable income is to be computed. Thus if the rules by which inventories are to be valued are laid

down in the Accounting Standards and are followed in the determination of Accounting Income,

then tax laws doesn’t need to lay down the rules and the tax authorities do not need to examine

the computation of the value of inventories and its effect on computation of income. Similarly if

there is an Accounting Standard on depreciation which requires estimation of the useful life and

prescribes the appropriate method for apportionment of the cost of fixed asset over their useful life

, it is unnecessary for the tax laws to apply an artificial rule to decide the extent of allowance for

depreciation.

Finally, the adoption of Accounting Standards and of accounting income as taxable income would

avoid distortion of accounting income which is real income.

Under Section 211(3A) Accounting Standards framed by the National Advisory Committee on

Accounting Standards constituted under Section 210A are now made mandatory. Every Company

has to comply with the said standards. Similarly under Section 227(3)(d) every auditor has to certify

whether the profit and loss account and balance sheet comply with the accounting standards

referred to in Section 211(3C). Similarly, under section 211(1) the company accounts have to reflect

a “true and fair” view of the state of affairs. Therefore the object behind insistence on compliance

with the AS and “true and fair” accrual is the presentation of accounts in a manner which would

reflect the true income/profit. In our view, the provisions of the Companies Act together with the

rules framed by the Central Government constitute a complete scheme. Without the rules, the

Companies Act cannot be implemented. The impugned rules framed under section 642 are a

legitimate aid to construction of the Companies Act as contemporaneaexpositio. Many of the


provisions of the Companies Act like computation of book profit, net profit etc cannot be put into

operation without the rules.

Para 79

In our view, it is the statutory function given to the central government to frame Accounting

Standards in consultation with the National Advisory Committee on Accounting Standards(NAC)

under Section 211(3C). It is not necessary for the Central Government to adopt in every case the

Accounting Standards issued by the Institute. Nothing prevents the Central Government from

enacting its own Accounting Standards which may not be in consonance with the standards

prescribed by the Institute. Similarly, nothing prevents the Central Government from adopting the

standards issued by the Institute as is the case in the present matter.

This seems to be genesis of the matter. The accounting Standards which were so far working fine were

done away with by the Central Government by enacting its own accounting Standards. There can be

difference in the Accounting profit and taxable income of a Company because of the differences in

reporting period and because of the fact that ICAI AS enabled an entity with flexibility of alternative

accounting treatments which made it possible for a taxpayer to avoid payment of correct taxes by choosing

a particular system.While accounting profit is computed based on the accounting standards, or generally

accepted accounting policies(GAAP), the taxable income is calculated using the provisions of Income-tax

Act,1961 and Rules and thus need was felt to standardise the alternatives in various standards so that the

income for tax purposes can be computed precisely as per the Act.

Matching Concept of Accounting

Matching concept is a very significant concept of accounting. According to this concept income and

expense must be recognised in the period to which they relate. In India Profit & Loss is computed with two

different set of provisions one set is profit and loss as per the Companies Act, 2013(earlier it was

Companies Act, 1956) and the second one is Profit & Loss as per Income-tax Act,1961. The root cause of

difference between Incomes as per these two acts is different treatment given to some items of income

and expenditure and transactions. Some of these items are as follows:-

1. Treatment of Interest during Construction period

2. Valuation of inventories

3. Depreciation rates

4. Accounting for changes in foreign exchange difference

5. Accounting for investment

6. Accounting for Impairment of assets

7. Revenue recognition

8. Deferred revenue expenditure

9. Prepaid expenses- claimable under the Income-tax in one year as against accounting where it can be claimed year to year- Recent Supreme Court judgement to give. Treatment of work-in-progress in case of construction companies. Morvi Industries ltd – 82 ITR 835(SC). Recognition of revenue causes problem where in reality it may not be feasible to account the same as income and this causes the problem.


There can be other reasons also. Thus it has been seen that time and again courts have interpreted the

accounting standards in different manner as far as their effect is to be given for the purposes of

computation of Income under the Income-tax Act, 1961 and therefore the need for Income Computation

and Disclosure Standards can be said to have arisen.

1.2 Income Computation and Disclosure Standards- Details of Introduction

Chapter XIV of the Income Tax Act, 1961 deals with the “Procedure for Assessment”. The provisions of

Section 145 of the Income Tax Act, 1961 are contained in Chapter XIV as mentioned above.

As a matter of fact, Section 145 of the Income Tax Act, 1961 traces its history to the provisions of Section

13 of the Indian Income Tax Act, 1922, which read as follows:

“13. Method of accounting.—Income, profits and gains shall be computed, for the purposes of sections 10 11* and 12, in accordance with the method of accounting regularly employed by the assessee:

Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.”

The said section was incorporated as Section 145 in the new Act and the section had been divided into two sub–sections. Sub-section (1) covered the cases where the accounts were correct and complete. The first proviso empowered in case the method employed did not reveal proper income, an assessment on a different basis and manner thought fit by the Assessing Officer. Section 145 (2) dealt with situation where the accounts were not correct and complete, or where no method of accounting had been regularly employed by the assessee. In such cases, the Assessing Officer was empowered to make best judgment assessment in the manner provided in Section 144. The latter portion was not provided in the 1922 Act.

Hence, after a series of amendments in Section 145 of the Income Tax Act, 1961, the Finance Act, 1995 (w.e.f. 1-4-1997) brought into existence a substituted section which read as follows:

“Method of accounting.

145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

The scope and effect of it have been elaborated by the department in Circular No. 717 dated 14th August, 1995. Paragraph number 44.1 of the circular read as follows:

http://www.incometaxindia.gov.in/_layouts/15/dit/Pages/viewer.aspx?grp=Act&cname=CMSID&cval=102120000002045774&k=&IsDlg=1#fn11


“Methods of accounting and accounting standards for computing income

44.1 Section 145(1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assesses are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted.”

After the above mentioned amendments, today we finally have Section 145 of the Income Tax Act, 1961 as amended by the Section 52 of the Finance (No. 2) Act, 2014 (w.e.f. 01.04.2015) wherein the words “accounting standards” have been substituted by “income computation and disclosure standards”. The term “income computation and disclosure standards” was introduced in clause 50 of the Finance (No.2) Bill, 2014. Clause 50 of the Finance (No.2) Bill reads as follows:

“Section 145 of the Act provides that the method of accounting for computation of income under the heads “Profits and gains of business or profession” and “Income from other sources” can either be the cash or mercantile system of accounting. The Finance Act, 1995 empowered the Central Government to notify Accounting Standards (AS) for any class of assesses or for any class of income. Since the introduction of these provisions, only two Accounting Standards relating to disclosure of accounting policies and disclosure of prior period and extraordinary items and changes in accounting policies have been notified.

The Central Government had constituted an Accounting Standard Committee vide Order dated 20thDecember, 2010 comprising of officials of the Tax authorities and professionals with the following terms of reference:

1. To study the harmonisation of the ICAI AS with the Indian Tax Laws and to suggest the accounting standards for tax compliance under the Income-tax Act, 1961 with suggestions for modifications

2. To suggest a method for determination of tax base for the purpose of computation of MAT in case of companies migrating to IND AS in the initial year of adoption and thereafter.

3. To suggest appropriate amendments to the Tax Laws in view of the transition to the IND AS.

The Committee has submitted its Final Report in August, 2012. The Committee recommended that the AS notified under the Act should be made applicable only to the computation of taxable income and a taxpayer should not be required to maintain books of account on the basis of AS notified under the Act. The Final Report of the Committee was placed in public domain for inviting comments from stakeholders and general public. After examining the comments/suggestions, the Committee inter alia recommended that the provisions of section 145 of the Act may be suitably amended to clarify that the notified AS are not meant for maintenance of books of account but are to be followed for computation of income.

In order to clarify that the standards notified under section 145(2) of the Act are to be followed for computation of income and disclosure of information by any class of assesses or for any class of income, it is proposed to provide that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of or in respect of any class of income. It is further proposed to provide that the Assessing Officer may make an assessment in the


manner provided in section 144 of the Act, if the income has not been computed in accordance with the standards notified under section 145(2) of the Act.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.”

Earlier, Accounting Standard I and Accounting Standard II were notified under Section 145 (2) of the Income Tax Act, 1961 under NO. 9949 [F. NO. 132/7/95-TPL], DATED 25-1-1996.

Now we have a set of ten Income Computation and Disclosure Standards notified as on 31st March, 2015 by Notification no. 32/2015 F. No. 134/48/2010‐TPL.

1.3 Difference between Accounting Standards (AS), Indian Accounting Standards (IndAS), Tax Accounting Standards (TAS) and Income Computation and Disclosure Standards (ICDS)

In exercise of the powers conferred by section 133 read with section 469 of the Companies Act, 2013 (18 of 2013) and sub-section 210A of the Companies Act, 1956 (1 of 1956), the Central Government, in consultation with the National Advisory Committee on Accounting Standards came up with a notification on the 16th of February, 2015. The notification announced the Companies (Indian Accounting Standards) Rules, 2015. These rules came into force on the 1st day of April, 2015.

In rule 4 of the Companies (Indian Accounting Standards) Rules, 2015, it has been clearly that the companies and their auditors mentioned in this rule shall mandatorily comply with IndAS for preparation of their financial statements and audit respectively. The companies mentioned in this rule are:

(i) any company may comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning on or after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter;

(ii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1 st April, 2016, with the comparatives for the periods ending on 31st March, 2016, or thereafter, namely:- (a) companies whose equity or debt securities are listed or are in the process of being listed on

any stock exchange in India or outside India and having net worth of rupees five hundred crore or more;

(b) companies other than those covered by sub-clause (a) of clause (ii) of subrule (1) and having net worth of rupees five hundred crore or more;

(c) holding, subsidiary, joint venture or associate companies of companies covered by sub-

clause (a) of clause (ii) of sub- rule (1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case may be; and

(iii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the

accounting periods beginning on or after 1 st April, 2017, with the comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-

(a) companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees five hundred crore;


(b) companies other than those covered in clause (ii) of sub- rule (1) and sub clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies having net worth of rupees two hundred and fifty crore or more but less than rupees five hundred crore.

(c) holding, subsidiary, joint venture or associate companies of companies covered under sub-clause (a) of clause (iii) of sub- rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the case may be:

Provided that nothing in this sub-rule, except clause (i), shall apply to companies whose securities are listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial public offering in accordance with the provisions of Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.”

Further, sub-rule 2 of Rule 2 of the Companies (Indian Accounting Standards) Rules, 2015 states that Accounting Standards as mentioned in the annexure to the Companies (Accounting Standards) Rules, 2006 shall be the Accounting Standards applicable to the companies other than the classes of companies specified in rule 4 (as given above). Hence, we can conclude that companies other than those mentioned in Rule 4 shall continue to apply the Accounting Standards notified in Companies (Accounting Standards) Rules, 2006.

Further we see that, the Government had constituted a committee in July 2002 for formulation of Accounting Standards for the purpose of notification under the Income Tax Act. This Committee recommended for notification of the Accounting Standards issued by the ICAI without any modification along with consequential legislative amendments to the Act for preventing any revenue leakage. Subsequently, the CBDT constituted another Committee to harmonize the Accounting Standards issued by the ICAI with the provisions of the Act for the purposes of notification under the Act and also to suggest amendments to the Act necessitated by transition to IndAS/IFRS. The Committee recommended that the Accounting Standards to be notified under the Act may be termed as "Tax Accounting Standards" (TAS), to distinguish the same from the Accounting Standards issued by the ICAI. The Committee examined all the thirty one Accounting Standards issued by the ICAI and noted that some of the Accounting Standards issued by the ICAI relate to 'disclosure' requirement, whilst some other contain matter that are adequately dealt within the Act. In view of this, the Committee recommended that Tax Accounting Standards need not to be notified in respect of seventeen Accounting Standards issued by the ICAI. The Committee then formulated the drafts of Tax Accounting Standards on the issues covered by the rest of the fourteen Accounting Standards issued by the ICAI. After continuous review, the CBDT again came up with a set of twelve draft Income Computation and

Disclosure Standards (TAS being renamed) on the 8th of January, 2015 which was open for public

comments until 8th of February, 2015. Hence, finally on the 31st day of March, 2015, CBDT came up with

notification no. 32/2015 [F. No. 134/48/2010 – TPL]/ SO 892(E) issuing ten Income Computation and

Disclosure Standards (ICDS) listed as below:

Serial No.

ICDS No. Name of the standard

1 I Accounting Policies

2 II Valuation of inventories

3 III Construction contracts

4 IV Revenue recognition

5 V Tangible fixed assets

6 VI Effects of changes in foreign exchange rates


7 VII Government Grants

8 VIII Securities

9 IX Borrowing Costs

10 X Provisions, contingent liabilities and contingent assets

The chart below gives a detail of the Accounting Standards issued by the ICAI which were recommended

for notification under the Act by the Committee and the ones which were not recommended.

Serial No.

AS No. Recommended - Topic AS No. Not Recommended - Topic

1 1 Disclosure of Accounting Policies

3 Cash Flow Statements

2 2 Valuation of Inventories 14 Accounting for Amalgamations

3 4 Contingencies and Events Occurring After the Balance

Sheet Date

15 Employee Benefits

4 5 Net Profit or Loss for the Period, Prior Period Items and changes in Accounting

Policies

17 Segment Reporting

5 7 Construction Contracts 18 Related Party Disclosures

6 9 Revenue Recognition 20 Earnings Per Share

7 10 Property Plant and Equipment

21 Consolidated Financial Statements **

8 11 The Effects of Changes in Foreign Exchange Rates

22 Accounting for Taxes on Income

9 12 Accounting for Government Grants

23 Accounting for Investments in Associates in Consolidated

finance Statements

10 13 Accounting for Investments 24 Discontinuing Operations

11 16 Borrowing Costs 25 Interim Financial Reporting

12 19 Leases 27 Financial Reporting of Interests in Joint Ventures

13 26 Intangible Assets 28 Impairment of Assets

14 29 Provisions, Contingent Liabilities and Contingent

Assets

30 Financial Instruments : Recognition and Measurement

15 31 Financial Instruments : Presentation

16 32 Financial Instruments : Disclosures

1.3.1 Amendment in the Accounting Standard issued by Central Government and ICAI

The Central Government vide its notification dated 30.03.2016 has withdrawn AS -6 dealing with

Depreciation Accounting and amended AS 2, 4, 10, 13, 14, 21 & 29. Further the name of AS-10 Accounting


for Fixed Assets has been changed to Property, Plant and Equipment. The said changes weremade effective

w.e.f accounting year commencing on or after 30.03.2016.

Further in view to harmonise Accounting Standard issued by ICAI for non corporate entities and the

amendment to the Accounting Standard notified by the central government, the council of ICAI also made

similar changes in the accounting standard. However the said changes will be applicable for non corporate

entities for accounting period starting on or after 01.04.2017

1.4.1Key Features of ICDS

1) Earlier effective date of ICDS was 01st April, 2015 i.e. FY: 2015-16 & AY: 2016-17. However later on

the same was deferred and made applicable from the assessment year 2017-18.

2) ICDS applicable to all assesses i.e. Corporate & Non Corporate Assesses.

3) No Net Worth or Turnover Criteria Prescribed for applicability.

4) ICDS is meant for giving clarity in certain contentious tax issues and disclosures thereof. It does not

mandate requirement of separate books of accounts to be maintained. Even though, all the ICDS

say that ICDS is not for the purpose of maintenance of accounts, however, ICDS deals with

i) Fundamental accounting assumptions

ii) Accounting policies

iii) Consideration in selection and change of policy.

Is it not contradictory?

5) In the case of conflict between the provisions of the Income‐tax Act, 1961 and Income Computation

and Disclosure Standard, the provisions of the Act shall prevail to that extent.

6) ICDS requires certain disclosures to be made in Tax Audit Report(Form 3CD) and Income Tax Return

Deferment of applicability of ICDS

The CBDT vide press release dated 06.07.2016 has deferred the applicability of ICDS by one year. The

reason for such deferment was that the expert committee has recommended amendments to the

notified ICDS and also issuance of clarification in respect of certain points raised by the stakeholders.

The CBDT finally by notification no 87/2016 dated 29.09.2016 has issued the new 10 ICDS which more

or less are same with the ICDS which were issued earlier. However the changes made in the new ICDS

vis-à-vis in old ICDS are stated in ANNEXURE–A

Further in order to clarify some points the CBDT had issued Clarification on Income Computation and

Disclosure Standards (ICDS) notified under section 145(2) of the Income Tax Act, 1961 by circular no

10/2017 dated 23.03.2017 which is enclosed in ANNEXURE-B


Even after issuing 10 ICDS some doubts were prevailing that whether these ICDS are applicable to

entities engaged in real estate transaction. However all these doubt were put to rest by CBDT when it

had invited comments of public on Draft Income and Computation Standard on Real Estate

Transactions vide press release dated 11.05.2017. The copy of draft ICDS on Real estate transactions is

enclosed in ANNEXURE-C

1.4.2 ICDS- Can it make a receipt income even though it may not be an income under the Act.

a) Though it has been specified that in case of divergence between the ICDS and the Act, the provisions of the Act will prevail. The Act- Will it cover the interpretations laid down by the judgements of various Courts over the years since the enactment of the 1922 Act and thereafter the 1961 Act?

b) Section 145 by virtue of which ICDS has been enacted is a computation section and not a charging section and thus cannot override Section 4 and 5 of the Act by simply enacting the Income computation and disclosure standards(ICDS). ICDS is meant for computation of income and not for defining what is income. In this regard, it may be noted that the ICDS which have been enacted by CBDT are by virtue of powers available with it u/s 145 of the Income-tax Act,1961 i.e., by way of a delegated legislation. In the following cases, it has been held that delegated legislation cannot override the statute.

i) CIT Vs Sirpur Paper Mills Ltd (1999) 3 SCC 596(SC) ii) CIT Vs Taj Mahal Hotel (1971) 3 SCC 550(SC) There has to be limitation on statute which is enacted by way of delegation. In the case of State Bank of Travancore v. CIT, (1986) 2 SCC 11 : 1986 SCC (Tax) 289 at page 25, it was held that

Though these provisions provide for charging the income by way of profits and gains of business and prescribe the manner of computation the question as to at what point of time its chargeability arises is answered by Section 5 of the Act which states that the total income of a resident assessee from whatever source derived becomes chargeable either when it is received by him or when it accrues or arises to him during the previous year. In other words taxability is attracted even when income has accrued and it is clear that the receipt of income is not the sole test of taxability under the Act; but whether on receipt basis or accrual basis it is the real income and not any hypothetical income which may have theoretically accrued that is subjected to tax under the Act.

An acceptable formula of correlating the notion of real income in conjunction with the method of accounting for the purpose of computation of income for the purpose of taxation is difficult to evolve. Besides, any straitjacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only.


What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made “no income”.

The extension of such a value judgment to such a field is pregnant with the possibility of misuse and should be treaded with caution; otherwise one would be on sticky grounds. One should proceed cautiously and not fall a prey to the shifting sands of time.

As a result of the aforesaid discussion, the following propositions emerge:

“(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.

(2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue.

(3) Where a debt has become bad deduction in compliance with the provisions of the Act should be claimed and allowed.

(4) Where the Act applies the concept of real income should not be so read as to defeat the provisions of the Act.

(5) If there is any diversion of income at source under any statute or by overriding title then there is no income to the assessee.

(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.

(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry — but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or treated as such by the assessee.

(8) The concept of real income is certainly applicable in judging whether there has been income or not but in every case it must be applied with care and within well recognised limits.”

c) There was no need for a separate ICDS but the divergence between the policies could have been

laid to rest by saying that the accounting policies which are followed in preparation of the accounts must be followed. MAT is continued to be levied on the basis of the Accounting Standards which was followed by the company and the taxes will have to be paid upon this.

d) Moreover, the regular tax will have to be paid as per the ICDS which may have acceleration in the form of pre-ponement of the income (even though it may not have accrued) and in such a situation there may be double taxation with no clarity over setoff of the MAT Credit and/or backward adjustment of the losses against the taxes paid in earlier years. There cannot be any double taxation across different years. ICDS is not a deeming fiction. Already Section 40(a)(ia),44BB,etc are there in the statute which levy taxes on deeming fiction.


e) ICDS is followed only if the Mercantile System of accounting is employed. Moreover, Section 145A overrides the provisions of Section 145 and thus even ICDS can be bypassed in such cases.

1.5 A short detailed comparison between AS and ICDS has been stated below:

1. AS 1 and ICDS I: Accounting Policies

The AS specified that the primary consideration for selection of accounting policies by an

enterprises is that the financial statements prepared and presented on the basis of such

accounting policies should represent a true and fair view of the state of affairs of the

enterprise as at the balance sheet date and of the profit or loss of the period ended on that

date and criterion for selection in the Accounting Standard 1 was three fold:-

a) Prudence

b) Substance over form

c) Materiality

The above three contours of principles are well accepted principles.

Prudence means cautious, seeing ahead. It Is the rule of becoming carefulness. In

accounting ,w e become careful from future losses.

The concept of materiality has not been expressly stated in ICDS but can be said to be there

by implication.

In the case of Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 at page 455

In the case of CIT, Bombay City [AIR 1959 SC 82 : 1959 Supp (1) SCR 45 : 35 ITR 298] v. ShoorjiVallabhdas of Co. [46 ITR 144] Hidayatullah, J., (as he then was) speaking for the Court observed: “Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though, an entry to that effect might, in certain circumstances, have been made in the books of account”.

However, ICDS does not recognizes the concept of prudence and rather only mentions

about the disallowance of recognition of expected losses or marked to market losses unless

specifically permitted by any other standard.It may be noted that currently no ICDS provides

for dealing with mark to market losses on derivatives. Moreover, without prudence being

recognised in ICDS, there is a likely hood that income may be recognised earlier than when it

should have been or expenses may be delayed from recognised.In this regard, it may be

noted that ICDS II provides for valuation of inventories at cost or lower of net realisable

value, whichever is lower. ICDS has remained silent on the treatment of mark-to-market


unrealized gains.As opposed to this, under the Indian AS, mark to market losses are

provided in view of the concept of prudence. Expected losses are also provided in

accordance with the relevant Indian GAAP standards. In this regard, the apex court

judgement of Vazir Sultan Tobacco is relevant.

Also, a major concept – materiality has also been removed in the current ICDS I. In auditing

materiality pertains to the largest number (threshold) of uncorrected errors, misstatements,

or erroneous disclosures or omissions that exist in the financial statements and yet are not

misleading. The auditor plans and executes an audit with a reasonable expectation of

detecting material misstatements. Keeping the above in mind, ICDS I might cause

implementation problems in the treatment of unadjusted audit differences which may need

to be considered in computing the taxable income.

Another change which might slightly affect the tax authorities is that ICDS does not define

the term “reasonable cause”. Hence, since it does not permit a change in the accounting

policy without any reasonable cause, it might end up into litigations and thereafter

judgments of the authorities. The present AS has been interpreted by several courts and

have held certain fundamental principles underlying change of accounting policies.

However, whether they will fit into the parameters of “reasonable cause” is to be seen in

coming days and months and years. The existing AS allows change in accounting policy if it is

i) Required by a Statute

ii) Compliance with Accounting Standard

iii) More appropriate presentation

However, since ICDS doesn’t specify them and states “reasonable cause” one can interpret

that the reason for change could be other than these also.

The AS 1 specifies that all significant accounting policies adopted in the preparation and

presentation of financial statement should be disclosed. The disclosure of the significant

accounting policies as such should form part of the financial statements and the significant

accounting policies should normally be disclosed at one place. However under the ICDS

there is no such mandate as to the place of disclosure. It has also been specified that the

disclosure of accounting policies or of changes therein cannot remedy a wrong or

inappropriate treatment of the item. Often it is seen that the accounting policies state that

this is the policy adopted which is though consistently followed but not in accordance with

the Accounting Standards issued by ICAI or now may be CBDT.

AS 1 recognises that in the following areas different accounting policies may be adopted by

different enterprises:

a) Methods of depreciation, depletion and amortisation

b) Treatment of expenditure during construction

c) Conversion or translation of foreign currency Loans

d) Valuation of inventories


e) Treatment of goodwill

f) Valuation of investments

g) Recognition of profits on long term contracts

h) Valuation of fixed assets

i) Treatment of contingent liabilities

Though the above list is not an exhaustive list and there can be other items too.

Important cases

1. [1959] 37 ITR 1 (SC) SUPREME COURT OF INDIACalcutta Co. Ltd.v.Commissioner of

Income-tax

Section 28(i) , read with section 145 of the Income-tax Act, 1961 (Corresponding to section

10(1), read with section 13 of the Indian Income-tax Act, 1922) - Business deductions -

Allowable as - Assessment year 1948-49 - Assessee dealt in land and property and carried on

land developing business - It maintained its accounts in mercantile method - In relevant

accounting period it sold certain plots and even though assessee received only a portion of

sale price, it entered in credit side of its account books whole of sale price of plots - Under

terms of side deeds assessee undertook to carryout developments within six months from

date of sale - Accordingly, it estimated a sum as expenditure for developments to be carried

out in respect of plots sold out during relevant year and debited said sum in its books of

account as accrued liability - Department did not take any exception to said estimated

expenditure in regard to quantum but disallowed assessee's claim for deduction of that sum

by relying upon provisions of section 10(2) of 1922 Act - Whether estimated expenditure

which had to be incurred by assessee in discharging a liability which it had already

undertaken under terms of sale-deeds of lands in question was an accrued liability which

according to mercantile system of accounting assessee was entitled to debit in its books of

account for accounting year as against receipts which represented sale proceeds of said

lands - Held, yes

2. AS 2 and ICDS II: Valuation of Inventories

ICDS II specifies various categories of inventories which are not to be valued as per ICDS II

and they are :-

a) Work in progress arising under construction contract including directly related to service

contract which is dealt with by Income Computation and Disclosure standard on

construction contracts.

b) Work in progress dealt with by any other ICDS

c) Shares, debentures and other financial instruments held as stock in trades which are

dealt with by ICDS on securities.

d) Producers inventories of livestock, agriculture and forest products, mineral oils, ores and

gases to the extent that they are measured at net realisable value.


e) Machinery spares, which can be used in conjunction with a tangible fixed asset and their

use is expected to be irregular, shall be dealt with in accordance with ICDS on tangible

fixed assets. In this regard, Accounting Standards Interpretation(ASI) 2 has been issued

which deals with which machinery spares are covered under AS 2 and AS 10 and what

should be the accounting for machinery spares under the respective standards.

The definition of inventory remains the same under both the standard.

The cost of purchase under the ICDS includes duties and taxes even if subsequently

recoverable from taxing authorities. This is in line with the provisions of Section 145A of the

Income-tax Act,1961. However, under the AS, the cost of purchase doesn’t include duties

and taxes if subsequently recoverable from taxing authorities, though Section 145A

overrides Section 145. Thus it can be safely argued that for the purchase and sales, ICDS can

not be applied, since Section 145A starts with a non-obstante clause.

As per AS-2 duty drawback is deducted in determining the cost of purchases, However ICDS

doesn’t specify this.

Valuation of opening inventory- Conflict of Section 45(2)

As per ICDS II- the value of the inventory as on the beginning of the previous year shall be (i)

the cost of inventory available, if any, on the day of the commencement of the business

when the business has commenced during the previous year and (ii) the value of the

inventory as on the close of the immediately preceding previous year, in any other case.

As against this, Section 45(2) says that the profits and gains arising from the transfer by way

of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade

of a business carried on by him shall be chargeable to income-tax as his income of the

previous year in which such stock-in-trade is sold or otherwise transferred by him and, for

the purposes of Section 48, the fair market value of the asset on the date of such conversion

or treatment shall be deemed to be the full value of the consideration received or accruing

as a result of the transfer of the capital asset.

Thus, as per ICDS-2 whether the value on which capital gains has already been paid will be

considered as cost of inventory or otherwise- there is no clarity.

ICDS provides that the inventory of a service provided is to be valued at cost or net

realisable value whichever is lower and cost of services to consist of labour and costs of

personnel directly engaged in providing the services including supervisory personnel and

attributable overheads. Under the AS-2 which did not provide for valuation of work in

progress arising in ordinary course for the service providers.These Chartered

Accountantsnow have to value inventory of services provided and report the same which

until now was not being done. Difficulty may arise where the changeability itself depend on

success of the services.

Another major issue which might arise due the effective changes is the rise of litigations due

to the unexplained term “reasonable cause”. ICDS II says that method of valuation of

inventory shall not be changed without a reasonable cause. It has not given any description

on the meaning of the phrase “reasonable cause” which shall again lead to the interruption

of tax authorities for analyzing the reasonability of the change in method by any assessee.

AS 2 specify that the method of valuation of inventories may be changed if it is considered

that the change would result in a more appropriate presentation.


ICDS II deals with valuation of inventory in case of certain dissolutions and says that in case

of dissolution of a partnership firm or association of persons or body of individuals,

notwithstanding whether business is discontinued or not, the inventory on the date of

dissolution shall be valued at net realisable value. There being no specific provision to allow

such NRV as cost to the successor of the business, there may be difficulties. In this regard,

the decision of the Apex Court in the case of ALA Firm 189 ITR 225(SC) in this regard may be

referred to. Also the decision of the Apex Court in the case of Sakthi Trading Co Ltd Vs CIT

(2001) 250 ITR 871 may be looked into. The existing AS 2 has no such mechanism because of

the assumption of going concern.

Regarding interest and borrowing cost, Para 11 of the ICDS II states that interest and

borrowing costs shall not be included in the cost of inventories , unless they meet the

criteria for recognition of interest as a component of the cost as specified in ICDS on

borrowing cost. In this regard, it may be noted that ICDS on borrowing costs defines

qualifying asset interalia as “inventories that require a period of twelve months or more to

bring them to a saleable condition and thus only these types of inventory is eligible for

inclusion of borrowing cost in the inventory. However, in Para 25 of this ICDS dealing with

transitional provisions it has been stated that the interest and borrowing costs, which do

not meet the criteria for recognition of interest as a component of the cost as per para11

but included in the cot of opening inventory as on the 1st day of April, 2015 shall be taken

into account for determining costs of such inventory for valuation as on the close of the

previous year beginning on or after 1stday of April, 2015 if such inventory continue to

remain part of inventory as on the close of the previous year beginning on or after 1st day of

April, 2015.

The disclosure requirement specifies that the accounting policies adopted in measuring

inventories including the cost formulae used and the total carrying amount of inventories

and its classification appropriate to a person.

Important Cases

1. [1991] 54 TAXMAN 499 (SC)SUPREME COURT OF INDIACommissioner of Income-tax

v.British Paints India Ltd.

Section 145 of the Income - tax Act, 1961 - Method of accounting - Valuation of closing stock

- Assessment years 1963-64 and 1964-65 - Assessee - company was engaged in business of

manufacture and sale of paints - It had valued goods in process and finished products

exclusively at cost of raw materials and totally excluding overhead expenditure, i.e., stock-

in-trade was valued at 84.49 per cent representing actual cost of raw material and overhead

charges representing 15.51 per cent of total cost had been excluded from assessee's

valuation of stock - Whether ITO was justified in rejecting assessee's method of valuation

and in holding that assessee's goods in process and Finished products were liable to be

valued at 100 per cent of cost which included overhead expenditure and not at 84.49 per

cent as claimed by assessee - Held, on facts, yes


2. [1991] 55 TAXMAN 497 (SC)SUPREME COURT OF INDIAA.L.A. Firmv.Commissioner of

Income-tax

Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment

year 1961-62 - On dissolution of assessee-firm, its stock-in-trade was revalued and certain

amount was shown as 'difference on revaluation' in the profit and loss account - Whether,

having valued stock-in-trade at market price, partners of assessee could not contend that

valuation should be on some other basis and, thus, such surplus on valuation was to be

charged to tax as profits of firm - Held, yes

3. [2007] 161 TAXMAN 162 (SC)SUPREME COURT OF INDIACommissioner of Income-tax,

Udaipur v.Hindustan Zinc Ltd.

Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock -

Assessment year 1996-97 - Whether correct principle of accounting is to enter stock in

books of account at cost unless value is required to be reduced by reason of fall in market

value of goods below original cost - Held, yes - Whether therefore, goods should not be

written down below cost price except where there is an actual or anticipated loss - Held, yes

- Whether if fall in price is only such as it would reduce merely prospective profit, there

would be no justification to discard initial valuation at cost - Held, yes - Assessee- company

was engaged in business of producing zinc concentrate which was utilised by it captively -

During assessment year 1996-97, certain stock of zinc concentrate got accumulated - Since

domestic consumption of accumulated stock was not possible, assessee decided to export

same - Assessee estimated/valued net realisable value of stock by adopting London Metallic

Exchange Price which was lower than Weighted Average Cost (WAC) on 31-3-1996, by Rs.

27.08 crores, while in past, it had been valuing closing stock of zinc concentrate for captive

consumption at WAC - Assessing Officer observed that auditors’ report indicated that if

accounting policy of earlier years was to be followed, then in that event, profits would have

increased by Rs. 27.08 crores and, accordingly, added back Rs. 27.08 crores to income of

assessee - Whether on facts, assessee’s valuation could not be sustained - Held, yes

4. [2001] 118 TAXMAN 301 (SC)SUPREME COURT OF INDIASakthi Trading

Co.v.Commissioner of Income-tax

Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of closing

stock - Assessment year 1984-85 - Whether where on dissolution of assessee-firm

because of death of one partner business is taken over by remaining partners without

discontinuance of its business and value of closing stock on date of dissolution

determined under regular method of accounting is accepted by partners in settlement of

accounts for dissolution purposes, it is impermissible for Assessing Officer to substitute

market value in respect of closing stock alone for purpose of determining income of firm

up to date of dissolution - Held, yes


5. [1991] 55 TAXMAN 497 (SC) SUPREME COURT OF INDIA, A.L.A. Firv.Commissioner of

Income-tax


year 1961-62 - On dissolution of assessee-firm, its stock-in-trade was revalued and

certain amount was shown as 'difference on revaluation' in the profit and loss account -

Whether, having valued stock-in-trade at market price, partners of assessee could not

contend that valuation should be on some other basis and, thus, such surplus on

valuation was to be charged to tax as profits of firm - Held, yes

3. AS 7 and ICDS III: Construction Contracts

AS 7 specify that it doesn’t deal with Real Estate Developers for which there is a separate

guidance note by ICAI. However, ICDS III doesn’t clarify this.

AS 7 provides for the recognition of losses including probable or expected losses to be

recognized fully and not as an asset when it is probable that these costs are recoverable.

ICDS C does not permit the recognition of expected losses on onerous contracts.

AS 7 provided that contract revenue to be recognised if it is possible to reliably estimate the

outcome of a contract. However, ICDS III has omitted this criteria. ICDS III says that contract

revenue shall comprise of:

a) The initial amount of revenue agreed in the contract, including retentions; and

b) Variations in contract work, claims and incentive payments

I. To the extent that it is probable that they will result in revenue; and

II. They are capable of being reliably measured.

It is also specified that where contract revenue already recognised as income is subsequently

written off in the books of accounts as uncollectible, the same shall be recognised as an

expense and not as an adjustment of the amount of contract revenue.

AS 7 does not permit the recognition of revenue during the early stages of a contract but

ICDS III provides for recognition of revenue only to the extent of cost incurred in the early

stages of a contract where the outcome cannot be estimated reliably. Also, this early stage

of contract shall not extend beyond 25% of the stage of completion.

These changes will happen to affect the accounting of various entities because where earlier

recognition of revenue not being allowed at all and now being allowed partially. Also, the

disallowance of recognition of expected losses on onerous contracts will lead to accounting

discrepancies among entities.

Incidental income –interest etc-whether the decision of Karnal Cooperative and Bokaro Steel-Still Valid or overruled. ICDS dealing with the Recognition of revenue deals with this in Para 7 of that ICDS and makes it taxable.

Retention money- to be recognised on POCM basis.As per Clause 10 –Contract revenue shall comprise of the initial amount of revenue agreed in the contract including retention. Taxed only upon fulfilment of contractual conditions

[Simplex Concrete Tiles India Pvt. Ltd (179 ITR 8) (Calcutta HC)]

MAT mismatch:


In case of taxpayer following Completed Contract method in books of accounts-

Year % of project completed in

the year

Income under ICDS

Book profits under MAT

Remarks

1 20 NIL NIL Higher income under normal computation

2 20 80,000 NIL

3 30 60,000 NIL

4 20 40,000 NIL

5 10 20,000 2,00,000 Taxable under MAT

Total 100 2,00,000 2,00,000

4. AS 9 and ICDS IV: Revenue Recognition

AS 9 doesn’t apply to Companies engaged in Insurance business. ICDS is silent on the same

and

AS 9 permits the use of both percentage completion method and completed service

contract method but ICDS IV permits only the use of percentage completion method.

Although, completed contract method does not accurately reflect revenues, expenses and

profits in the period in which they are incurred and earned, the tax advantages of this

method were obvious – the deferral of tax liability of future years. This cannot be availed

now due to the applicability of ICDS IV. Accounting entries shall also slightly change in the

percentage completion method.

Another change which has taken place is AS 9 provides for the postponement of recognition

of revenue in relation to any claim if the ability to assess the ultimate collection with

reasonable certainty is lacking. ICDS IV provides that where the ability to assess the ultimate

collection with reasonable certainty is lacking at the time of raising any claim for escalation

of price and export incentives, revenue recognition in respect of such claim shall be

postponed to the extent of uncertainty involved. With regard to this what people could do

was postpone the recognition of revenue and thereby artificially reduce the amount of net

profit after tax, reserves and surpluses of the year and the net current assets leading to an

effect on taxes also but ICDS has limited the postponement only to escalation of price and

export incentives.

Revenue from Service transactions shall be recognised by percentage completion method.

Under this method, revenue from service transactions is matched with the service

transaction costs incurred in reaching the stage of completion, resulting in the

determination of revenue, expenses and profits which can be attributed to the proportion

of work completed. ICDS on construction contract also requires the recognition of revenue

on this basis. The requirements of that standard shall mutatismutandis apply to the

recognition of the revenue and the associated expenses for a service transaction.

Important cases

1. [2013] 38 taxmann.com 100 (SC)SUPREME COURT OF INDIACommissioner of Income-

taxv.Excel Industries Ltd.*


Section 28(iv) of the Income-tax Act, 1961 - Business income - Value of any benefit or

perquisite, arising from business or exercise of profession [Advance license and duty

entitlement pass book] - Whether until imports are actually made by assessee, benefits

under advance license or under duty entitlement pass book represent only hypothetical

income which cannot be brought to tax by applying provisions of section 28(iv) - Held, yes

[Paras 20 & 21] [In favor of assessee]

2. [1999] 104 TAXMAN 547 (SC)SUPREME COURT OF INDIAUCOBankv.Commissioner of

Income-tax

Section 5, read with sections 119 and 145, of the Income-tax Act, 1961 - Income -

Accrual of - Assessment year 1981-82 - Whether in view of CBDT circular, dated 9-10-

1984, interest on a loan whose recovery is doubtful and which has not been recovered

by assessee-bank for last three years but has been kept in a suspense account and has

not been brought to profit and loss account of assessee, cannot be included in income of

assessee - Held, yes - Whether CBDT circular dated 9-10-1984 is in conflict with

provisions of section 145 - Held, no

Section 119 of the Income-tax Act, 1961 - Central Board of Direct Taxes - Power to issue

circulars, etc. - Whether, since Board has considered it necessary to lay down a general

test for deciding what is a doubtful debt in circular dated 9-10-1984 and directed that all

ITOs should treat such amounts as not forming part of income of assessee until realised,

this direction by way of a circular cannot be considered as travelling beyond powers of

Board under section 119 and such a circular is binding under section 119 - Held, yes

3. [1971] 82 ITR 835 (SC)SUPREME COURT OF INDIAMorvi Industries Ltdv.Commissioner of

Income-tax

Section 37(1) , read with section 5 of the Income-tax Act, 1961 [Corresponding to section

10(2)(xv), read with section 4(1)(b)(ii), of the Indian Income-tax Act, 1922] – Business

expenditure – Allowability of – Assessment years 1956-57 and 1957-58 – Assessee-

company, being managing agent of its subsidiary company and maintaining its accounts

on mercantile system, relinquished certain amounts representing fixed monthly officer

allowance and commission on sales, payable to it by managed-company in view of heavy

financial losses suffered by managed company – Amounts of commission were

relinquished after they had become "due" but before they were "payable" in terms of

managing agencies agreement – Tribunal held that relinquishment by assessee of its

income after it had become due was of no effect and that relinquishment was not for

benefit of assessee so as to allow assessee's claim for amounts relinquished as

permissible deduction under section 10(2)(xv) of 1922 Act – Whether postponement of

date of payment did not affect accrual of income, and fact that amount of income was

not subsequently received by assessee would not also detract from or efface accrual of

income – Held, yes – Whether since amounts of income for years in question were given

up unilaterally by assessee after they had accrued to it, assessee-company could not


escape liability to tax on those amounts – Held, yes – Whether since there was nothing

to show that amounts were relinquished on grounds of commercial expediency or for

advancing assessee's business interests, assessee was not entitled to claim deduction of

said amounts as business expenditure under section 10(2)(xv) of 1922 Act – Held, yes

4. [1986] 24 TAXMAN 337 (SC)SUPREME COURT OF INDIAState Bank of

Travancorev.Commissioner of Income-tax

Section 5, read with section 145, of the Income-tax Act, 1961 - Income - Accrual of -

Assessee-bank, following mercantile system of accounting, charged interest on advances

considered doubtful of recovery, called sticky advances by debiting concerned parties

but, instead of carrying it to profit and loss account, credited it to separate account

styled 'Interest suspense account' In its return assessee disclosed such interest

separately and claimed that same was not taxable in its hands as income of concerned

years - Whether in view of concept of real income, impugned interest, which had

accrued to assessee, could be excluded from assessee's taxable income of concerned

years - Held, no

5. [1997] 091 TAXMAN 351 (SC)SUPREME COURT OF INDIAGodhra Electricity Co.

Ltd.v.Commissioner of Income-tax

Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1969-70

to 1972-73 - Assessee-company a licensee to generate and supply electricity to its

consumers, from 1963 enhanced tariff - Suit was filed by consumers which was decreed

against assessee ultimately - Supreme Court decided dispute in favour of assessee-

company in 1969 - During pendency of litigations assessee though accounting for

enhanced tariff could not recover same and even after decisions in its favour in view of

Government's advice assessee was prevented from realising amounts in question -

Ultimately, company was taken over by Government and later transferred to Electricity

Board - Whether in above circumstances, since assessee was not able to collect

enhanced charges, necessary entries made in its books of account represented only

hypothetical income and it could not be brought to tax as it did not represent income

which had really accrued even though assessee-company was following mercantile

system of accounting - Held, yes

5. AS 10 and ICDS V: Tangible Fixed Assets

ICDS V provides that “tangible fixed asset” is an asset being land, building, machinery, plant

or furniture held with the intention of being used for the purpose of producing or providing

goods or services and is not held for the sale in the normal course of business. The definition

is same except that the AS 10 refers to the word “asset” as against the specific items of land,

building, machinery, plant or furniture referred to in ICDS V. Moreover, the AS specifically


says that the standard doesn’tdeal with the following items to which special consideration

applies i.e.,

a) Forests, plantations and similar regenerative naturalresources;

b) Wasting assets including mineral rights , expenditure on the exploration for and

extraction of mineral oil, natural gas and similar non regenerative resources;

c) Expenditure on real estate development

d) Livestock

Though it has been specified in AS that expenditure on individual items of fixed assets used

to develop or maintain the activities covered in (i) to (iv) above, but separable from those

activities are to be accounted for in accordance with the AS 2.

AS 10 applies to Good will but ICDS doesn’t

One difference which can be highlighted majorly is the value at which an asset shall be

acquired in exchange for another fixed asset or shares or securities. AS 10 says to record the

fixed asset at the fair value of the asset given or acquired whichever is more clearly evident

while ICDS V says to record the asset acquired in exchange at the actual cost of the asset so

acquired. This although may not cause difficulties in accounting but shall mandatorily lead

to discrepancies in valuation of the fixed asset and thereby shall affect the balance sheet

also.

There is no concept of revaluation of fixed assets under ICDS whereas the AS 2 provides for

revaluation of the fixed assets.

ICDS V says that depreciation on tangible fixed asset shall be computed in accordance with

the provisions of the Act and again specifies that income arising on transfer of a tangible

fixed asset shall be computed in accordance with the provisions of the Act. AS 10 provides

for guidance on retirements and disposals of the fixed assets.

ICDS V specifically provides that the following disclosures shall be made regarding the

tangible fixed assets, namely:-

a) Description of asset or blocks of assets

b) Rate of depreciation

c) Actual cost or written down value, as the case may be

d) Additions or deductions during the year with dates, in the case of any addition of an

asset, date put to use, including adjustment on account of-

-Central Value added tax credit claimed and allowed under the Cenvat Credit Rules, 2004

-change in rate of currency

-subsidy or grant or reimbursement, by whatever name called.

e) Depreciation allowable

f) Written down value at the end of the year.

The existing AS 10 has also disclosure requirement but not exactly in the above manner.

There is no mention regarding maintenance of ICDS specific FA register, which was though

proposed earlier.


6. AS 11 and ICDS VI: Effects of Changes in foreign exchange rates

ICDS requires premium, discount or exchange differences on forward contracts that are

intended for trading or speculation purposes, or that are entered into to hedge the foreign

currency risk of a firm commitment of a highly probable forecast transaction to be

recognized at the time of settlement. This is different from the recognition of gains and

losses on mark to market basis or recognition of only losses in line with the principle of

prudence. Due to this the recognition of losses stands delayed thereby leading to a rise in

income and taxes because the settlement of the losses on foreign currency and forward

contracts usually takes time.

AS 9 provides for accumulation of exchange differences arising from the translation of

financial statements of non-integral foreign operations in a foreign currency translation

reserve in a balance sheet while ICDS VI provides for recognition of such differences as

income or expense. This implies that now since we have to route the exchange differences

through the profit and loss account, taxes shall be levied on the same and the income shall

be accordingly higher on a positive exchange difference and lower on a negative exchange

difference.

Section 43A of the Income Tax Act, 1961 as well as Rule 115 of the Income-tax Rules, 1962 are to be followed in supersession of even ICDS and has been specifically stated in the ICDS itself.

Important Cases

1. [1979] 116 ITR 1 (SC)SUPREME COURT OF INDIASutlej Cotton Mills Ltd. VsCommissioner

of Income-tax

Section 28(1) of the Income-tax Act, 1961 (Corresponding to section 10(1) of Indian

Income-tax Act, 1922) – Business loss/ deductions – Allowable as - – Assessment years

1957-58 and 1959-60 – Assessee-company after remitting certain amounts from

Pakistan where it was doing business in fabrics, claimed that it suffered business loss

due to devaluation of Pakistani rupee – Revenue authorities rejected assessee’s claim –

High Court also took view that it was not a business loss as it was caused by devaluation

of rupee which was an act of state – Whether where profit or loss arises to an assessee

on account of appreciation or depreciation in value of foreign currency held by him, on

conversion into another currency, such profit or loss would ordinarily be trading profit or

loss if foreign currency is held by assessee on revenue account or as a trading asset or as

part of circulating capital embarked in business – Held, yes – Whether, however, if

foreign currency is held as a capital asset or as fixed capital, such profit or loss would be

of capital nature – Held, yes – Whether therefore, matter was to be remanded to

Tribunal to firstly determine as to whether amounts in question were held in Pakistan as

capital asset or as trading asset – Held, yes

2. CIT Vs Woodward Governor India P Ltd (2009) 312 ITR 254(SC)

3. ACIT Vs EleconEngg. Co Ltd (2010) 189 Taxman 83(SC)

4. Oil & Natural Gas Corporation Ltd Vs CIT(2010) 322 ITR 180(SC)


7. AS 12 and ICDS VII: Government Grants

A major difference which ICDS VII has brought in is the disallowance of the use of capital

approach method for recording of government grants. Thus, with the effect of ICDS, grants

cannot be anymore treated as a part of the shareholder’s funds. It has to be either treated

as revenue receipt or reduced from the cost of the fixed asset depending on the purpose

for which the grant or subsidy is given. Thus, the theory of recognizing government grants

outside the profit and loss account merely because it represents an incentive provided by

the government without related costs stands dismissed in the newly formulated ICDS.

ICDS VII mentions that recognition of government grants shall not be postponed beyond

the date of actual receipt even though all the recognition conditions in accordance with the

accounting standards are not met. This has been done in order to reduce litigations

regarding the recognition criteria and also to provide certainty on the topic. Under the AS

12 it is provided that mere receipt of a grant is not necessarily conclusive evidence that

conditions attaching to the grant have been or will be fulfilled.

AS provides that Government Grant in the nature of promoters’ contribution (i.e. they are

given with reference to the total investments in an undertaking or by way of contribution

towards its total capital outlay and no repayment is ordinarily expected, are credited

directly to shareholders funds. There is no such mention in the ICDS.

Important cases

1. [1997] 94 TAXMAN 368 (SC)SUPREME COURT OF INDIASahneySteel& Press Works

Ltd.v.Commissioner of Income-tax

Section 4 of the Income-tax Act, 1961 - Income - Assessable as - Assessment year 1974-75 -

According to a notification issued by Government of Andhra Pradesh, certain facilities and

incentives were to be given to new industrial undertakings which commenced production

on or after 1-1-1969 with investment capital not exceeding 5 crores for five years from date

of commencement - Production incentives were not available unless and until production

had commenced - In terms of said notification assessee received refund of sales tax -

Whether refund of sales tax was a revenue receipt - Held, yes

2. [2009] 185 TAXMAN 409 (SC)Mepco Industries Ltd. v.Commissioner of Income-tax

Section 154 of the Income-tax Act, 1961 - Rectification of mistakes - Apparent from

record - Assessment years 1993-94 and 1994-95 - Assessee, engaged in business of

manufacture of potassium chlorate, received power subsidy for two years, which it

initially offered as revenue receipt in its returns of income - However, thereafter, it

sought revision of assessment orders contending that subsidy amount was a capital

receipt and, hence, not liable to be taxed - Commissioner allowed revision petitions -

Subsequently, in case of Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/ 94

Taxman 368 (SC), Supreme Court held that incentive subsidy admissible to that

company was a revenue receipt and, hence, it was liable to be taxed under section 28 -

Following said judgment, Commissioner passed order of rectification on ground that

power tariff subsidy given to assessee was admissible only after commencement of


production and, consequently, it constituted operational subsidies and not capital

subsidies - Whether in each case one has to examine nature of subsidy and this exercise

cannot be undertaken under section 154 - Held, yes - Whether, on facts, when

Commissioner, while passing orders under section 264, had taken view that subsidy in

question was a capital receipt not taxable under Act, he was justified in invoking section

154 and holding subsidy in question to be revenue in nature based on judgment of

Supreme Court in case of Sahney Steel & Press Works Ltd. (supra) - Held, no

8. AS 13 and ICDS VIII:Accounting for Investments

This ICDS deals with securities held as stock in trade.

Accounting Standard 13 (Accounting for Investments) deals with current investments, long

term investments and property but excludes shares, debentures or other securities which

are held as stock in trade by any assessee. ICDS VIII (Securities) on the other hand deals

only with securities held as stock in trade. Hence, since both the AS 13 and ICDS VIII deal

with two totally irreconcilable topics, collation of both shall stand unjustified. ICDS VIII

requires the comparison of cost and net realizable value for securities held as stock-in-trade

to be assessed category wise and not for each individual security. ICDS VIII also quotes that

securities that are not quoted or are quoted irregularly shall be valued at cost. This could

represent a change in practice for some entities.

ICDS provides that cost shall be determined on FIFO basis.

At the end of the previous year, securities held as stock in trade shall be valued at actual

cost initially recognised or net realisable value at the end of the previous year whichever is

lower.

Securities are attached importance in a sense that ICDS 2 does not deal with securities and

a specific standard has been provided for the securities.

Net realisable value is not defined in this Standard even though it is defined in the ICDS 2.

There are bound to be disputes in this regard. Only fair value is defined as the amount for

which an asset could be exchanged between a knowledgeable, willing buyer and a

knowledgeable willing seller in an arm’s length transaction.

Key differences between AS-13 and ICDS VIII-The key basis and change are disclosed herein

below.

Basis AS – 13 ICDS – VIII

Applicability AS 13 includes long term investments and current investments but excludes securities held as stock-in-trade

It deals only with securities held as stock-in-trade

Approach for year-end valuation

Individual security wise Portfolio approach(see example below)

Method of valuation of unlisted securities at the year-end

Lower of Cost or NRV Actual cost method

Method of Weighted Average method FIFO method


determination of cost where specific identification is not possible

Key issues that may be involved are:

a) Portfolio approach vis-a-vis individual security wise valuation-

Individual Security Cost NRV Valuation

Company A 100 20 20

Company B 105 30 30

Company C 145 40 40

Company D 100 300 100

Valuation as per AS-13 190

Valuation as per ICDS 450 390 390

b) Practical difficulty in valuing securities on FIFO basis vis-a-vis weighted average method

Also, with respect to pre-acquisition period interest, ICDS allows the same to be

reduced from actual cost. It is not treated as income and hence, is in parity with the

prevalent industry practice.

9. AS 16 and ICDS IX: Borrowing Costs

The major changes which have taken place in AS 16 with regard to ICDS IX is in the method

of capitalisation of borrowing costs. In AS 16 we are supposed to suspend the capitalisation

of borrowing costs during extended periods in which active development is interrupted

while in that of ICDS IX, nothing about the same has been mentioned hence we assume that

capitalisation of borrowing costs should not be suspended even where active development

of a capital asset is interrupted. Also, in AS 16, capitalisation of borrowing cost is to be done

only on incurrence of expenditure on qualifying asset, incurrence of borrowing cost and on

activities that are necessary to prepare the asset for its intended use or sale while in ICDS IX

it is mentioned to commence to capitalise the borrowing costs from the date on which the

funds have been borrowed. There has also been some changes in the capitalisation of

general borrowings. These changes in the method and timing of capitalisation can bring

about some discrepancies in accounting.

Also, in AS 16, income from temporary investments was to be deducted from borrowing

costs but in ICDS IX, no mention has been made about the same hence we assume it as non-

deductible and thereby a taxable income.

Borrowing in AS 16 specifies that exchange difference arises from foreign currency

borrowing to the extent that they are regarded as an adjustment to interest costs may be

included in borrowing cost. However these are not covered in ICDS IX.

Hindustan Lever Ltd has taken a loan of USD 10 Million on April 1, 2015, for a specific

project @3% p.a., payable annually. On April 1, 2015 the exchange rate Rs. 60/USD. The


exchange rate, as at March 31, 2016, is Rs. 46/USD. The corresponding amount could have

been borrowed by HLL. in local currency @11% p.a. on April 1, 2015. In this case, AS 16

prescribed the calculation of difference attributable as interest.

Qualifying asset is defined in a simple manner in the AS 16 as an asset which takes

substantial period of time to get ready for its intended use or sale. In this regard the ASI

explains the meaning of the term “Substantial period of time”. The following assets

ordinarily take 12 months or more to get ready for intended use or sale unless the contrary

is proved by the enterprise:

a) Assets that are constructed or otherwise produced for an enterprise’s own use e.g.

assets constructed under major capital expansions.

b) Assets intended for sale or lease that are constructed or otherwise produced as discrete

projects for example ships or real estate developments.

In case of inventories, substantial period of time is considered to be involved where time is

the major factor in bringing about a change in the condition of the inventory. For example,

liquor is often required to be kept in store for more than 12 months for maturing.

ICDS however, says that qualifying asset means

a) Land, building, machinery, plant or furniture being tangible assets.

b) Know-how, patents, copy rights, trade marks, licences , franchises or any other business

or commercial rights of similar nature, being intangible assets.

c) Inventories that require a period of 12 monthor more to bring them to a saleable

condition.

Thus, as per ICDS all assets other than inventories (excluding inventories as given

hereinabove) are considered for capitalisation of borrowing costs. Until now , the Act

required that capitalisation of borrowing cost only when there was an extension of business.

This condition of extension is now removed by the Finance Act, 2015. Thus ICDS is now in

line with the Act.

Amendment in Section 36(1)(iii) – Finance Act, 2015 The Finance Act 2015 had omitted the Words “for extension of existing business or profession” in first proviso from 1/4/2016 thereby meaning that any amount of interest paid, in respect of capital borrowed for acquisition of an asset for any period beginning from the date when the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, is not allowable as a deduction. Para 6 ,7 8 and 9 deals with the capitalisation part in ICDS. Interest costs pertaining to acquisition of asset now to be capitalised.

Income from temporary deployment of surplus funds – Not to be reduced from borrowing cost Treatment aligned with Tuticorin Alkali decision (227 ITR 172)(SC) already discussed hereinabove.

Important Cases


1. [1975] 98 ITR 167 (SC)SUPREME COURT OF INDIAChallapalli Sugars Ltd.V.Commissioner

of Income-tax

Section 43(1) , read with section 32 of the Income-tax Act, 1961 (Corresponding to section

12B(1) of the Indian Income-tax Act, 1922) – Actual cost – Whether for purpose of

deduction on account of depreciation and development rebate, interest paid before

commencement of production on amount borrowed for acquisition and installation of plant

and machinery can be considered to be part of actual cost of assets to assessee - Held, yes

2. [1997] 93 TAXMAN 502 (SC)SUPREME COURT OF INDIATuticorin Alkali Chemicals

&Fertilizers Ltd.v.Commissioner of Income-tax

Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as -

Assessment year 1980-81 - Whether interest earned on short-term investment of funds

borrowed for setting-up of factory during construction of factory before commencement of

business-has to be assessed as income from other sources and it cannot be said that interest

income is not taxable on ground that it would go to reduce interest on borrowed amount

which would be capitalised - Held, yes

3. [1999] 102 TAXMAN 94 (SC)SUPREME COURT OF INDIACommissioner of Income-

taxv.Bokaro Steel Ltd.


years 1965-66 to 1971-72 - Assessee-company was in process of constructing and erecting

its plant and had not started any business during relevant assessment years - It received

certain amounts through (i) rent charged by assessee from its contractors for housing

workers and staff employed by contractor for construction work of assessee, (ii) hire

charges for plant and machinery given to contractors for use in construction work of

assessee, (iii) interest from advances made to contractors for purpose of facilitating work of

construction, and (iv) royalty for excavation and use of stones lying on assessee’s land for

construction work - First three receipts had been adjusted against charges payable to

contractors and, thus, had gone to reduce cost of construction - Whether first three receipts

being intrinsically connected with construction of assessee’s plant, would be capital receipt

and not income of assessee from any independent source - Held, yes - Whether similarly

royalty received for stone excavated from assessee’s land would go to reduce cost of plant

and could not be taxed as income - Held, yes

4. [2008] 167 TAXMAN 206 (SC)SUPREME COURT OF INDIADeputy Commissioner of

Income-taxv.Core Health Care Ltd.*

Section 36(1)(iii) , read with Explanation 8 to section 43(1), of the Income-tax Act, 1961 -

Interest on borrowed capital - Assessment year 1992-93 - Whether proviso inserted in

section 36(1)(iii) with effect from 1-4-2004 has to be read as prospectively - Held, yes -

Whether what section 36(1)(iii) emphasises on is user of capital and not user of asset


which comes into existence as a result of borrowed capital, unlike section 37(1) which

expressly excludes an expense of a capital nature - Held, yes - Whether Legislature has,

therefore, made no distinction in section 36(1)(iii) between ‘capital borrowed for a

revenue purpose’ and ‘capital borrowed for a capital purpose’ and an assessee is

entitled to claim interest paid on borrowed capital provided that capital is used for

business purpose irrespective of what may be result of using such borrowed capital -

Held, yes - Whether Explanation 8 to section 43 as well as concept of determination of

‘actual cost’ have no application to section 36(1)(iii) as this section does not incorporate

concept of depreciation - Held, yes - Assessee had a running business of manufacturing

and selling of intravenous solutions - It installed new machineries on which production

was not started during relevant year - Assessee claimed deduction of interest on

borrowings made for purchasing these machineries - Whether assessee’s claim was to

be allowed - Held, yes

10. AS 29 and ICDS X: Provisions, Contingent Liabilities and Contingent assets

ICDS X specifically says that the standard deals with provisions, contingent liabilities and

contingent assts, except those

a) Resulting from financial instruments

b) Resulting from executory contracts

c) Arising in insurance business from contracts with policyholders; and

d) Covered by another ICDS

An important point to be noted is that the ICDS provides that the term provision is also used

in the context of items such as depreciation, impairment of assets and doubtful debts which

are adjustments to the carrying amounts of assets and are not addressed in this ICDS. Thus,

the issues relating to the provisions of bad and doubtful debts which have been held to be

not eligible for being deducted while computing book profit are sought to be taken care of

by this exception.

Unlike the existing AS 29, ICDS X requires the recognition of provisions only if it is reasonably

certain that an outflow of resources embodying economic benefits will be required to settle

the obligation and a reliable estimate can be made of the amount of the obligation.The

phrase “reasonably certain” has not been defined. As against this, AS 29 uses the word

“Probable”. This might cause a certain delay in the recognition of provisions although not

much.

The definition of the term Present obligation also uses the phrase “reasonably certain” as

against “Probable” used in AS 29.

AS 29 clarify that “obligation” may be legally enforceable and may arise from normal

commercial business practice or to act in a desirable business atmosphere. However, the

ICDS does not define the term “obligation”. Thus, provisions made in order to follow normal

business practices arising out of good customer relationship may not be allowed. Take the

example of MNCs who are generally in the forefront in this.


Contingent Assets and reimbursement claims are recognised if inflow of economic benefits/

reimbursement is “virtually certain” as against “reasonably certain”. The term “reasonably

certain” has not been defined and thus prone to disputes.

Important judgement.

1. Rotork Controls India P Ltd (2009) 314 ITR 62(SC)

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of -

Assessment years 1991-92 to 1994-95 - Whether for a provision to qualify for

recognition, there must be a present obligation arising from past events, settlement of

which is expected to result in an outflow of resources and in respect of which a reliable

estimate of amount of obligation is possible - Held, yes - Whether if historical trend

indicates that in past large number of sophisticated goods were being manufactured and

defects existed in some of items manufactured and sold, then provision made for

warranty in respect of army of such sophisticated goods would be entitled to deduction

from gross receipts under section 37(1), provided data is systematically maintained by

assessee - Held, yes

1.5 ICDS and MAT Computation

1. In case of MAT income- even though accounts are prepared as per AS- you are assuming that to be correct for the purposes of payment of taxes. In the case of MAT you are assuming that the accounts must be prepared as per the Accounting Standards where as for normal computation you would not be doing so. Levying tax on book profit which is determined as per the AS and again asking companies to restate the accounts using ICDS appears to be a tedious task. May be the coming budget will see changes in the provisions relating to MAT by including ICDS in Section 115JB and 115JC dealing with MAT and AMT.

1.6 Some other Cases in relation to the Computation vis-à-vis accounting Standards a) Taparia Tools Ltd (2015) 55 taxmann.com 361(SC) b) Madras Industrial Investment Corporation Ltd Vs CIT(1997) 225 ITR 102(SC)

Thanking You,

CA Ramesh Kumar Patodia

[email protected]

Disclaimer: The analysis in this booklet is solely for information purposes. We are not offering it as a legal, accounting or other professional service advice. While best efforts have been made in this preparation, we assume no liabilities of any kind with respect to the accuracy or completeness of the contents, and specifically disclaim from any loss caused, is alleged to have been caused directly or indirectly by the information contained herein. Readers are advised not to take expert opinion.

mailto:[email protected]

Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015

1

ICDS 1 (NOTIFICATION: 32/2015) ICDS 2 (NOTIFICATION: 87/2016)

Main Paragraph In exercise of the powers conferred by

subsection (2) of section 145 of the

Income tax Act, 1961 (43 of 1961) and

in supersession of the notification of

the Government of India in the

Ministry of Finance, Department of

Revenue, published in the Gazette of

India, Part II, Section 3, Subsection

(ii), vide number S.O 69(E) dated the

25th January, 1996, except as respects

things done or omitted to be done

before such supersession, the Central

Government hereby notifies the

income computation and disclosure

standards as specified in the Annexure

to be followed by all assessees,

following the mercantile system of

accounting, for the purposes of

computation of income chargeable to

income tax under the head "Profit and

gains of business or profession" or "

Income from other sources". This

notification shall come into force with

effect from 1st day of April, 2015, and

shall accordingly apply to the

assessment year 2016-17 and

subsequent assessment years.

In exercise of the powers conferred

by subsection(2) of section 145 of

the Income tax Act, 1961 (43 of

1961, the Central Government

hereby notifies the income

computation and disclosure standards

as specified in the Annexure to this

notification to be followed by all

assessees (other than an individual or

a Hindu undivided family who is not

required to get his accounts of the

previous year audited in accordance

with the provisions of section 44AB

of the said Act) following the

mercantile system of accounting, for

the purposes of computation of

income chargeable to income tax

under the head "Profits and gains of

business or profession" or "Income

from other sources".

2. This notification shall apply to the

assessment year 2017-18 and

subsequent assessment years.

Annexures-B: Income Computation and Disclosure Standard II relating to valuation of inventories Clause-18 Retail Method

18. Where it is impracticable to use

the costing methods referred to in

paragraph 16, the retail method can be

used in the retail trade for measuring

inventories of large number of rapidly

changing items that have similar

margins. The cost of the inventory is

determined by reducing from the sales

value of the inventory, the appropriate

percentage gross margin. The

percentage used takes into

consideration inventory, which has

been marked down to below its

original selling price.

Techniques for the Measurement

of Cost

18(1). Techniques for the

measurement of the cost of

inventories, such as the standard cost

method or the retail method, may be

used for convenience if the results

approximate the actual cost. Standard

costs take into account normal levels

of consumption of materials and

supplies, labour, efficiency and

capacity utilisation. They are

regularly reviewed and, if necessary,

revised in the light of the current

conditions.

(2) The retail method can be used in


2

the retail trade for measuring

inventories of large number of

rapidly changing items that have

similar margins and for which it is

impracticable to use other costing

methods. The cost of the inventory is

determined by reducing from the

sales value of the inventory, the

appropriate percentage gross margin.

The percentage used takes into

consideration inventory, which has

been marked down to below its

original selling price. An average

percentage for each retail department

is to be used. Clause-26(a) the accounting policies adopted in

measuring inventories including the

cost formulae used;

the accounting policies adopted in

measuring inventories including the

cost formulae used. Where Standard

Costing has been used as a

measurement of cost, details of such

inventories and a confirmation of the

fact that standard cost approximates

the actual cost

Annexure-C: Income Computation and Disclosure Standard III relating to construction contracts. Clause-22 22. Contract revenue and contract

costs associated with the construction

contract, which commenced on or

before the 31st day of March, 2015 but

not completed by the said date, shall

be recognised as revenue and costs

respectively in accordance with the

provisions of this standard. The

amount of contract revenue, contract

costs or expected loss, if any,

recognised for the said contract for

any previous year commencing on or

before the 1st day of April, 2014 shall

be taken into account for recognising

revenue and costs of the said contract

for the previous year commencing on

the 1st day of April, 2015 and

subsequent previous years.

22.1 Contract revenue and contract

costs associated with the

construction contract, which

commenced on or after 1st day of

April, 2016 shall be recognised in

accordance with the provisions of

this standard.

22.2 Contract revenue and contract

costs associated with the

construction contract, which

commenced on or before the 31st

day of March, 2016 but not

completed by the said date, shall be

recognised based on the method

regularly followed by the person

prior to the previous year beginning

on the 1st day of April, 2016.


3

Annexure-D: Income Computation and Disclosure Standard IV relating to revenue recognition Clause-6 & 7(2016)

6. Revenue from service transactions shall

be recognised by the percentage

completion method. Under this method,

revenue from service transactions is

matched with the service transactions

costs incurred in reaching the stage of

completion, resulting in the determination

of revenue, expenses and profit which can

be attributed to the proportion of work

completed. Income Computation and

Disclosure Standard on construction

contract also requires the recognition of

revenue on this basis. The requirements of

that Standard shall mutatis mutandis apply

to the recognition of revenue and the

associated expenses for a service

transaction.

6. Subject to Para 7, revenue from

service transactions shall be recognised

by the percentage completion method.

Under this method, revenue from service

transactions is matched with the service

transaction costs incurred in reaching the

stage of completion, resulting in the

determination of revenue, expenses and

profit which can be attributed to the

proportion of work completed. Income

Computation and Disclosure Standard

on construction contract also requires

the recognition of revenue on this basis.

The requirements of that Standard shall

mutatis mutandis apply to the

recognition of revenue and the

associated expenses for a service

transaction. However, when services are

provided by an indeterminate number of

acts over a specific period of time,

revenue may be recognised on a straight

line basis over the specific period.

7. Revenue from service contracts with

duration of not more than ninety days

may be recognised when the rendering

of services under that contract is

completed or substantially completed.

Clause-7 (2015) corresponding to 8(2016)

7. Interest shall accrue on the time

basis determined by the amount

outstanding and the rate applicable.

Discount or premium on debt

securities held is treated as though it

were accruing over the period to

maturity.

8. (1) Subject to sub paragraph (2),

interest shall accrue on the time basis

determined by the amount

outstanding and the rate applicable.

(2) Interest on refund of any tax,

duty or cess shall be deemed to be

the income of the previous year in

which such interest is received.

(3) Discount or premium on debt

securities held is treated as though it

were accruing over the period to

maturity.

Annexure-E: Income Computation and Disclosure Standard V relating to tangible fixed assets Clause- 14 Where a person owns tangible fixed

assets jointly with others, the

proportion in the actual cost,

accumulated depreciation and written

down value is grouped together with

similar fully owned tangible fixed

Where a person owns tangible fixed

assets jointly with others, the

proportion in the actual cost,

accumulated depreciation and written

down value is grouped together with

similar fully owned tangible fixed


4

assets. Details of such jointly owned

tangible fixed assets shall be indicated

separately in the tangible fixed assets

register.

assets.

Annexure-F: Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates Clause- 2(1) (k) "Integral foreign operation" is a

foreign operation, the activities of

which are an integral part of the

operation of the person.

(m) "Non-integral foreign operation" is

a foreign operation that is not an

integral foreign operation.

-

Clause- 4(d) - Nonmonetary item being inventory

which is carried at net realisable

value denominated in a foreign

currency shall be reported using the

exchange rate that existed when such

value was determined. Clause-7-10 Classification of Foreign Operations

7. (1) The method used to translate the

financial statements of a foreign

operation depends on the way in

which it is financed and operates in

relation to a person. For this purpose,

foreign operations are classified as

either "integral foreign operations" or

"non-integral foreign operations".

(2) The following are indications that

a foreign operation is a non-integral

foreign operation rather than an

integral foreign operation:

(a.a) while the person may control the

foreign operation, the activities of the

foreign operation are carried out with

a significant degree of autonomy from

the activities of the person;

(a.b) transactions with the person are

not a high proportion of the foreign

operation's activities;

(a.c) the activities of the foreign

operation are financed mainly from its

own operations or local borrowings;

(a.d) costs of labour, material and

7. The financial statements of a

foreign operation shall be translated

using the principles and procedures

in paragraphs 3 to 6 as if the

transactions of the foreign operation

had been those of the person himself.


5

other components of the foreign

operation's products or services are

primarily paid or settled in the local

currency;

(a.e) the foreign operation's sales are

mainly in currencies other than Indian

currency;

(a.f) cash flows of the person are

insulated from the day-to-day

activities of the foreign operation;

(a.g) sales prices for the foreign

operation's products or services are not

primarily responsive on a Short-term

basis to changes in exchange rates but

are determined more by local

competition or local government

regulation;

(a.h) there is an active local sales

market for the foreign operation's

products or services, although there

also might be significant amounts of

exports.

Integral Foreign Operations

8. The financial statements of an

integral foreign operation shall be

translated using the principles and

procedures in paragraphs 3 to 6 as if

the transactions of the foreign

operation had been those of the person

himself.

Non-integral Foreign Operations

9. (1) In translating the financial

statements of a non-integral foreign

operation for a previous year, the

person shall apply the following,

namely:

(a.h.1.a) the assets and liabilities, both

monetary and nonmonetary, of the

non-integral foreign operation shall be

translated at the closing rate;

(a.h.1.b) income and expense items of

the non-integral foreign operation

shall be translated at exchange rates at

the dates of the transactions; and

(a.h.1.c) all resulting exchange

differences shall be recognised as

income or as expenses in that previous


6

year.

(2) Notwithstanding anything stated in

subparagraph 1, translation and

recognition of exchange difference

in cases referred to in section 43A of

the Act or Rule 115 of Income tax

Rules, 1962 shall be carried out in

accordance with the provisions

contained in that section or that Rule,

as the case may be.

Change in the Classification of a

Foreign Operation

10(1) When there is a change in the

classification of a foreign operation,

the translation procedures applicable

to the revised classification should be

applied from the date of the change in

the classification.

(2) The consistency principle requires

that foreign operation once classified

as integral or non-integral

Is continued to be so classified.

However, a change in the way in

which a foreign operation is financed

and operates in relation to the person

may lead to a change in the

classification of that foreign operation.

Annexure-H: Income Computation and Disclosure Standard VIII relating to securities Clause- 3(1) (b) "Securities" shall have the meaning

assigned to it in clause (h) of Section 2

of the Securities Contract (Regulation)

Act, 1956 (42 of 1956), other than

derivatives referred to in sub-clause

(1a) of that clause.

(b) "Securities" shall have the

meaning assigned to it in clause (h)

of section 2 of the Securities

Contracts (Regulation) Act, 1956 (42

of 1956) and shall include share of a

company in which public are not

substantially interested but shall not

include derivatives referred to in sub-

clause (ia) of that clause (h).

Part-B - Scope

1. This part of Income Computation

and Disclosure Standard deals with

securities held by a scheduled bank

or public financial institutions

formed under a Central or a State Act

or so declared under the Companies


7

Act, 1956 (1 of 1956) or the

Companies Act, 2013 (18 of 2013).

Definitions

2(1) The following terms are used in

this part of Income Computation and

Disclosure Standard with the

meanings specified:

(a) "Scheduled Bank" shall have the

meaning assigned to it in clause (ii)

of the Explanation to clause (viia) of

subsection (1) of section 36 of the

Act.

(b) "Securities" shall have the

meaning assigned to it in clause (h)

of section 2 of the Securities

Contract (Regulation) Act, 1956 (42

of 1956) and shall include share of a

company in which public are not

substantially interested;

2(2) Words and expressions used and

not defined in this part of Income

Computation and Disclosure

Standard but defined in the Act shall

have the meaning respectively

assigned to them in the Act.

Classification, Recognition and

Measurement of Securities

3. Securities shall be classified,

recognised and measured in

accordance with the extant guidelines

issued by the Reserve Bank of India

in this regard and any claim for

deduction in excess of the said

guidelines shall not be taken into

account. To this extent, the

provisions of Income Computation

and Disclosure Standard VI on the

effect of changes in foreign exchange

rates relating to forward exchange

contracts shall not apply."

Annexure-I: Income Computation and Disclosure Standard IX relating to borrowing cost Clause-5 To the extent the funds are borrowed

specifically for the purposes of

Subject to paragraph 8, the extent to

which funds are borrowed


8

acquisition, construction or production

of a qualifying asset, the amount of

borrowing costs to be capitalised on

that asset shall be the actual borrowing

costs incurred during the period on the

funds so borrowed.

specifically for the purposes of

acquisition, construction or

production of a qualifying asset, the

amount of borrowing costs to be

capitalised on that asset shall be the

actual borrowing costs incurred

during the period on the funds so

borrowed.

Clause-6 To the extent the funds are borrowed

generally and utilised for the purposes

of acquisition, construction or

production of a qualifying asset, the

amount of borrowing costs to be

capitalised shall be computed in

accordance with the following formula

namely :-

A x B/C

Where A = borrowing costs incurred

during the previous year except on

borrowings directly relatable to

specific purposes;

B = (i) the average of costs of

qualifying asset as appearing in the

balance sheet of a person on the first

day and the last day of the previous

year;

(ii) in case the qualifying asset does

not appear in the balance sheet of a

person on the first day or both on the

first day and the last day of previous

year, half of the cost of qualifying

asset;

(iii) in case the qualifying asset does


person on the last day of previous

year, the average of the costs of



day of the previous year and on the

date of put to use or completion, as the

case may be ,

other than those qualifying assets

which are directly funded out of

specific borrowings; or

C = the average of the amount of total

Subject to Para 8, in respect of

borrowing other than those referred

to in Para 5, if any, the amount of

borrowing costs to be capitalised

shall be computed in accordance

with the following formula namely

:—

A x B/C

Where A = borrowing costs incurred

during the previous year except on

borrowings referred to in Para 5

above;

B = (i) the average of costs of




year;

(ii) in case the qualifying asset does


person on the first day, half of the

cost of qualifying asset; or

(iii) in case the qualifying asset does


person on the last day of the previous

year, the average of the costs of



day of the previous year and on the

date of put to use or completion, as

the case may be, excluding the extent

to which the qualifying assets are

directly funded out of specific

borrowings;

C = the average of the amount of

total assets as appearing in the



year, other than assets to the extent


9

assets as appearing in the balance

sheet of a person on the first day and

the last day of the previous year, other

than those assets which are directly

funded out of specific borrowings;

they are directly funded out of

specific borrowings;

Explanation — For the purpose of

this paragraph, a qualifying asset

shall be such asset that necessarily

requires a period of twelve months or

more for its acquisition, construction

or production.

Note:

There is an apparent mistake in the Transitional Provision clause 12 of Annexure D: Income

Computation and Disclosure Standard IV relating to revenue recognition where the reference

made to an earlier paragraph has been mistakenly printed as Para 10 instead of Para 11.

Government of India Ministry of Finance

Department of Revenue Central Board of Direct Taxes

PRESS RELEASE

New Delhi, 11th May, 2017.

Request for stakeholders comments on Draft Income Computation and Disclosure Standards on Real Estate Transactions

Section 145(2) of the Income-tax Act, 1961 („the Act‟) provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. Accordingly, Central Government notified 10 ICDS vide Notification No. S.O. 3079 (E) dated 29th September, 2016. These ICDS inter-alia contains provisions relating to valuation of inventory; construction contracts; Effects in changes of foreign exchange rates, borrowing costs etc. These ICDS are applicable from assessment year 2017-18 (previous year 2016-17) in respect of specified assessees for computation of income under the head “Profits and gains of business or profession” or “Income from other sources”.

The Finance Minister had constituted a committee comprising of experts from accounting field; departmental officers and representatives from Institute of Chartered Accountants of India (ICAI) to suggest the areas in respect of which further ICDS may be notified under the Act.

The Committee suggested notification of ICDS in respect of Real Estate Transactions and submitted the draft of the same. The draft ICDS submitted by the committee is based on the Guidance Note issued on Real Estate Transactions issued by ICAI. For the purposes of providing uniformity and certainty and harmonising the same with provisions of the Act, the committee suggested certain changes in draft ICDS.

The draft ICDS on Real Estate Transactions along with the significant changes suggested in ICDS vis-à-vis the Guidance Note issued by ICAI are uploaded on the Income-tax website at http://www.incometaxindia.gov.in. The stakeholders are requested to submit their comments on draft ICDS on Real Estate Transactions by 26th May, 2017 to Director TPL-III by e-mail at [email protected].

(Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy)

Official Spokesperson, CBDT.

http://www.incometaxindia.gov.in/

mailto:[email protected]

DRAFT INCOME COMPUTATION AND DISCLOSURE STANDARD

ON

REAL ESTATE TRANSACTIONS

MAY 2017

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

Draft Income Computation and Disclosure Standard [ICDS]

Real Estate Transactions

Preamble

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.

Scope

1. This Income Computation and Disclosure Standard shall be applicable for

determination of income from all forms of transactions in real estate, which refers to

land as well as buildings and rights in relation thereto. This will include:

a) Sale of plots of land (including long term sale type leases) without any

developments.

b) Sale of plots of land (including long term sale type leases) with development

in the form of common facilities.

c) Development and sale of residential and commercial units, row houses,

independent houses, with or without an undivided share in land.

d) Acquisition, utilization and transfer of development rights.

e) Redevelopment of existing buildings and structures.

f) Joint development agreements for any of the above activities.

Definitions

2 (1) The following terms are used in this Income Computation and Disclosure Standard

with the meanings specified:

(a) “Fair value” is the amount for which an asset could be exchanged between a

knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s

length transaction.

(b) “Project” means the smallest group of units, plots or saleable spaces, as the

case may be, which are linked with a common set of basic facilities, if any, in

such a manner that unless the facilities are made available and functional,

these units, plots or saleable spaces cannot be put to their intended effective use.

A larger venture shall be split into smaller projects when these basic conditions

are fulfilled.

(c) “Project Costs” in relation to a project

A. shall comprise of :-

(i) Cost of land and cost of development rights - All costs related to the

acquisition of land, development rights in the land or property including

cost of land, cost of development rights, rehabilitation costs, registration

charges, stamp duty, brokerage costs and incidental expenses.

(ii) Borrowing costs – Costs which are incurred directly in relation to a project

or which are apportioned to a project in accordance with Income

Computation and Disclosure Standard IX relating to Borrowing Costs.

(iii) Construction and development costs – Costs that relate directly to the

specific project and costs that may be attributable to project activity in

general and allocated to the project.

B. shall exclude costs that cannot be attributed to any project activity or cannot be

allocated to a project.

(d) “Project revenues” include revenue on sale of plots, undivided share in land,

sale of finished and semi-finished structures, consideration for construction,

consideration for amenities and interiors, consideration for parking spaces and

sale of development rights.

2(2) Words and expressions used and not defined in this Income Computation and

Disclosure Standard but defined in the Act shall have the meaning assigned to

them in the Act.

Real Estate Projects

3(1) Project revenue and project cost shall be recognised as revenue and cost

respectively by reference to the stage of completion of the project on the last date

of the previous year for projects where the economic substance is similar to

construction contracts. The recognition of revenue and expenses by reference to

the stage of completion of a project is referred to as the percentage of completion

method.

3(2) Indicators that economic substance of a project is similar to a construction

contract are:

(a) The duration of such projects is beyond 12 months and the project

commencement date and project completion date fall into different

previous years.

(b) Project involves activities similar to construction contracts such as land

development, structural engineering, architectural design, construction or

activities of similar nature.

(c) While individual units of the project are contracted to be delivered to

different buyers these are interdependent upon or interrelated to

completion of a number of common activities with or without provision

of common facilities.

(d) The construction or development activities form a significant proportion

of the project activity.

3(3) In case of a project where the economic substance is not similar to construction

contract, revenue shall be recognised in accordance with Income Computation

and Disclosure Standard IV relating to Revenue Recognition and provisions of

para 3, para 4 and para 5 of the said standard shall apply mutatis mutandis,

provided :–

(a) the seller has transferred to the buyer all significant risks and rewards of

ownership and the seller retains no effective control of the real estate to a

degree usually associated with ownership or the seller has effectively

handed over possession of the real estate unit to the buyer forming part of

the transaction;

(b) no significant uncertainty exists regarding the amount of consideration

that will be derived from the real estate sales;

(c) there is a reasonable certainty that the revenue will be ultimately

collected from buyers.

Application of Percentage of Completion Method

4(1) The revenue in respect of a project shall be recognised under the percentage of

completion method when:-

(a) the expenditure incurred on construction and development costs is 25 % or

more of the construction and development costs;

(b) 25% or more of the saleable project area is secured by contracts or

agreements with buyers; and

(c) 10 % or more of the total revenue as per the agreements of sale or any other

legally enforceable documents are realised in respect of each of the contracts

and it is reasonably certain that the parties to such contracts will comply

with the payment terms as defined in the contracts.

4(2) Revenue shall be recognised in respect of such units which satisfy the condition

mentioned in para 4(1)(c) with reference to the percentage of completion of the

project.

4(3) For applying the percentage of completion method in respect of a project, the

provisions of ICDS III on Construction Contract shall apply mutatis mutandis.

Transferable Development Rights

5(1) Transferable Development Rights are acquired in different ways as mentioned

hereunder:

(a) Direct purchase.

(b) Development and construction of built-up area.

(c) Giving up of rights over existing structures or open land.

5(2) When development rights are acquired by way of direct purchase or on

development or construction of built-up area, cost of acquisition would be the

cost of purchases or amount spent on development or construction of built- up

area, respectively. Where development rights are acquired by way of giving up of

rights over existing structures or open land, the development rights shall be

recorded at fair value of the development rights so acquired.

5(3) When development rights are utilised in a real estate project by a person, the cost

of acquisition shall be added to the project costs.

5(4) When development rights are sold or transferred, revenue shall be recognised

when both the following conditions are fulfilled:

(a) title to the development rights is transferred to the buyer; and

(b) it is reasonable to expect that the revenue will be ultimately collected.

Transactions with multiple elements

6(1) A person may contract with a buyer to deliver goods or services in addition to the

construction or development of real estate. In such cases, the contract

consideration shall be split into separately identifiable components including one

for the construction and delivery of real estate units.

6(2) The consideration received or receivable for the contract shall be allocated to each

component on the basis of the fair value of each component.

6(3) The recognition of revenue of each of the components shall be in accordance with

provisions of relevant ICDS.

Transitional Provisions

7(1) Project revenue and project costs associated with the real estate project, which

commenced on or after 1st day of April, 201X shall be recognised in accordance

with the provisions of this standard.

7(2) Project revenue and project costs associated with the real estate project, which

commenced on or before the 31st day of March, 201X but not completed by the

said date, shall be recognised based on the method regularly followed by the

person prior to the previous year beginning on the 1st day of April, 201X.

Disclosure

8(1) A person shall disclose:

(a) the amount of project revenue recognised as revenue in the period;

(b) the methods used to determine the project revenue recognised in the period;

and

(c) the method used to determine the stage of completion of the project.

8(2) A person shall also disclose each of the following for projects in progress at the

end of the previous year:

(a) the aggregate amount of costs incurred and profits recognised (less recognised

losses) to date;

(b) the amount of advances received;

(c) the amount of work in progress and the value of inventories; and

(d) Excess of revenue recognised over actual bills raised (unbilled revenue).

******

Significant changes made in the draft ICDS on Real Estate transactions

vis-à-vis

Guidance Note on Real Estate transactions issued by the ICAI

The draft ICDS on Real Estate Transactions is based on Guidance Note on Accounting for

Real Estate Transactions issued by the ICAI. While recommending the ICDS, the

Committee suggested the following significant changes in the Guidance Note:

(i) Definition of project – As per the Guidance Note, the set of units which are connected

by a common set of amenities will constitute a single project. To bring certainty in this

matter, the Committee recommends use of term ‘Basic facilities’ in place of common

amenities. This would ensure restricting the definition of the term Project to the smallest

possible group of units. Accordingly, the revenue will be required to be recognised on

such smallest group of units without linking the same to peripheral common amenities

like club-house, entertainment, sports, gymnasiums, health club, restaurants etc,.

(ii) Definition of project cost – The Guidance Note contains illustrative list of items to be

included, allocated or excluded in the project cost. Consistent with the framework of

ICDS, the illustrations have been excluded in the standard while retaining the main

principle that costs that cannot be attributed to any project activity or allocated to project

shall be excluded from project cost. This is also consistent with ICDS III relating to

Construction Contracts.

(iii) Real estate projects – As per the Guidance Note, the revenue in respect of real estate

projects is required to be recognised based on principles of either AS 9 or AS 7

depending on the economic substance of the project. The Guidance Note further

provides that in cases where economic substance of the project is in the nature of

construction contract, the revenue is required to be recognised as per percentage of

completion method (POCM) in accordance of AS 7. The proposed ICDS retains the

same principles for recognition of revenue and cost without usage of illustrative

language of the Guidance Note to provide simplicity and certainty.

(iv) Application of POCM for Real estate projects – The Guidance Note in para 5.3

contains four conditions to be satisfied for recognition of revenue including the

condition of obtaining all critical approvals. Since the recognition of revenue under

other conditions is deferred upto incurrence of 25% of construction and development

cost (which does not include land cost), the condition in respect of obtaining critical

approval is not found by the Committee to be very relevant for recognition of revenue

under ICDS in view of the newly enacted ‘The Real Estate (Regulation and

Development) Act, 2016’ (RERA). All other conditions have been retained in the

proposed ICDS.

Further, the Guidance note permits all methods for determination of stage of completion

like cost incurred, survey of work done, technical estimation, etc,. The Guidance Note

however puts a cap on recognition of revenue based on stage of completion determined

with reference to project cost incurred. In order to make it consistent with the provisions

of ICDS III relating to Construction contract, the proposed ICDS does not provide for

capping the recognition of revenue based on stage of completion determined with

reference to project cost incurred.

(v) Transferable Development Rights (TDRs) – In case of acquisition of TDRs, the

Guidance Note provides that where development rights are acquired by way of giving up

of rights over existing structures or open land, the development rights shall be recorded

at the fair market value or net book value. To bring certainty and consistency with other

ICDSs, the Committee recommends that in this situation, the development rights shall

be recorded at the fair value of the development rights so acquired.

*****

SEMINAR ON - Association of Corporate Adviser & … Computation and Disclosure Standards ( ICDS )...

Documents

Transcript of SEMINAR ON - Association of Corporate Adviser & … Computation and Disclosure Standards ( ICDS )...