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ICDS(Income Computation & Disclosure Standard): Understanding Change
ICDS(Income Computation & Disclosure Standard): Understanding Change: CBDT has notified 10 income computation & disclosure standards (ICDS) in exercise of powers conferred to it under section 145(2) of The Income Tax Act, 1961 vide Notification No. 87/2016, dated 29th September, 2016. The Standards are applicable from a.y 2017-18 i.e Financial Year 2016-2017 and subsequent assessment years. ICDS were issued with the aim of bringing uniformity in accounting policies governing computation of income in accordance with tax related provisions, and also reducing the irregularities amongst them.The Standards are 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”.The Form – 3CD (Tax Audit Report) has been revised for making mandatory disclosures in compliance with these disclosures. CBDT has issued Clarifications by way of 25 FAQ’s for better compliance of these standards. Non compliance of ICDS attracts Section 144 of the Income Tax Act i.e Best Judgment Assessment. In case of conflict between ICDS and provisions of the Income Tax Act, 1961, the provisions of the Income Tax Act shall prevail.
Clarifications explained in crux below:♦ ICDS is not meant for maintenance of books of accounts or preparation of financial statements. Persons are required to maintain books and prepare financial statements as per accounting policies applicable to them. Companies are required to maintain books of account and prepare financial statements as per requirements of Companies Act 2013. The accounting policies mentioned in ICDS-I being fundamental in nature shall be applicable for computing income under the heads “Profits and gains of business or profession” or “Income from other sources”.♦ Certain ICDS provisions are inconsistent with judicial precedents. Question arises whether these judicial precedents would prevail over ICDS. The ICDS have been notified after due deliberation and after examining judicial views for bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in the absence of authoritative guidance on these issues under the Act for computing income under the head “Profits and gains of business or profession” or Income from other sources. Since certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and subsequent assessment years.♦ ICDS will also apply to non-corporate taxpayers who are not required to maintain books of account and/or those who are covered by presumptive scheme of taxation like sections 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc. of the Act. ICDS is applicable to specified persons having income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’. Therefore, the relevant provisions of ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For example, for computing presumptive income of a partnership firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or turnover, as the case may be.♦ If there is conflict between ICDS and other specific provisions of the Income-tax rules, 1962 (‘The Rules’) governing taxation of income like rules 9A, 9B etc. of the Rules, the provisions of Rules, which deal with specific circumstances, shall prevail.♦ ICDS shall apply to companies irrespective of the accounting standards adopted by companies or the Ind-AS.♦ The provisions of ICDS shall not apply for computation of MAT.♦ The provisions of ICDS shall apply for computation of AMT.♦ The general provisions of ICDS shall apply to all persons unless there are sector specific provisions contained in the ICDS or the Act. For example, ICDS VIII contains specific provisions for banks and certain financial institutions and Schedule I of the Act contains specific provisions for Insurance business.♦ As per ICDS-I, Market to Market (MTM) loss or an expected loss shall not be recognized unless the recognition is in accordance with the rovisions of any other ICDS. Same principle as contained in ICDS-I relating to MTM losses or an expected loss shall apply mutatis mutandis to MTM gains or an expected profit.♦ ICDS-I provides that an accounting policy shall not be changed without reasonable cause. The term ‘reasonable cause’ is not defined. Reasonable cause confers desired flexibility to the tax payer in deserving cases.♦ ICDS do govern derivative instruments. ICDS —V1 (subject to Para 3 of ICDS-VIII) provides guidance on accounting for derivative contracts such as forward contracts and other similar contracts. For derivatives, not within the scope of ICDS-VI, provisions of ICDS-I would apply.♦ Retention money, being part of overall contract revenue, shall be recognised as revenue subject to reasonable certainty of its ultimate collection condition, as contained in Para 9 of ICDS-III on Construction contracts.♦ There is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable.♦ Provisions of ICDS shall apply for computation of interest, royalty and fees for technical services (for non-residents u/s 115A) incomes which are liable to tax on gross basis.♦ As clarified in Para 8 of ICDS-V, the expenditure incurred till a plant has begun commercial production, i.e production intended for sale or captive consumption, shall be treated as capital expenditure.♦ Foreign Currency Translation Reserve (FCTR) balance as on 1 April 2016 pertaining to exchange differences on monetary items for non-integral operations, shall be recognised in the previous year relevant for assessment year 2017-18 to the extent not recognised in the income computation in the past.♦ Para 4 of ICDS-V11 read with Para 5 to Para 9 of ICDS-VII provides for timing of recognition of government grant. The transitional provision in Para 13 of ICDS-VII provides that a government grant which meets the recognition criteria on or after 1st day of April 2016 shall be recognised in accordance with ICDS-VII. All government grants actually received prior to 1st day of April 2016 shall be deemed to have been recognised on its receipt in accordance with Para 4(2) of ICDS-VII and accordingly will be outside the transitional provision and therefore the government grants received on or after 1st day of April 2016 and for which recognition criteria provided in Para 5 to Para 9 of ICDS-VII is also satisfied thereafter, the same shall be recognised as per the provisions of ICDS-VII. The grants received prior to 1st day of April 2016 shall continue to be recognised as per the law prevailing prior to that date. For example, if out of total subsidy entitlement of 10 Crore an amount of 6 Crore is recognised in the books of accounts till 3 l st day of March 2016 and recognition of balance 4 Crore is deferred pending satisfaction of related conditions and/or achieving reasonable certainty of receipt. The balance amount of 4 Crore will be taxed in the year in which related conditions are met and reasonable certainty is achieved. If these conditions are met over two years, the amount of 4 Crore shall be taxed over the period of two years. The amount of 6 Crore for which recognition criteria were met prior to 1st day of April 2016 shall not be taxable post 1st day of April 2016. But if the subsidy is already received prior to 1st day of April 2016, Para 13 of ICDS-VII shall not apply even if some of the related conditions are met on or after 1 April 2016. This is in view of Para 4(2) of ICDS-VII which provides that Government grant shall not be postponed beyond the date of actual receipt. Such grants shall continue to be governed by the provisions of law applicable prior to 1st day of April 2016.♦ If the taxpayer sells a security on the 30th day of April 2017. The interest payment dates are December and June. The actual date of receipt of interest is on the 30th day of June 2017 but the interest on accrual basis has been accounted as income on the 31st day of March .2017. The taxpayer shall be permitted to claim deduction of such interest as already taxed as interest income on accrual basis for computation of income arising from such sale.♦ Para 9 of ICDS-VIII on securities requires securities held as stock-in-trade shall be valued at actual cost initially recognised or net realisable value (NRV) at the end of that previous year, whichever is lower. Para 10 of Part-A of ICDS-VIII requires the said exercise to be carried out category wise. For subsequent measurement of securities held as stock-in-trade, the securities are first aggregated category wise. The aggregate cost and NRV of each category of security are compared and the lower of the two is to be taken as carrying value as per ICDS-VIII.♦ It is clarified that borrowing costs to be considered for capitalization under ICDS IX shall exclude those borrowing costs which are disallowed under specific provisions of the Act. Capitalization of borrowing cost shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under the Act. Bill discounting charges and other similar charges are covered as borrowing cost.♦ The capitalization of general borrowing cost under ICDS-IX shall be done on asset-by-asset basis.♦ Impact of Para 20 of ICDS X containing transitional provisions: Para 20 of ICDS X provides that all the provisions or assets and related income shall be recognised for the previous year commencing on or after 1st day of April 2016 in accordance with the provisions of this standard after taking into account the amount recognised, if any, for the same for any previous year ending on or before 31st day of March, 2016. The intent of transitional provision is that there is neither ‘double taxation’ of income due to application of ICDS nor there should be escape of any income due to application of ICDS from a particular date.♦ It is clarified that Provisioning for employee benefits like medical benefits which are otherwise covered by AS 15 shall continue to be governed by specific provisions of the Act and are not dealt with by ICDS-X.♦ Net effect on the income due to application of ICDS is to be disclosed in the Return of income. The disclosures required under ICDS shall be made in the tax audit report in Form 3CD. However, there shall not be any separate disclosure requirements for persons who are not liable to tax audit.