c.v.o. ca’s news & views vol. 21 no. 2 / august 2017 2017/fullissue.pdf · c.v.o. ca’s news...

C.V.O. CA’S NEWS & VIEWS VOL. 21 NO. 2 / AUGUST 2017

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From the desk of Chairman

NEWS BULLETINCOMMITEE

ChairmanCA Dinesh Shah

Office BearerCA Sunil Dedhia

AdvisorCA Manoj Shah

ConvenorCA Harsh Dedhia

Jt. ConvenorCA Jigar Chheda

MembersCA Hitesh Pasad

CA Bhavin DedhiaCA Kaushik GadaCA Nikita GogriCA Sagar MaruCA Virav DedhiaCA Zalak Savla

Sp. InviteesCA Rakesh Vora

C O N T E N T S

ASSOCIATION NEWS

Managing &Sub committees ............ 4

Minimum Scalesof Fees forGoods & ServicesTsx Work (GST) ........... 5

Annual Activity .............. 7

Forth ComingEvents ........................... 9

EventsRetrospect ..................... 9

New MembersEnrolled ........................ 10

A R T I C L E S

ICDS – FewImminent Issues .......... 11

ICDS V :TangibleFixed AssetsICDS IX :Borrowing Cost ............ 18

ICDS VI - Effectsof Changesin ForeignExchange Rates .......... 24

United Kingdom’sDiver tedProfits Tax: .................. 26

LEGALUPDATESDirect TaxUpdates ....................... 29

WHO AM I ?

Paryushan Parva is regarded as the most important of all Jain festivals because it provides us with an auspicious opportunity toreflect, introspect and strive towards achieving our spiritual goals.Human beings have been eternally asking the question “Who am I?” A human being is a seeker, who is in search of himself.Many seek; however, only a few find the answer.Whenever someone asks us as to who we are, in response we give our name, qualification, age, position in life and sometimesour religion, our caste/sub caste,the state and our country. Alternatively, we give our visiting card which gives our name,education, qualification and organisation to which we belong and the position that we hold in the organisation. But the issue stillremains: What are we? This is because even if all these are taken away, we still remain.‘I’ is the word we use more than any other word in our day-to-day living. We say: I slept well; I said this; I did that; I enjoyed mymeal; I like my work. It is always ‘I’,which prevails in our life and yet we never pause to enquire: Who is the ‘I’, What is this ‘I’.Inother words, we fail to enquire -Who am I?The power of human beings is increasing but he himself is becoming weaker. This may sound like a paradox, but it is the truth.External strength has increased, while internal strength has decreased. Our inner strength is being sapped to nothingness. We arechasing external objects but the need to attain the self has ceased. We are so busy experiencing the Non-Self through the sensesthat we forget to experience the Self. In knowing about the world, we have become oblivious to remembering the Self. Weresemble the earthen lamp that spreads light everywhere but its own base remains in utter darkness.However far and wide we may extend, but until we attain that which is our true Self, we will remain powerless. It is this innerpoint of Consciousness, which is the source of infinite strength. Only on attaining that does true strength arise.“Know Thyself” is the message Socrates, the great philosopher gave to his pupils.Several great saints /philosophers have said “Give up all questions, save one: Who Am I.”After all the only fact you are sure of,is that ‘you are’. The “I am” is cer tain; the “I am this” is not.They teach us that to know who you are, you must first investigate:Who you are not.In our younger days we used to play a game of asking questions with reasoning. We need to adopt a similar art of reasoning.We have to discover ourselves by finding out WHAT WE ARE NOT. The key to understand this is: what is mine, cannot be me–bungalow, car, diamond necklace, etc. are not you, but they belong to you. Similarly it is true about our body. We speak of “mybody”. The question is whose body is mine, we accept that we are not the body. Whatever can be perceived or felt is an object.What perceives or feels is the subject. That is I. Similarly a thought is an object, the thinker is the subject. Who is the perceiver,fetcher, thinker? We have to discover ’him’ within us.On being hurt, there is a tendency to believe, I have been wounded, I am in pain. If that is the case, then, the awareness thatyou are only the knower has still not manifested. As long as one feels oneness with the body, spirituality has not entered in yourlife. Instead when you feel that the hand is wounded and I am merely observing it,that is an indication that the witness is presentand there is awareness of the knower.Reading that we are a soul and not the body, is one thing, understanding and accepting this is another thing and realising thisis still another thing. It is difficult and only a few courageous ones can achieve this and succeed in finding the answer to thequestion “Who am I?”The only path to self–realisation or the soul’s liberation consists in realizing the Self as completely different from body and theworldly attachments. The soul is free, pure, enlightened and immortal. As Shrimad Rajchandraji has said, “TO BE FREE FROMPASSION (RAAG) AND AVERSION (DWESH) FROM EVERYWHERE - THAT ONLY IS MY RELIGION”Let us be amongst the few who understand and accept that we are "not a body having soul but a soul having a body". This realization will lead us to know: Who I Am and experience true bliss – the bliss which lies within us. As Brahma Kumaris teach -“I am a peaceful soul”.Bhagvad Gita explains this in very simple terms -

“I am that which will still remain even when my body is cremated and reduced to ashes.”In the 38th Verse of the “Samaysaar”, Acharyashri Kundkund Dev expounds -

“I AM ONE, PURE, ETERNAL AND FORMLESS, OF THE NATURE OF KNOWLEDGE AND PERCEPTION:ANYTHING OTHER THAN THAT IS NOT MINE, EVEN A BIT”

Let us yearn, pray and succeed in this life span in searching and finding the answer to the eternal question: Who am I ? or else,we will be wasting this priceless (chintamani) opportunity.

May all gain the right understanding.May all perform practices sincerely with the goal always in mind.

May all attain Self.Mumbai CA DINESH SHAH

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VOL. 21 NO. 2 / AUGUST 2017 C.V.O. CA’S NEWS & VIEWS

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CVO CHARTERED AND COST ACCOUNTANTS' ASSOCIATIONLIST OF OFFICE BEARERS, MANAGING AND SUB COMMITTEE MEMBERS 2017-18

OFFICE BEARERS &MANAGING COMMITTEE

CA Nilesh T. Dedhia President

CA Sunil V. Dedhia Vice President

CA Sanjay V. Chheda Secretary

CA Jigar R. Gogri Jt. Secretary

CA Rahul T. Nagda Treasurer

CA Ketan N. Gada Imm. P. P.

CA Priti P. Savla Member

CA Jigar C. Chheda Member

CA Ameet M. Chheda Member

CA Jeenal Sangoi Savla Member

CA Vinit D. Gada Member

CA Mehul T. Gala Member

CA Harsh H. Dedhia Member

CA Gautam R. Mota Member

CA Parin D. Gala Member

Committees Program Study Circle News Bulletin RRC & PDCommittee Committee Committee Committee

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Chairman CA Champak Dedhia CA Paras Savla CA Dinesh Shah CA Mulesh Savla

Convenor CA Jigar Gogri CA Priti Savla CA Harsh Dedhia CA Ameet Chheda

Jt. Convenor CA Ameet Chheda CA Mehul Gala CA Jigar Chheda CA Parin Gala

Jt. Convenor CA Shreyas Sangoi

Advisor CA Dinesh Ghalla CA Haresh Chheda CA Manoj Shah CA Hashmukh Dedhia

OB in Charge CA Sunil Dedhia CA Rahul Nagda CA Sunil Dedhia CA Sanjay Chheda

Spl. Invitee CA Arvind Nagda CA Paresh Vora CA Rakesh Vora CA Jayesh Salia

Members CA Anil Haria CA Deepesh Chheda CA Bhavin Dedhia CA Kishor Gada

CA Gautam Mota CA Heenal Shah CA Hitesh Pasad CA Girish Maru

CA Jeenal Savla CA Hetal Maru CA Kaushik Gada CA Kruti Sangoi

CA Nilesh Saiya CA Jay Gala CA Nikita Gogri CA Neerav Gala

CA Vinit Gada CA Kewal Satra CA Sagar Maru CA Neha Vira

CA Neeraj Chheda CA Virav Dedhia

CA Viral Satra CA Zalak Savla

CA Vishesh Sangoi

Students Young & Industry Publication, Capital Market Membership & WebsiteCommittee Committee Members & Training Committee Recreation & IT Committee

Empowerment CommitteeCommittee

5 6 7 8 9 10

Chairman CA Himanshu Chheda CA Atul Bheda CA Ketan Gada CA Ashok Chheda CA Bharat Gala CA Paras Savla

Convenor CA Gautam Mota CA Jeenal Savla CA Parin Gala CA Mehul Gala CA Vinit Gada CA Harsh Dedhia

Jt. Convenor CA Girish Maru CA Jay Gosar CA Chintan Rambhia CA Siddharth Karani CA Umang Soni

Advisor CA Rajesh Shah CA Mahendra Gala CA Navin Shah

OB in Charge CA Jigar Gogri CA Sanjay Chheda CA Sunil Dedhia CA Rahul Nagda CA Jigar Gogri CA Sanjay Chheda

Spl Invitee CA Bharat Nagda CA Sanjeev Lalan CA Jasmine Savla CA Sudhir Bheda CA Vignesh Bheda CA Ashwin Shah

Members CA Hemant Shah CA Disha Dedhia CA Chintan Dedhia CA Bhavin Chheda CA Ketan Mamania CA Umang Soni

CA Chintan Karani CA Jeet Gala CA Kiran Nandu CA Anil Haria CA HarshvardhanShah CA Gautam Mota

CA Dharmi Kenia CA Jinit Bheda CA Manish Dedhia CA Chunky Shah CA Anant Vora CA Nimesh Dedhia

CA Hetal Nandu CA Kimi Nagda CA Namrata Dedhia CA Kiran Nandu CA Jay Gosar

CA Paras Maru CA Misha Gala CA Nisha Shah CA Nilesh Chhadwa CA Kushal Dedhia

CA Shreya Jagani CA Mittal Sangoi CA Poojan Dedhia CA Romil Karani CA Neerav Gala

CA Hilloni Shah CA Shrenik Shah CA Rupal Haria CA Sanjay Savla CA Pratik Shahnad

CA Smith Shah

CA Dimpal Chheda

GST SUPPORT TEAMCA Hiten Gada CA Jayesh GogriCA Shreyas Sangoi CA Prashant VoraCA Tanshukh Chheda CA Bharat GosarCA Nitin Kenia


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ANNUAL ACTIVITY

PROGRAM COMMITTEE : Budget Program

Local Budget Meetings for public

RERA and impact of GST on real estate

Corporate Social Responsibility and it’sbenefits to our community Trusts

Business Management

Business Economics – to be conducted everyquarter

NEWS BULLETIN COMMITTEE : To Publish Monthly Bulletin on articles of

professional and non-professional interest. Topublish special issues on current topics andspecific topics like RERA, Transfer Pricing,ICDS, GST, IFC, International Taxation, etc.

Recent Updates under various laws alongwith unreported decisions under variouslaws.

Special Column on “Around the World” i.e.tax structures of different countries.

New member’s photos & CongratulationsColumn to be given as and when it happens aswell as Representations given to variousgovernment authorities to be published inNews & Views.

To review the member’s details for News &Views readership for curtailing the excessissuance of News Bulletins.

Articles and write-ups on legal maxims andjudicial interpretations.

RRC AND PD COMMITTEE : 2 day NRRC on GST and Allied laws

3 days Members RRC

Workshop on etiquettes and communicationskills.

STUDY CIRCLE COMMITTEE: Study Circle Meeting on recent allied laws

Study circle meeting on taxation /audit andrelated topics

Workshop on GST

Study Group on GST/BFSI

Study Course on International Taxation /FEMA

CAPITAL MARKET COMMITTEE: Two days technical course for members

Meeting for Members/ Group discussions onfuture opportunities

Industrial Visit

Visit to NSE

Study Course on How to Read Financials andreports

MEMBERS IN INDUSTRY &YOUTH COMMITTEE: Members in Industry meet Car Treasure Hunt, Yoga etc Youth RRC with Skill Development Technical sessions on topics related to

Industry Encouraging and identifying new members to

lead group discussion and study circles

STUDENTS COMMITTEE: Student NRRC/RRC

Study Circle on recent topics

Efforts to be taken to increase the studentmembership

Detailed process flow chart about loandisbursement to needy students

Disbursement of loan to needy students


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FOR ATTENTION OF MEMBERS/SUBSCRIBERS Members are requested to come forward and contribute

their articles in CVO CA’s News & Views, the mouthpiece ofour Association. Best Article contributed by new comershall be awarded with a special prize.

While sending Articles for News & Views, please confirmthat the same are not published/not given for publishingelsewhere. No correspondence shall be made inrespect of Articles not accepted for publication; nor willthey be sent back.

The views and opinion expressed or implied in the Newsand Views are those of the authors and do notnecessarily reflects those of the association. Theopinion expressed herein should not be construed aslegal or professional advice. Neither the Association northe authors/contributors are responsible in any mannerfor any personal or professional liability arising due tothe decisions taken by readers on the basis of theseviews. The association is also not in any wayresponsible for the result of any action taken on thebasis of the advertisement published in the journal.

This is “YOUR” magazine. Please give your feedback/suggestions etc. Kindly intimate change of youraddress by sending the necessary intimation to theAssociations’ Office.

Non receipt of News & Views may be intimated to :

CA Harsh Dedhia - 9892444121

Email Id - [email protected]

Rates for Advertisements in CVO CA’s News & Views(per insertion) are as under:

Inside Full Page (Single color printing) Rs. 8,000/-

Inside Half Page (Single color printing) Rs. 5,000/-

Inside Quarter Page (Single color ptg.) Rs. 3,000/-

(More than one insertion at time entitles for discount)Classified Advertisements rate Rs. 400/- for 100 words.

CVO CA's News & View Subscription charges for 1 yearRs. 500 & 3 years Rs. 1200 for Non members of theassociation.

Members are requested to register themselves to CVOCA Yahoo Group by sending E-mail to “cvoca-subscribe@ yahoogroups.co.in” to quickly receivethe latest updates and communication from theAssociation.

PUBLICATION & TRAININGCOMMITTEE: GST Workshop for students, accountants and

staff Monthly publication on “Karvera na Atapatta”

in patrika Budget booklet To consider a tie-up with taxmann and

provide books on discounts to members Conducting CCA course

MEMBERSHIP & RECREATIONCOMMITTEE: Felicitating newly passed CA Encouraging a member, through advertise-

ment in patrika to become member Conducting career guidance seminar for

newly passed CA Refining and updating member’s database Taking special initiatives to make members

from past list Undertaking recreation activities like sports,

picnic, board games, etc.

WEBSITE & IT COMMITTEE: Regular upgradation in website Creating events on website including a

payment gateway for E-receipts Uploading powerpoint presentations of public

programs and study circle on website with thepermission of speaker

To map the events on Group Manager Appwith the Mobile calendar.

Uploading video recording on CVOCAYoutube channel of public programs andstudy circle seminars.

To consider an option of Explara for member’sdatabase updation.

GST SUPPORT TEAM[GST TEAM] To support, advice and guide the various

committee to arrange programs, study circlemeetings, fees scale etc. in the GST.

To prepare and draft article on GST for publicawareness.


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EVENTS IN RETROSPECT

Compiled by :CA. Harsh DedhiaCA. Jigar Chheda

ASSOCIATIONNEWS

FORTHCOMING EVENTS

MONSOON PICNICDate: 12th & 13th Aug 2017Membership & Recreation Committee of CVO CA Associationis organising two full days Monsoon Picnic atDreammland, Near Kundan Dam, Kundan Pada,Shirol Gaon, Shahapur.Point of attraction: Waterfall, Dam & lot of natural beautyFor more details on venue visit: http://www.dreammland.com/Charges: Rs 3,600/- person (adult) andRs 3,200/- kids (below 12 years)Including stay, food and travelling cost.For Registration Contact:Name Email ID TelephoneCA Nilesh Dedhia [email protected] 9820871019CA Vinit Gada [email protected] 8655840598

STUDY CIRCLE COMMITTEEEvent Study circle meetingTopic Filing of GST ReturnsDate 11th August , 2017Venue Mysore HallSpeaker CA Bharat Gosar

CA Rajendra PankhaniaFees Free for Members of DADAR (E) CPE SC

Rs.300/- for Non members

STUDY CIRCLE COMMITTEEEvent GST Study GroupTopic Various important aspects in GSTDate Once in fortnight/week will be

finalised in due courseVenue D R Ghalla Memorial HallSpeaker GD shall be lead by group memberFees Rs.1,500/-

STUDENTS COMMITTEEEvent Students Study Circle MeetingTopic INCOME COMPUTATION AND

DISCLOSURE STANDARDSDate 12th July 2017Speaker Somil VisariaChairman CA Vishesh SangoiParticipants 45Venue D.R. Ghalla Memorial Hall

STUDENTS COMMITTEEEvent Students Study Circle MeetingTopic RETURN FILING

IN INCOME TAXDate 13th July 2017Speaker Mansi ChhedaChairman CA Hetal MaruParticipants 45Venue D.R. Ghalla Memorial Hall

DADAR (E) CPE STUDY CIRCLEREFRESHER COURSE ON GSTDate Topic Speaker7th July Registration, Accounts, Invoicing, Returns CA Shreyas Sangoi11th July Levy, Scope, Composition Levy, Place and time of Supply CA Heetesh Vira12th July Input Tax Credit and Related Transitional Provisions CA Kewal SatraVenue Mysore Association HallParticipants 78


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CA FORAM MAHESH GADABHOJAYMULUNDMobile :Email : [email protected]

CA TWINKLE MANSUKH SATRAWADALADOMBIVLIMobile : 9930650566Email : [email protected]

CA HARSH NIKESH MARULAKHAPARKANDIVLIMobile : 9819425326Email : [email protected]

CA AMISHI TARUN VORAPATRISIONMobile : 9870779341Email : [email protected]

CA RINKITA JETHALAL CHHEDASHERDIMULUNDMobile : 9773846688Email : [email protected]

CA PRIYA BHAVESH SHAHKODAYVASHIMobile : 99200 23200Email : [email protected]

CA NIKUNJ MAHENDRA SAVLABERAJANALASOPARAMobile : 9324440684Email : [email protected]

CA AMEY KIRAN CHHEDAKOTDA ROHAMULUNDMobile : 7666554885Email : [email protected]

CA MINAL LAXMICHAND SAVLABHISARAGOREGAONMobile : 8097289661Email : [email protected]

CA JILL MUKUND GANGARNAGALPURPARELMobile : 9167760097Email :

CA NIRAV RAJESH VIRANANI KHAKHARBYCULLAMobile : 8082611020Email : [email protected]

CA AVNI NILESH MARULAKHAPURCHEMBURMobile : 9593235038Email : [email protected]

CA DHWANI PARESH CHHEDALAKHAPURMULUND (W)MOBILE : 8108826553EMAIL : [email protected]

NEW MEMBERS ENROLLED

EVENTS IN RETROSPECTMEMBERSHIP AND RECREATIONEvent Career Guidance and

Felicitation of newly passed CAsDate 3rd August 2017Inaugural Speaker CA Atul BhedaPanel of Speakers :CA HeeteshVeera, CA Jignesh Kenia,CA Jiger Saiya, CA Sudhir Bheda,CA Hasmukh Dedhia, CA Priti SavlaVenue D.R. Ghalla Memorial HallParticipants 31

PUBLICATION & TRAININGEvent Workshop on GST for

Students, Staff, AccountantsDate 4th August & 5th August, 2017Speaker CA Chintan Rambhia

CA Jinesh GadaCA Dharmi KeniaMr. Punit Mehta

Venue Mysore Association HallParticipants 75


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ICDS – FEW IMMINENT ISSUESContributed by :CA Vishal Gada(a member of the association)

he can be reached [email protected]

1. Background of Income Computation and Disclosure Standards (‘ICDS’):Section 145 of the Income-Tax Act, 1961 (‘the Act’), pertaining to the method of accounting, provides forcomputation of income chargeable under the head “Profits and Gains of Business or Profession” (‘PGBP’)or “Income From Other Sources” (‘IFOS’) in accordance with either cash or mercantile system of accountingregularly employed by the taxpayer. However, the same is subject to section 145(2) of the Act whichempowers Central Government(‘CG’) to issue ICDS.

Prior to introduction of the ICDS, the taxable profits were computed based on the commercial accountingprinciples subject to express provisions of the Act. Post issuance of the ICDS, the income of the tax payers,to whom the provisions of the ICDS are applicable, shall be computed based on the commercial accountingprinciples as modified by the provisions of the ICDS. However, it is pertinent to note that in case of conflictbetween provisions of the Act and the ICDS, the provisions of the Act shall prevail to that extent.

Certain provisions of the ICDS are likely to bring a substantial change in the approach and methodologyof computing the income to be offered to tax. Various concerns were raised by the stakeholders on thedifficulty in interpretation and application of ICDS. Therefore, to ease the implementation of the ICDS, theCBDT took the following measures:

Rescission of the earlier notification dated 31st March 2015 and release of revised set of 10 ICDS videnotification no. 87dated 29th September 2016 ;

Deferment of the applicability of the revised ICDS by one-year i.e. the revised ICDS are applicable fromFY 2016-17 (AY 2017-18);

Issuance of various clarifications in the form of Frequently Asked Questions (‘CBDT FAQs’) on therevised ICDS by way of circular no. 10 dated 23rd March 2017.

The revised ICDS shall apply to all the taxpayers (other than an individual or Hindu Undivided Family whois not required to get the accounts audited in the Previous Year under section 44AB of the Act) followingmercantile system of accounting for computation of income chargeable under the head PGBP and IFOS.

While the aforesaid measures would certainly aid in tackling some of the issues, considering the extensiveimpact of ICDS, further clarity would be required to achieve the desired objective of bringing consistencyand clarity in computation of taxable income and thereby reducing the scope for litigation. This article seeksto highlight a few open issues, surrounding the implementation of ICDS, which warrant clarity.

ICDS No. Name of the ICDS Equivalent Accounting Equivalent IndianStandard (AS) AS (IND AS)

I Accounting Policies AS - 1 IND AS - 1 and 8II Valuation of Inventories AS - 2 IND AS - 2III Construction Contracts AS - 7 IND AS - 115IV Revenue Recognition AS - 9 IND AS - 115V Tangible Fixed Assets AS - 10 IND AS - 16VI Effects of Changes in

Foreign Exchange Rates AS - 11 IND AS - 21VII Government Grants AS - 12 IND AS - 20VIII Securities AS - 13 IND AS - 32 and 109IX Borrowing Costs AS - 16 IND AS - 23X Provisions, Contingent Liabilities

and Contingent Assets AS - 29 IND AS - 37


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2. Key Concerns:2.1 Constitutional validity of the ICDS - a delegated legislation:

The powers of notifying the ICDS were delegated to the CG which further sub-delegated the powers to theCBDT. Few questions that arise here are as under:

Whether CG has the power to sub-delegate, which is against the legal principle of ‘delegatapotestas nonpotestdelegari’, which means that no delegated powers can be further delegated?

Whether CBDT, in exercise of such delegated powers can prepone the taxability of various incomes andpostpone the allowability of deductions?

Whether such delegated legislation can go beyond the provisions of the statue and modify or nullify the age-old principles laid down by the legislative authorities including the apex court and several high courts?

In this regard, a writ petition, challenging the constitutional validity of ICDS, has been filed by theChamber of Tax Consultants (CTC) and is pending before the High Court of Delhi. The matter is listed forhearing on 28th August 2017.

2.2 Can the ICDS widen the meaning and scope of Income as specified under the Act?Section 2(24) of the Act defines the term ‘Income’ and section 4 and 5 of the Act deals with the charge ofincome-tax and the scope of total income respectively. Section 145 provides for ‘Computation of Income’under the head PGBP and IFOS in accordance with ICDS. ICDS deals only with computation of income andits disclosure. Therefore, section 145 of the Act is a machinery provision and cannot qualify the chargingsection so as to make the latter otiose. The said view is upheld by Madras High Court in the case of CITv. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. Also, preamble to each ICDS clarifies the same.

Accordingly, it is possible to argue that the ICDS cannot create a charge on an item which is otherwise notconsidered as an ‘income’ under the relevant provisions of the Act. The accruing, arising and receipt, asenvisaged under section 5 of the Act, forms the basis of taxing incomes. This principle is sacrosanct andshould be strictly adhered to. Therefore, ICDS should come into play only at the time of computation ofincome whereas chargeability of income should still be governed by the relevant provisions of the Act.

It may be relevant to note that the FAQ’s recommended by the Institute of Chartered Accountants of India(‘ICAI’) to the CBDT, in the letter dated 20th May 2016, states that ‘ICDS does not override the provisionsof section 4 and 5 of the Act. The Assessing Officers should consider well-settled principles of ‘accrual’ ofincome based on binding judicial precedents before applying ICDS’. However, CBDT FAQs are silent onthe said aspect.

2.3 Whether judicial precedents would prevail over the ICDS?CBDT FAQs clarify that certain judicial pronouncements were pronounced in the absence of anyauthoritative guidance and therefore, provisions of the ICDS shall be applicable to the transactional issuesdealt with by the ICDS.

Broadly, one may divide the judicial decisions in two categories, one, which are based on the underlyingprinciples of the Act (eg: accrual concept, avoidance of double taxation etc.) and the other, based on theaccounting principles or methods adopted by the tax payer. Considering that ICDS cannot create a freshcharge of income and that the FAQs issued by way of a circular are not binding on the tax payers, can aview be taken that rulings falling in the former category i.e. based on underlying principles of the Act wouldstill hold good and override the provisions of ICDS? Irrespective of the above, in the post ICDS scenario,the tax payers would need to re-visit the positions adopted by them based on the judicial precedents andmake requisite adjustments while computing income chargeable to tax.

2.4 Application of the ICDS by companies following IND-AS accounting:Presently, it is mandatory for many companies to follow the IND-AS notified under the Companies Act,2013. CBDT FAQs clarify that the ICDS shall apply irrespective of the accounting standards followed, i.e.


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AS or IND-AS. Accordingly, companies following IND-AS accounting shall also be compulsorily required tocomply with the provisions of the ICDS.

The compliance with the ICDS may be a significant challenge for such companies since the ICDS have beenframed based on the AS. IND-AS, which represent the converged form of IFRS, are based on the ‘fair value’concept unlike AS, which are based on the ‘cost’ concept.

Considering variation on account of the introduction of ‘fair value’ concept, unless CBDT clarifies varioustax positions that need to be adopted by the taxpayers following IND-AS accounting, reconciling thedifference between the income as per the books of accounts and as per the ICDS would practically cast anadditional administrative burden on the taxpayers.

3. Specific Issues:

3.1 ICDS I : Relating to Accounting Policies Whether the concept of ‘prudence’ done away with?

Under the AS 1 and IND AS 8, the concept of prudence is one of the key accounting principles whichprecludes recognition of anticipated profits and requires recognition of anticipated losses. Whereas the ICDSdoes not acknowledge the said concept. ICDS provides that Marked to Market (‘MTM’) loss or an expectedloss shall not be recognized unless the recognition of such loss is in accordance with the provisions of anyother ICDS.

Such non-recognition of expected loss for tax purposes, and recognition only in the year of crystallizationof loss, may lead to double taxation in the year in which the loss is crystallised, due to applicability of MATprovisions.

Further, the treatment as per ICDS may be litigious, since the same is contrary to the following establishedjudicial precedents which acknowledged the concept of prudence and upheld the allowability of MTM/expected losses.

Bharat Earth Movers v. CIT [2000] 112 Taxman 61 (SC)CIT v. Woodward Governor India Pvt. Ltd. [2009] 179 Taxman 326 (SC)

3.2 ICDS II: Relating to Valuation of Inventories Whether ICDS II is applicable to service providers?

AS 2 excludes from its scope Work-In-Progress (WIP) arising in the ordinary course of business of serviceproviders. IND AS 2 specifically provides that in the case of a service provider, inventories include the costsof the service for which the related revenue is not yet recognised. The definition of inventories as per ICDSII does not specifically include WIP of a service provider. Reference to ‘service provider’ in paragraph 6 ofICDS II i.e. ‘Costs of services’ has been omitted in the revised ICDS.

ICDS IV relating to revenue recognition requires revenue from service transaction to be matched with therelated cost as per Percentage of Completion Method (‘PCM’) and provides for requirements of ICDS III tomutatis mutandis apply for a service transaction. ICDS II excludes WIP dealt with by ICDS III and by anyother ICDS whereas ICDS III includes in its scope a contract for rendering of services which are directlyrelated to the construction of the asset.

In view of the above, it appears that ICDS II will have no application in case of service providers. Thetechnical guide issued by ICAI also upholds the said view.

Since, WIP arising in the ordinary course of business of service providers is not specifically excluded fromthe scope of ICDS II, there may be litigation on this aspect. Hence, a clarification in this regard by CBDTby either specifically excluding service providers from the scope of ICDS II or specifying the interplaybetween ICDS II and ICDS IV would provide certainty.


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Valuation of stock in case of dissolution of a partnership firm:ICDS provides that notwithstanding whether the business is discontinued or not, inventory on the date ofdissolution of partnership firm/ association of person/ body of individuals shall be valued at the net realisablevalue. These situations are not dealt with in the AS as well as IND AS.

This provision in the ICDS is contrary to the following judicial precedents wherein it has been upheld thatwhere there was no cessation of business on dissolution of the firm, the question of realizing the value ofgoods does not arise and therefore, there was no necessity for valuing the closing stock at market rate.

Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC)Kwality Steel Suppliers v. CIT [2004] 141 Taxman 177 (Guj.)

In view of the specific provision in the ICDS, the above decisions would be impacted. Therefore, even in caseswhere business of the firm is continued after its dissolution, inventory shall be valued at net realisablevalue. However, such treatment of valuation of closing stock may be a subject matter of litigation as itattempts to tax something which is not an ‘income’ per se.

3.3 ICDS III : Relating to Construction Contracts Recognition of retention money income :

Generally, receipt of retention money is contingent upon the satisfaction of certain performance linkedcriteria. The AS and IND AS are silent about treatment of retention money. ICDS III acknowledges theaccrual concept as it provides that the contract revenue shall be recognized on the basis of PCM methodsubject to the reasonable certainty of its ultimate collection. ICDS III further provides for inclusion ofretention money as part of contract revenue. In view of the above, retention money income will be requiredto be offered to tax on PCM basis irrespective of whether the right to receive the same has accrued or not.Such early recognition of retention money as income would lead to accelerated taxation. Such treatmentmay also lead to double taxation in view of applicability of MAT provisions.

In the pre-ICDS scenario, as a general practice, retention money was not offered to tax on the premise thatthe right to receive the retention money accrues only after the obligations under the contract are fulfilled.Therefore, it would not amount to income of the year in which the amount is so retained. Taxpayersgenerally adopted this view relying upon following judicial precedents:

CIT v. East Coast Constructions and Industries Ltd. (2006) (283 ITR 297) (Madras)CIT v. Simplex Concrete Piles (India) P. Ltd. (1989) (179 ITR 8) (Cal.)

Since the treatment under the ICDS is contrary to judicial precedents, one may argue that the said judicialprecedents are based on underlying principle of ‘accrual’ and they should still hold good. Accordingly, itremains to be seen as to how would judicial authorities interpret the provisions of the Act, ICDS and judicialprecedents with respect to said issue.

Recognition of expected losses :As discussed earlier, AS and IND AS follows the concept of prudence and provides that total expected losson a contract must be recognized as an expense immediately. Following the said accounting principle,various judicial forums have taken a view that treatment of foreseeable loss provided in the books ofaccounts as per the Accounting Standards should be allowed as an expenditure:

ACIT v. Ashoka Buildcon Ltd.[2015]61 taxmann.com 330 (Pune Trib.)Asstt. CIT v. ITD Cementation India Ltd [2013]36 taxmann.com 74 (Mum. Trib.)CIT v. Triveni Engg. & Industries Ltd. [2010] 8 taxmann.com 146 (Delhi)

ICDS III is silent on the treatment of expected losses. ICDS III, however, provides that contract revenueand contract costs associated with the construction contract should be recognized as per the PCM method.Therefore, for the purposes of income-tax computation, since there is no specific provision in ICDS III


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allowing future / anticipated losses, such losses shall not be allowed unless actually incurred and only inproportion to the stage of completion. In doing so, ICDS overrules the said judicial rulings to disallow theexpected losses recognized in the books of accounts as per AS and IND AS.

This may create a situation where an entity is required to pay tax under the MAT provisions despite havingincurred a loss on an overall basis. If at the end of the contract period, the actual loss is lesser than theexpected loss recognized in the books earlier, then the entity may need to reverse the difference in its booksof accounts on which it might be required to pay MAT. For ease of understanding, following illustration maybe referred to.

Assumptions :a) Expected loss in Year 1: INR 1000b) Actual loss in Year 1, 2 and 3: INR 400, 400 and 100

Year MAT Normal computationParticulars Profit / (loss) Particulars Profit / (loss)

1 Expected loss (1000) Actual loss (400)2 - - Actual loss (400)3 Reversal of loss 100 Actual loss (100)

3.4 ICDS IV : Relating to Revenue Recognition Recognition of interest income :

AS provides for accrual of interest income on the time basis and further provides that the revenuerecognition of interest can be postponed where it is unreasonable to expect ultimate collection. ICDSprovides for recognition of interest income of a time basis irrespective of whether the ultimate collectionthereof is certain or not. Further, the FAQs clarify that subsequent non-recovery of such interest can beclaimed as a deduction in view of amendments to section 36(1)(vii) of the Act.

In case where the interest income is offered to tax under the head IFOS, it is not clear as to under whichsection the write off of such interest can be claimed as a deduction. It needs to be tested whether such writeoff would be deductible as an expenditure under section 57(iii) of the Act or not.

Further, the FAQs clarify that ‘the provision of the Act (e.g. section 43D) shall prevail over the provisionsof ICDS.’ Section 43D provides that interest income from Non-Performing Assets (NPAs) of Public FinancialInstitutions, Scheduled Banks, Co-operative Banks etc. is taxable in the year in which it is credited or inthe year of receipt, whichever is earlier. However, Non-Banking Financial Corporations(NBFCs) are notcovered under the scope of section 43D. Therefore, it appears that the provisions of the ICDS shall applyto NBFCs even in respect of NPAs.

Such recognition of interest income as per ICDS may be a subject matter of litigation as it is against thewell-settled fundamental principle of accrual of income and the ‘real income’ theory as enunciated byvarious judicial authorities. One may rely on the following judicial precedents to argue that the incomeaccrues only when an irrevocable right to receive vests in the recipient of income and hence, recognition ofinterest income on time basis is unwarranted.E. D. Sassoon & Co. Ltd. v CIT[1954] (26 ITR 27) (SC)Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC)It remains to be seen as to how would judicial authorities interpret the provisions of the Act, ICDS andjudicial precedents with respect to the said issue.

3.5 ICDS V: Relating to Tangible Fixed Assets Subsequent capital expenditure to be added to actual cost

ICDS provides that capital expenditure which meets the specified criteria, i.e. expenditure which increases


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the future benefits from existing asset beyond its previously assessed standard of performance, is requiredto be added to actual cost.

In the Pre-ICDS scenario, such expenditure was regarded as a capital expenditure which would not beallowable as deduction under section 37 of the Act. It is pertinent to note here that actual cost of asset hasbeen defined under section 43(1) of the Act to mean the ‘actual cost of the assets to the assessee, reducedby that portion of the cost thereof, if any, as has been met directly or indirectly by any other person orauthority’.

ICDS also provides that depreciation on a tangible fixed asset shall be computed in accordance with theprovisions of the Act. For the purpose of computation of depreciation, the ‘Written Down Value’ has beendefined under section 43(6) of the Act. Section 43(6)(c) of the Act provides that block of assets shall beincreased by actual cost of asset acquired during the previous year.

On a conjoint reading of section 43(1) and 43(6)(c), it can be construed that addition of actual cost to blockof assets is possible only if there is an asset which comes into existence.

ICDS provides for adding such expenditure to the actual cost which meets the specified criteria. However,since the said treatment is not strictly in line with the present provisions of the Act, it would be interestingto see as how would judicial authorities approach this issue in case where tax payer has adopted treatmentwhich is in line with ICDS but not strictly as per the provisions of the Act.

3.6 ICDS VI : Relating to effects of changes in Foreign Exchange rates Treatment of exchange differences on borrowings for acquisition of domestic assets:

ICDS provides that the exchange difference on monetary items should to be recognized as an expense orincome, as the case may be. Further, ICDS expressly provides that these provisions will be subject to section43A of the Act. The said section permits adjustment of realized exchange difference to actual cost in caseof imported assets. However, there is no specific provision in the Act dealing with recognition of exchangedifference in case of domestic assets.

Accordingly, following the ICDS provisions, it may be construed that exchange difference in case of domesticassets should be allowed as a deduction. However, claim of deduction on account of exchange differencecould be litigious in view of following judicial precedents wherein such deduction has been disallowedholding it to be capital in nature.

Sutlej Cotton Mills Ltd v. CIT [1979] (116 ITR 1) (SC)CIT v. V.S. Dempo & Co Pvt. Ltd [1994] (206 ITR 291) (Bom.)CIT v. Sandoz (India) [1994] (206 ITR 599) (Bom.)

3.7 ICDS VII : Relating to Government Grants Recognition of government grant:

AS, IND AS as well as ICDS provides that the government grant shall not be recognised until there isreasonable assurance that conditions attached to grant shall be complied with and that grant shall bereceived. However, unlike AS and IND AS, ICDS further provides that the recognition of the grant cannotbe postponed beyond the date of actual receipt even though the conditions attached to the same are not yetfulfilled. Since, these provisions of ICDS are against the well-settled ‘real income’ theory, the said treatmentwould be prone to litigation.

3.8 ICDS VIII : Relating to Securities Treatment of broken period interest:

CBDT FAQs clarify that the interest already taxed as income is to be taken into account for computationof capital gain arising on sale of such security, pending receipt of interest.Considering the fact that the provisions of ICDS do not apply for computation of capital gains, adjustmentof interest income already offered to tax to the cost of acquisition of security or full value of considerationas contemplated under section 48 of the Act may pose a challenge as the said treatment, suggested by CBDT


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FAQs, does not seem to be strictly in line with the provisions of the Act.

Further, the ICDS for recognition of revenue do not apply to the payer of the interest, who may still chooseto record interest expense and deduct corresponding TDS only when the same is due (i.e. not as per timebasis). This shall lead to TDS mismatch in case of sale of security pending receipt of interest.

3.9 ICDS IX : Relating to Borrowing Costs: Computation of general purpose borrowing costs to be capitalised

The quantum of the borrowing costs to be capitalised and the qualifying assets under ICDS wouldsignificantly differ from the same under AS and IND AS because the following reasons:ICDS provides for a relatively broader definition of qualifying assets covering majority of the assets. Unlike AS and IND AS, ICDS implies offering interest earned on temporary investments as income for taxpurposes. There is no concept of suspension of borrowing costs under ICDS i.e. borrowing costs incurredeven during the periods in which active development of the asset is interrupted is also required to becapitalized. ICDS prepones the commencement of capitalisation compared to AS and IND AS. ASand IND AS provides for borrowings costs of general purpose borrowings to be capitalised using a weightedaverage capitalisation rate, as against an allocation formula prescribed under ICDS

Considering the vast difference in the computation of mechanism, the quantification of the borrowing coststo be capitalised may prove to be a complex task for large companies with substantial borrowings and willnecessitate maintenance of separate records casting an additional administrative burden on the tax payers.

3.10 ICDS X : Relating to Provisions, Contingent Liabilities and Contingent Assets : Test of ‘reasonable certainty’ for recognition of ‘provision’ and ‘contingent asset’

ICDS provides that the provisions and the contingent assets should be recognised if they meet the criteriaof ‘reasonably certain’, as against the prescribed criteria under AS of ‘probable’ for provisions and ‘virtuallycertain’ for contingent assets. In absence of any guidance on the said terms or their distinction from oneanother, tax department may be inclined to interpret the said provision in a manner that would result indeferment of recognition of provisions and early recognition of contingent assets. Therefore, since the sameis likely to result in a subjective interpretation, it may defeat the objective bringing certainty and may addto the litigation on the said subject.

Further, in absence of any ‘grandfathering’ for past contingent items, the entities will have to meticulouslyreview each provision as well as contingent asset existing prior to the date of applicability of ICDS in viewof the ‘reasonable certainty’ test and give its effect accordingly. This may have a considerable impact in theyear of transition to ICDS.

4. Conclusion:ICDS primarily attempts to accelerate the collection of taxes by preponing the income and postponing thedeductibility of expenses/losses which results in increased timing difference between accounting income andtaxable income. Further, as already discussed above, there may be situations which would lead to doubletaxation because applicability of MAT provisions. Therefore, it is imperative for CBDT to clarify theinterplay between the ICDS and MAT provisions.

Though the technical guide (issued by the ICAI in July 2017) and the CBDT FAQs would assist thetaxpayers in interpreting and applying the provisions of the ICDS, however, certain open issues still requireclarification from the CBDT. Considering that the taxpayers are already struggling with multiple regulatorychanges like Companies Act, 2013, IND AS, Goods and Services Tax etc., the implementation of ICDS wouldentail additional compliance burden and would pave the way for increased litigation.

Further, it would be interesting to witness the outcome of the writ petition filed by the CTC (challengingthe constitutional validity of the ICDS) which may serve to be the last savior for the taxpayers fromthe complexities arising due to the ICDS, before filing their first ICDS compliant return of income forAY 2017-18.


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ICDS V : TANGIBLE FIXED ASSETSICDS IX : BORROWING COST

Contributed by :CA Umang Soni(a member of the association


A. Scope & Definition: “Tangible fixed asset” = land, building,

machinery, plant or furniture + held with theintention of being used for the purpose ofproducing or providing goods or services -held for sale in the normal course ofbusiness.(Concept is same as that of AS-10,but wordings are somewhat different).

a) Stand-by equipment & servicing equipment= capitalised.

b) Machinery spares = charged to the revenueas and when consumed.

c) Spares used in connection with tangiblefixed asset + irregular expected use =capitalised

d) No monetary threshold is prescribedfor any asset to be identified as atangible fixed asset. Under AS 10 andInd AS 16, with regard to purchase ofinsignificant items, Appropriate aggregatevalue of such items, on the basis ofjudgement and materiality, can beexpensed out in books. ICDS does nothave the concept of materiality andtherefore one will have to consider theprinciple of enduring benefit of the asset forthe purpose of treating the particular itemas tangible fixed asset.

Coverage of Assets in possession withcontrol over it:

a) In the case of Mysore Minerals Ltd v CIT[1999] 239 ITR 775 (SC), the Hon’bleSupreme Court has held that the term‘owned’ must be assigned a wider meaningand that a person having acquiredpossession over an asset in his own right,though a legal title may not have beenconveyed to him, could still be considered asthe ‘owner’.

b) This enlarged meaning of ‘owner’ asinterpreted by the Hon’ble Supreme Courtcan be correlated to the term used namely‘asset held’ in this ICDS.

c) Possession of the asset in own right andexercise of dominion over the asset areimportant tests to determine whether theasset is ‘held’ as covered by this ICDS.

d) Further, ICDS I require the treatmentand presentation of transactions andevents to be governed by theirsubstance and not merely by theirlegal form.

B. Acquired Tangible Fixed Asset

1. Through Monetary consideration:Recognise Tangible fixed asset at ActualCost = Purchase price + import duties and othertaxes (excluding recoverable taxes) – TradeDiscounts & Rebates+ other directly attributableexpenses + test run expenditure + experimentalproduction (Refer ICDS IX on Borrowing Costsfor capitalisation of borrowing cost)i. Expenses incurred during the interval

between readiness of the project tocommence its production and thecommencement of actual production =Expensed out or deferred over the period of3-5 years (ICDS is silent)

ii. Expense incurred after the conduct of testruns and experimental production butbefore commencement of commercialproduction = capitalised (CBDT Circular no.10/2017 dated 23/03/2017)

iii. The cost of a tangible fixed asset mayundergo changes subsequent to itsacquisition or construction on account ofprice adjustment, changes in duties,exchange fluctuation or similarfactors. (Refer to ICDS VII on GovernmentGrants, ICDS VI - Effects of changes inforeign exchange rates)

2. Through Non-Monetary consideration:a) Tangible fixed asset acquired in

exchange for another asset = Fairvalue of the tangible fixed asset soacquired


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As per AS 10: Cost of Acquired Asset =

Fair market value of the considerationgiven, or

Fair market value of the asset acquired ifthis is more clearly evident, or

Net book value of the asset given up(Exchange of assets when the assetsexchanged are similar)

An adjustment is made for any balancingreceipt or payment of cash or otherconsideration

b) Tangible fixed asset acquired inexchange for shares or othersecurities = Fair value of the tangiblefixed asset so acquired

As per AS 10 : Cost of Acquired Asset = Fairmarket value of acquired asset, or securitiesissued, whichever is more clearlyevident.

Difference in recognition amount as per AS10, Ind AS 16 & ICDS V will be given inblock of asset as defined under IT Act andresultant depreciation

“Fair value” of an asset is the amount forwhich that asset could be exchangedbetween knowledgeable, willing (meansnot in compulsion) parties in an arm’slength transaction (arm’s length “price”is defined under section 92F(ii) of IncomeTax Act, 1961).

C. Self- constructed Tangible Fixed Assets Recognise Tangible fixed asset at Actual

Cost = Purchase price + import duties and othertaxes (excluding recoverable taxes) – TradeDiscounts & Rebates + other directly attributableconstruction cost (related to or allocable tospecific tangible asset) & expenses + test runexpenditure + experimental production - Anyinternal profits

D. Special Cases

Tangible fixed assets owned jointly with others =Proportion in the actual cost, accumulateddepreciation and written down value is groupedtogether with similar fully owned tangible fixedassets

Several assets purchased for a consolidated price- Consideration apportioned to various assets ona fair basis

E. Improvements and Repairs Expenditure increasing future benefits from the

existing asset beyond its previously assessedstandard of performance = to be added to actualcosta. Parts of machinery completely worn out,

expenditure on their total replacement =Allowable business expenditure [NewShorrock Spg. & Mfg. Co Ltd v CIT[1956] 30 ITR 338 (Bom)]

b. Expenditure incurred on repairs that doesnot bring into existence any benefit oradvantage of an enduring nature or anynew asset or new advantage, nor changesthe nature of the asset as a whole orincreases its earning capacity = Deductibleexpenditure.[CIT v I.C.I (India) (P) Ltd[1983] 139 ITR 105 (Cal)]

c. Amount spent on new machinery, furnitureand extensive repairs = Not qualify as‘current repairs’ = Not a deductibleexpenditure [Ballimal Naval Kishore vCIT [1997] 224 ITR 414 (SC)]

d. The Hon’ble Supreme Court in CIT vSaravana Spg. Mills (P.) Ltd [2007] 293ITR 201 (SC) held that section 31(i) limitsthe scope of allowability of expenditure asdeduction in respect of repairs made tomachinery, plant or furniture by restrictingit to the concept of current repairs and allrepairs are not current repairs. The Courtfurther held that the test is not whetherexpenditure is revenue or capital innature, but whether expenditure iscurrent repairs. For expenditure to beallowable to constitute current repairs whatis necessary is that the expenditure musthave been incurred to preserve andmaintain an already existing asset, andobject of expenditure must not be to bring anew asset into existence or to obtain a newadvantage.

The cost of an addition or extension to anexisting tangible fixed asset + capitalnature + integral part of the existingtangible fixed asset = to be added to actualcost


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Any addition or extension + a separateidentity as an asset + capable of being usedindependently = separate asset.

F. Transitional Provisions (For acquisition orconstruction of tangible fixed assetscommenced on or before 31/03/2016 but notcompleted by the said date):

Actual cost as per above provisions of thisstandard after considering opening actual costalready accounted for any previous yearcommencing on or before the 01/04/2015 shall betaken into account

G. Depreciation & Income on transfer ofIntangible assets:

Computed in accordance with the provisionsof the Act

Fixed assets retired from active use + heldfor disposal = Lower of net book value andnet realisable value(NRV)

Expected loss recognised immediately in theprofit and loss statement – Not allowed inICDS

ICDS is silent on following areas:a) upward and downward revaluation of an

asset.b) Expense out items which would otherwise

be capitalised as amount is not material.

H. Disclosures:

Description of asset or block of assets;

Rate of depreciation;

Actual cost or written down value, as thecase may be;

Additions or deductions during the yearwith dates of transaction including date ofasset put to use;

Amounts should show adjustment onaccount of—

a) CENVAT credit claimed and allowed;b) Change in rate of exchange of currency;c) Subsidy or grant or reimbursement, by

whatever name called;

Depreciation Allowable; and

Written down value at the end of year

ICDS IX: Borrowing Cost

A. Scope:

Not deal with the actual or imputed cost ofowners’ equity and preference share capital

Treatment of borrowing costs.

B. Borrowing Cost & Qualifying Assets:

1. “Borrowing costs” are interest and othercosts incurred by a person in connection withthe borrowing of funds and include:

a) commitment charges on borrowings;b) amortised discounts or premiums relating to

borrowings;c) amortised ancillary costs for arrangement of

borrowings;d) finance lease charges;e) bill discounting charges and other similar

charges (CBDT Circular no. 10/2017 dated 23/03/2017); and

f) Loan prepayment charges (interpretation basedon inclusive definition of borrowing cost)

The term “interest” (not being defined in theICDS), would have the same meaning ascontained in section 2(28A) of the Act i.e.,“interest” means interest payable in any mannerin respect of any moneys borrowed or debtincurred (including a deposit, claim or othersimilar right or obligation) and includes anyservice fee or other charge in respect of themoneys borrowed or debt incurred or inrespect of any credit facility which has notbeen utilised. However, this term would haveto be read in the context of “borrowing of funds”,as contained in the definition, and would notapply to interest unrelated to borrowings,such as interest on overdue payments.

The Supreme Court in the case of Taparia ToolsLtd v JCIT [2015]372 ITR 605(SC) has taken aview that one time upfront discountedinterest payment on debentures, shown asdeferred revenue expenditure in books ofaccount to be written off over a period of fiveyears, was allowable as a deduction inentirety in the initial year of paymentitself, since the liability was incurred inthat year.

In case different amortisation method is followedin books of accounts & for income computation


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under Income Tax Act, the concept of amortisation vis-à-vis accounts, and therefore the amortisationreferred to in the definition of “borrowing costs” should be amortisation as per books of account.

Exchange differences arising from foreign currency borrowings to the extent that they areregarded as an adjustment to interest costs not covered in above definition - Notional parameters aretaken into consideration and IT act is always based on actual parameters instead of notionalparameters.

Deduction of income on temporary investment of borrowings not said in ICDS but covered in AS 16.

Exclude borrowing costs otherwise allowable under the specific provisions of the Act i.e. 14A, 43B, 40(a)and 40A(2)(b). (CBDT Circular no. 10/2017 dated 23/03/2017) – Section 40A(3) not covered in aboveclarification

Other borrowing costs shall be recognised in accordance with the provisions of the IT Act.

2. “Qualifying Asset” means:a) land, building, machinery, plant or furniture, being tangible assets;b) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial

rights of similar nature, being intangible assets;c) Inventories that require a period of twelve months or more to bring them to a saleable condition.

Points of Difference between AS 16 :

Substantial period is subjective in AS 16 - ordinarily, substantial period = 12 months, unlessa shorter or longer period can be justified on the basis of facts and circumstances of the case - Time takentechnologically and commercially for intended use or sale is considered.

Time taken to get qualifying asset ready for its intended use or sale (just referred as saleablecondition in ICDS IX)


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C. Commencement of Capitalisation

*Proviso to section 36(1)(iii): Interest amount paid in respect of capital borrowed for acquisition of an assetfor any period beginning from date of borrowing to date of asset first put to use = Not allowed asdeduction.


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As per AS 16, All 3 below conditions are to be fulfilled –a) Expenditure for the acquisition, construction or production of a qualifying asset is being incurred;b) Borrowing costs are being incurred; andc) Activities necessary for asset’s intended use or sale are in progress

Whether General borrowing costs is attributed to cost of inventory of real estate?a) Express provision of the Act shall override ICDSb) Interest is a period cost u/s 36(1)(iii) & unless specific borrowing for capital asset, expense has to be

allowedc) Lokhandwala Construction Inds. Ltd. 260 ITR 579 (Bombay HC) = still hold goodd) Note: special bench in case of Wall Street Construction Ltd. (5 SOT 103) had held against the aforesaid

proposition in case of stock in trade. Reliance was placed on Bombay HC decision Taparia Tools.However the aforesaid decision has been reversed by Supreme Court (372 ITR 605)

e) Calcutta HC in Cellice Developers Pvt. Ltd. in (231 Taxman 255) has followed the Bombay High Courtdecision as held in 260 ITR 579

ICDS is silent on – Temporary suspension of capitalisation of borrowing costs – extended periodsin which active development is interrupted

D. Cessation of Capitalisation:

Qualifying Tangible Assets As per ICDS As per AS 16Construction completed in parts and a completed part capable of beingused while construction continues for the other parts = capitalisationwith respect to part thereoff shall cease

Other than Inventory When first put to use when substantially all thewhen substantially all the activities necessary for its

Inventory activities necessary for its intended sale are completeintended sale are complete i.e. physical construction /

production is complete even thoughroutine administrative work /minor modifications might stillcontinue

Timing Difference between AS & ICDS:Though in common parlance both the words “Asset readyto use” & “Asset put to use” have different meaning, but courts have consistently taken a view thatready to use, means put to use for Income Tax purposes

E. Transitional Provisions:Borrowing costs incurred [on or after 01/04/2016] = capitalised for the previous year [on or after 01/04/2016] as per this ICDS after taking into account borrowing costs already capitalised, if any, forthe same borrowing for any previous year ending on or before 31/03/2016.

F. Disclosure: Accounting policy adopted; and

Borrowing costs capitalised during the previous year.

G. Other Provisions of IT Act prior to ICDS:

Explanation 8 to Section 43(1): Interest paid or payable for acquisition of an asset relating to periodafter such asset first put to use = Not to be included in actual asset cost.


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ICDS VI - EFFECTS OF CHANGESIN FOREIGN EXCHANGE RATES

Introduction:This Income Computation and Disclosure Standard(ICDS) is applicable for computation of incomechargeable under the head “Profits and gains ofbusiness or profession” or “Income from other sources”and not for the purpose of maintenance of books ofaccounts. Also, in case of conflict between theprovisions of the Income Tax Act, 1961 (The Act) andthis ICDS, the provisions of the Act shall prevail.

Scope:ICDS VI deals with:1. treatment of transactions in foreign currencies;2. translating the financial statements of foreign

operations;3. treatment of foreign currency transactions in the

nature of forward exchange contracts.

1. Foreign Currency TransactionsThe treatment in respect of transactions inforeign currencies is divided into two parts i.e.Monetary items and non- monetary items.

Monetary items are money held and assets andliabilities to be received or paid in fixed ordeterminable amounts of money, whereas non-monetary items are assets and liabilities otherthan monetary items. Cash, receivables, andpayables are examples of monetary items. Fixedassets, inventories, and investments in equityshares are examples of non-monetary items.

Tax treatment Pre-ICDS: Foreign currency transaction has to be initially

recorded in the reporting currency by applyingthe exchange rate between the reportingcurrency and the foreign currency at the date ofthe transaction.

On the last date of the previous year or on thedate of settlement, monetary items are convertedinto the reporting currency by applying theclosing rate or rate on the settlement date as thecase may be. This results in exchange differencearising out of conversion. The nature of the saidexchange gain/loss, whether capital or revenuewas matter of significant litigation.The SupremeCourt in the case of Tata LocomotiveEngineering [1966] 60 ITR 405 held that the

Contributed by :CA Deepesh Chheda(a member of the association


purpose for which the foreign currency is utilizedis to be considered. If utilized for capitalpurposes, then the same is neither taxable norallowed as deduction.The above referred decisionwas even referred in the case of Sutlej CottonMills Ltd [1979] SC 116 ITR 1. Thus, suppose aperson has borrowed a loan in foreign currencyfor acquiring an Indian asset. Loan being amonetary item will be converted into reportingcurrency by applying the closing rate. Now theloan was acquired for a capital asset, making thegain/loss, capital in nature and therefore, thesame would be disallowed based on the SupremeCourt decision in the case of Tata LocomotiveEngineering and other decisions.

In the case of Tata Iron and Steel Co. Ltd[1998] SC 231 ITR 285, it was held that the costof an asset and cost of raising money forpurchase of asset are two different andindependent transactions. Thus, eventssubsequent to acquisition of assets cannotchange price paid for it. After the said decision,Section 43A was inserted in the Act. Itnecessitates the exchange difference to becapitalized at the time of making payment, if theforeign currency loan was borrowed foracquiring foreign assets. Thus, if a personborrows a loan in foreign currency for foreignassets, then it would be specifically governed bySection 43A.

To summaries, following is the taxtreatment Pre-ICDS:

In case of a monetary item which are in form oftrading asset or part of circulating capital –Nature of gain / loss will be revenue in nature.

In case of a monetary & non-monetary itemwhich are part of fixed capital – Nature of gain/ loss will be capital in nature. In case gain / lossis related to imported assets then gain / loss willbe capitalized on payment towards importedassets / payment of loan borrowed for acquisitionof assets.

Tax treatment post ICDS: Even as per ICDS, foreign currency transaction

has to be initially recorded in the reportingcurrency by applying the exchange rate between


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the reporting currency and the foreign currencyat the date of the transaction.

On the last date of the previous year or on thedate of settlement, monetary items are convertedinto the reporting currency by applying theclosing rate or rate on the settlement date as thecase may be. ICDS does not follow utilizationconcept, but states that all gain/loss arising onaccount of monetary items would be revenue innature subject to provisions of section 43A. Thisindicates that they are doing away with theprinciple laid down by the Supreme Court in thecase of Tata Locomotive Engineering (supra) andfollowing more rational and practical approach.This is also evident from the decision of PuneTribunal in case of Cooper Corporation [69taxmann.com 244]which was rendered for theprevious year pre-ICDS, where the Assessee tookthe loans in foreign currency to take advantageof the lower rate of interest. It was held thatforeign exchange loss was on account of lowerinterest cost, which was revenue in nature andthus allowed. The aforesaid decision also in away deviates from the well accepted principle ofdetermining nature of gain/loss based onutilization of funds. The aforesaid decision hasconsidered the intention of the assesse whileborrowing in foreign currency, which was toreduce interest cost as interest rates on foreigncurrency borrowings is much lower than theborrowing in Indian rupee, hence the intentionof assesse was to earn benefit in revenue fieldand so corresponding foreign currency gain/losswould also be revenue in nature.

Non-monetary items will not be re-instated at theend of every previous year. In case there is anyre-instatement, the treatment of gain/losspertaining to non-monetary items needs to beevaluated based on nature of every item.

2. Financial Statements of foreign operationsThe treatment of foreign exchange fluctuationson translation of financial statements of foreignoperations shall be similar to treatmentprescribed for monetary and non-monetary itemsunder foreign currency transactions. Thus, ICDSdoes away with the concept of integral and non-integral foreign currency transactions.

3. Forward Exchange Contracts“Forward exchange contract” means anagreement to exchange different currencies at aforward rate, and includes a foreign currencyoption contract or another financial instrumentof a similar nature.

As the forward exchange contract involvesexchange of different currencies at future date, itis assumed that there would be difference in spotrate and forward rate.The difference isconsidered as premium or discount. For example:if a person entered into a forward contact to buy1$ at 62, and currently it is at the rate of 1$=60,then in that case 2 is the premium on the forwardcontract. Suppose in the same example, at theend of the year, 1$=65, then the exchangedifference (purposes excepttrading, speculationpurposes, firm commitment or a highly probableforecast transaction) is Rs. 5 (65-60).

Tax treatment Pre-ICDS

Currently, the premium or discount on theforward exchange contract (if not intended fortrading or speculation purposes) is amortizedover the life of the contract. Also, exchangedifference on such contract is recognized as anincome or an expense, except the instances,discussed in the part related to foreign currencytransaction, where the nature of capital gain/lossis considered as capital.

If the forward exchange contract is intended fortrading or speculation purposes, then the entirepremium or discount and the exchangedifference (difference between the contractedforward rate and the forward rate for theremaining period) is considered speculativeincome/loss.

Tax treatment Post-ICDS :

The premium or discount on the forwardexchange contract (if not intended for trading,speculation purposes, firm commitment or ahighly probable forecast transaction) isamortized over the life of the contract. Also,exchange difference on such contract isrecognized as an income or an expense(irrespective of its nature, whether capital orrevenue for the reasons as discussed in the partrelated to foreign currency transactions).

Premium, discount or exchange difference oncontracts that are intended for trading orspeculation purposes, or that are entered into tohedge the foreign currency risk of a firmcommitment or a highly probable forecasttransaction shall be recognized at the time ofsettlement and will be considered as speculativein nature.


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UNITED KINGDOM’S DIVERTED PROFITS TAX:UNILATERAL ATTEMPT TO RESOLVE AN

INTERNATIONAL PROBLEM

Contributed by :CA JIger Saiya(a member of the association


“Diageo told to pay £107mn in extra tax inprofits row” - BBC News“Google Tax’ on Corporations Yields $178 mn forU.K. in 2016" – Bloomberg BNA“Glencore Seeks ‘Google Tax’ Appeal at Second-Highest UK Court” - Bloomberg BNAThe above headlines have flooded the UK and globalmedia in past 3 months. Diageo Plc, the London-based alcoholic beverage giant behind brands such asJohnny Walker and Smirnoff revealed that it isfacing a GBP 107mn tax bill in relation to theDiverted Profits Tax (‘DPT’), or so-called ‘Google Tax’,and declared that it will be challenging HMRC overthe issue. However, it has been instructed to pay thefull amount assessed up-front and then continue towork to resolve this matter with HMRC.

London Stock Exchange Group Plc, Europe’s second-largest stock exchange, highlighted in its annualreport that it has made an accounting provision of £4.5 mn due to “uncertain tax positions” that includedthe DPT.

According to its 2016-17 annual report released onJuly 13, 2017, the HMRC have raked in a whopping£ 281 mn from the Google Tax for the year endingMarch 31, 2017. The remaining £ 143 mn came fromextra receipts from companies changing their taxplanning in wake of DPT. Further, in addition to theDPT collected, HMRC said in its annual report thataccelerated payment notices have been sent out tomore than 30,000 taxpayers, totaling to a taxdemand of £1.3 bn. The UK tax advisors haveremarked that HMRC has made several inquiriesthat started off just related to transfer pricing, butlater morphed into an inquiry on the DPT!

So, what is this buzz all about? What is thisGoogle Tax? Why is DPT referred to as “Google”tax? Why are the British and foreignmultinational entities (‘MNEs’) fearing this socalled draconian tax?

In the inaugural article under this series theauthors have attempted to provide an insightinto this anti-avoidance tax legislation

introduced by the UK.What is DPT?A little overtwo years ago, in April 2015, the UKgovernment introduced the first of its kind anti-avoidance rule called “Diverted Profits Tax”as a partof its tax legislation. The DPT was introduced with anobjective to counter aggressive tax planning usedby MNEs to transfer profits from UK, by deployingbusiness structures that prevent constituting apermanent establishment (‘PE’) in the UK, either bythe use of artificial transactions or of entities withouteconomic substance. DPT was dubbed the “GoogleTax” even before its introduction in April 2015.

Though not strictly a measure enacted in response tothe OECD’s BEPS recommendations, theintroduction of the DPT is nonetheless worthy ofmention in so far as it essentially preempted severalof the OECD BEPS action items (such as Actions 7 to10).

HMRC was always conscious of the low level of taxesbeing paid by some of the big companies operateingin the UK but having headquarters elsewhere.Therewere several reports suggesting that the amount ofcorporation tax Google paid in the UK was not basedon the amount of profits Google made from its sales toUK customers. Reports also suggested that despitethe UK being one of Google’s biggest markets, it paidpaltry sum of £20.4mn in taxes in 2013 as againstsales of £ 3.8bn for the said year. Google made mostof its UK profits through online advertising.Thecompany was criticized for its complex internationaltax structures. Its European headquarters were inIreland, which had a lower corporation tax rate thanUK. It was also alleged to have used companystructures in Bermuda - where the corporation taxrate is zero - to shelter profits.The DPT was thusnicknamed “Google Tax” amid this strong perceptionand concerns that Google (and also several otherglobal tech companies) were engaging in aggressivetax planning to shift profits from UK to certainoffshore tax havens.

Broadly, DPT has two charging provisions that applyto entities, which –i. design their activities to avoid creating a taxable


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presence (i.e. PE) in UK (for instance, in case aforeign company makes substantial sales in UK,but deliberately structures its UK activities sothat it is not treated as trading through a UKPE. The foreign company is thus not liable to UKcorporation tax on the associated profits); or

ii. create a tax advantage by using entities ortransactions that lack economic substance (forinstance, in case a UK resident company entersinto a transaction(s) with a related/ associatedentity resulting in erosion to UK’s tax basethrough increased expense/decreased income inthe UK company (for example, through royaltyor interest payments)).

The DPT is levied at a rate of 25%(55% in the case ofUK ring-fenced profits from oil and gas sectors),which is higher than the extant corporation tax rateof 19% (for FY 2015-16 and FY 2016-17, corporationtax rate was 20%) levied in the UK. The tax base onwhich DPT is leviable corresponds to the profits thatwould have been attributed to the PE if its presencehad not been prevented by the taxpayer. Further,the profits to be subject to the DPT are calculatedusing the same UK tax rules that govern theallocation of profits to PEs located in UK.

It may be noted that the DPT is not an allowablededuction for the purposes of corporation tax.However, where the profits on which the DPT ischarged are also subject to UK corporation tax (or aforeign tax corresponding to UK corporation tax),such tax shall be credited against the DPT liabilitytoavoid double taxation. However, DPT is notconsidered to be a corporation or an income tax, andthus, tax relief under existing UK double taxavoidance treaties may not be available.

What is the Rationale for Introduction of DPT?DPT is clearly designed to be punitive in nature andseeks to encourage behavioral change in the taxpayers. Since the rate of DPT is higher than the rateof corporation tax (ie 25% v. 20%), there will be anadded incentive for groups to avoid profits beingtreated as diverted, perhaps by bringing them on-shore into the scope of UK corporation tax, thusavoiding faulty re-organization structure for taxavoidance and profit shifting.

While UK has, in recent years,continually strived toattract foreign investment and become a center forinternational business, the UK Government has also

avowed its commitment to align the location oftaxable profits with the location of economic activity.UK has thus adopted an increasingly territorialapproach to corporate taxation.This is evident fromthe CFC rules introduced in the year 2012 and thenDPT brought in vide its Finance Act, 2015 (inadvance of publication of the final recommendationsunder the BEPS project of OECD.

Following the publication of the OECD’s final BEPSrecommendations in later part of 2015 and UK’sefforts to implement certain of these recomme-ndations into domestic law, it is still unclear how theDPT would interact with the BEPS recommendationsand action plans and whether UK government wouldfeel that it is still required.

To Whom Does DPT Apply and Who are Exempted?The DPT legislation outlines a number of tests andthresholds to assess whether DPT will apply to anytransaction or business activity. Although the rulesare complex, they could generally apply to:

§ a non-UK entity that sells goods or services toUK customers, even if only digital productsdelivered via the internet;

§ a non-UK entity that has a UK-based entityproviding services (e.g. sales, marketing or headoffice);

§ a non-UK entity with employees that performactivities in the UK; or

§ a UK-based entity with operations offshore.

However, it may be noted that only large MNEs aretargeted vide this tax. The term “large” is defined asper the EU laws to include entities which togetherwith connected entities have total UK-related sales ofmore than £ 10mn in the relevant accountingperiod.Likewise, an exclusion applies if the total UK-related expenses of the entity (together withconnected companies) in the relevant accountingperiod are less than £ 1 mn.

Further, transactions are also excluded from DPT, ifthey only give rise to one or more loan relationshipsand associated hedging derivatives.

Attacking Tax Avoidance, but Adding to TaxUncertainty!HMRC has stated that there would be no formalclearance process (similar to Advance Ruling) for theDPT. The HMRC guidance confirms that new APAswould not be finalized without a review from DPTperspective. However, no clarity is provided on


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whether DPT would impact APAs already agreed byHMRC with large MNEs.

In a tax world seeking order and uniformity, whileDPT (in its current form) seems to take on taxavoidance but little does it do to provide tax certaintyfor global corporations doing business in/with UK.

UK’s (or OECD’s) Influence!

AustraliaInfluenced and motivated by the UK government’sdrive in legislating the DPT and also considering theOECD’s recommendations under BEPS project,Australia’s Turnbull government introduced DPT,dubbing it as Australia’s “Google Tax”,arming theAustralian Taxation Office (‘ATO’) with some of theworld’s strongest powers to fight MNEs as it moves torecoup US$2bn in revenues from some of the nation’sbiggest companies -mostly tech giants.

The Australian DPT imposes a penalty rate of tax of40% on diverted profits (i.e. 10% higher than the 30%corporation tax rate) and applies for income yearsstarting on or after July 1, 2017 - irrespective ofwhether the particular arrangements were enteredinto before that time!The Australian DPT onlyapplies to “significant global entities” i.e. (i) aglobal parent entity with an annual global incomeexceeding A$1 bn; or (ii) a member of an accountingconsolidated group, and the global parent entity ofthe group has an annual global income exceedingA$1 bn.

The objective of the Australian DPT is to compelvoluntary disclosures by the entities to the ATO. TheATO has the authority to use whatever informationis available to it (including Country-by-CountryReport data) to raise DPT assessments.TheAustralian Government has quoted that the DPTwould raise about US$100 mn in revenues a yearfrom 2018-19.

While the Australian DPT is based to some extent onthe UK DPT, the rules are considerably wider thanthe UK DPT. The notable differences are the higherDPT rate (40 %, compared to 25% for the UK) andinclusion of financing transactions (which areexempt from UK DPT).

IndiaThe OECD in its final report on tax challenges of thedigital economy (Action Plan 1) provides 3 differentoptions for identifying and addressing these tax

challenges, and one of the options suggested is“Equalisation Levy”.Equalisation levy is by itsdefinition a levy to equalise the tax component of aresident e-commerce company as well as a non-resident e-commerce company and offer a levelplaying field to both.

India, though not influenced (directly) by UK, hastaken the OECD’s above option into considerationand introduced its version of “Google Tax” videChapter VIII of Finance Act, 2016.Under this regime,an equalization levy of 6% of the gross consideration(only if it exceeds INR 1 lakh) received by a non-resident for specified services in relation to onlineadvertisement and provision for digital advertisingspace provided to a resident in India or to a non-resident having a permanent establishment in India,is payable.The obligation to deduct and deposit thelevy to the Central government lies with the residentpayers in India or non-resident payers having apermanent establishment in India.

ConclusionThe way MNEs are taxed has been debated for manyyears and the international tax system is changing asa result.The above paragraphs reveal the anti-avoidance initiatives taken by UK, Australia andIndia reflecting the gradual shift which is in line withrecent OECD BEPS guidance. Global tax rules havebeen tightened over the past two years, with theOECD upholding that multinational companiesshould not deliberately move profits to differentcountries to avoid taxes.

Most OECD and G20 countries engaged in theOECD’s work, and many other countries, are eitherfully engaged or watching the developments closely.Each government is now determining how theguidance will affect existing rules and undertakingthe lengthy process of proposing, debating andenacting domestic tax changes. The OECDrecommendations have definitely hit the right noteand pressed the right nerve of the governments andinstilled a strong desire for preserving its tax base,promoting transparency and introducing anti-taxavoidance rules within its domestic laws.

In short, the OECD’s project has raised the bar forinternational tax policy across the globe. While thework may fall short of delivering an ideal tax world,it will still bring the world many steps closer,especially where tax fairness and transparency areconcerned.


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LEGAL UPDATES /DECISIONS1. DIRECT TAXES

UPDATECompiled by :

CA. Haresh P. Kenia

DEDUCTION OF TAX AT SOURCE – RENT U/S.194I – CBDT CLARIFICATION ON NON-APPLICABILITY OF PROVISIONS OF SECTION194I ON REMITTANCE OF PASSENGERSERVICE FEES (PSF) BY AN AIRLINE TO ANAIRPORT OPERATOR [248 TAXMAN (ST.) 4]

The CBDT Circular No. 21 / 2017 dated 12/06/2017clarified on applicability of provision of section 194I ofthe Act on payment of passenger Service Fees (PSF)by an Airline to an Airport Operator. The Hon’bleHigh Court of Bombay in CIT v. Jet Airways (India)Ltd. declined to admit the ground relating toapplicability of provisions of section 194I of the Act onPSF charges holding that no substantial question oflaw arises. While doing so it relied on the judgment ofthe Hon’ble Supreme Court dated 04/08/2015 in thecase of Japan Airlines and Singapore Airlines wherethe Apex Court held that in view of Explanation toSection 194I of the Act, though, the normal meaningof the word ‘rent’ stood expanded, however, theprimary requirement is that the payment must be forthe use of land and building and mere incidental /minor /insignificant use of the same while providingother facilities and service would not make it apayment for use of land and buildings so as to attractsection 194I of the Act.

The board has clarified that the above view of theHigh Court of Bombay is now a settled position u/s.194I of the Act with regard to PSF. Accordingly theboard has accepted the above view of the high court ofBombay and instructed for not to file appeal by thedepartment on the above settled issue and thosealready filed may be withdrawn and not pressed upon.

SEARCH AND SEIZURE – SECTION 132B –RETAINED ASSETS, APPLICATION OF CBDT’SCLARIFICATION ON APPLICABILITY OFEXPLANATION 2 TO SECTION 132B OF SAIDACT WITH REGARD TO ADJUSTMENT OFSEIZED / REQUISITIONED CASH AGAINSTADVANCE TAX LIABILITY. [248 TAXMAN (ST.)5]

The CBDT vide Circular No. 20 / 2017 has issued thefollowing clarification.

Section 132B of the Income Tax Act provides of theadjustment of seized assets / requisitioned assetsagainst the amount of any existing liability under theIncome Tax Act, Wealth Tax Act, the ExpenditureTax Act, the Gift Tax Act and Interest Tax Act and theamount of liability determined on completion of theassessment under section 153A of the Act and theassessment of the year relevant to the previous year inwhich search is initiated or requisition is made, or theamount of liability determined on completion of theassessment under Chapter XIV-B for the block period,as the case may be (including any penalty levied orinterest payable in connection with such assessment)and in respect of which such person is in default oris deemed to be in default, or the amount of liabilityarising on an application made before the SettlementCommission under sub section (1) of section 245C ofthe Act.

There was a issue with regard to the adjustment ofsuch seized / requisitioned cash against advance taxliability etc. The Court’s have held that the seizedmoney is to be adjusted against the advance taxliability of the assessee.

Subsequently, Explanation 2 to section 132B of the Actwas inserted by the Finance Act, 2013 w.e.f. 01/06/2013, clarifying that “existing liability” does notinclude advance tax payable in accordance with theprovision of Part C of Chapter XVII of the Act.However, the dispute continued on the issue as towhether the amendment was clarificatory in naturehaving retrospective applicability or it has onlyprospective applicability.

Several Courts have held that the insertion ofExplanation 2 to Section 132B of the Act, isprospective in nature and not applicable to cases priorto 01/06/2013. The SLPs filed by the Departmentagainst the judgment of the Hon’ble Punjab andHaryana High Court in the case of Cosmos Builders &Promoters Ltd. and the Hon’ble Allahabad High Courtin the case of Sunil Chandra Gupta, have beendismissed. Subsequently, the CBDT has also acceptedthe judgment of the Hon’ble Punjab Haryana HighCourt in the case of Spaze Towers Pvt Ltd. dated 17/11/2016, wherein it was held that the Explanation 2 toSection 132B of the Act is prospective in nature.

The CBDT now accepted and clarified that insertion ofexplanation 2 to section 132B of the Act is prospectiveand the appeal may not be filed by the department onthis issue for the cases prior to 01/06/2013 and thosealready filed may be withdrawn or not pressed upon.


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DEEMED DIVIDEND U/S. 2(22) – CBDT’SCLARIFICATION ON SETTLED VIEW OFSECTION 2(22)(e) OF THE SAID ACT ON TRADEADVANCES / COMMERCIAL TRANSACTIONS[248 TAXMAN (ST.) 6]

The CBDT vide circular no. 19/2017 dated 12/06/2017clarified that the trade advances which are in thenature of commercial transactions would not fallwithin the ambit of the word “advance” in section2(22)(e) of the Act and accordingly CBDT has directednot to file appeal on this grounds by officers of thedepartment and those already filed may be withdrawnor not pressed upon.

The board has observed that some courts in the recentpast have held that trade advances in the nature ofcommercial transactions would not fall within theambit of the provisions of section 2(22)(e) of the Act.Such views have attained finality.

Advances were made by a company to a sister concernand adjusted against the dues for job work done by thesister concern. It was held that amounts advanced forbusiness transactions do not fall within the definitionof deemed dividend under section 2(22)(e) of the Act.(CIT vs. Creative Dyeing & Printing Pvt Ltd. DelhiHigh Court)

Advance was made by a company to its shareholder toinstall plant and machinery at the shareholder’spremises to enable him to do job work for the companyso that the company could fulfill an export order. Itwas held that as the assessee proved businessexpediency, the advance was not covered by Section2(22)(e) of the Act. (CIT v. Amrik Singh, P & H HighCourt).

A floating security deposit was given by a company toits sister concern against the use of electricitygenerators belonging to the sister concern. Thecompany utilized gas available to its from GAIL togenerate electricity and supplied it to the sisterconcern at concessional rates. It was held that thesecurity deposit made by the company to its sisterconcern was a business transaction arising in thenormal course of business between two concerns andthe transaction did not attract section 2(22)(e) of theAct. (CIT, Agra v. Atul Engineering Udyog,Allahabad High Court).

AMENDMENT IN RULE 114B OF THE INCOMETAX RULES [247 TAXMAN (ST.) 43]

The CBDT vide notification no. GSR 569 (E) (NO. 51/2017(F. No. 370142 / 13 / 2017 - TPL)) dated 09/06/2017 gives income tax (14th Amendment) Rules 2017.It came into effect from the date of its publication. Itamends the rule 114B.

The second proviso to Rule 114B provides for makingof a declaration in form no. 60 where any person whodoes not have a permanent account number and whoenters in to any transaction specified in Rule 114B. itnow amends that such declaration should be either inpaper form or electronically under the Electronicverification code in accordance with the procedures,data structures and standards specified by thePrincipal Director General of Income Tax (Systems) orDirector General of Income Tax (Systems).

AMENDMENT IN RULE 30, 31 & 31A ANDINSERTION OF FORM NO. 16C & FORM 26QCIN RELATION TO PAYMENT OF RENT BYCERTAIN INDIVIDUALS OR HUF’S. [247TAXMAN (ST.) 52]

CBDT vide notification no. GSR 561 (E) dated 08/06/2017 gives income tax (13th Amendment) Rules 2017.It amends Rule 30, 31 & 31A. it inserts Form No. 16Cbeing certification u/s. 203 of the Income Tax Act fortax deducted at source and Form No. 26QC beingchallan - cum – statement of deduction of tax u/s.194IB.

AMENDMENT IN RULE 31A AND FORM 26B[247 TAXMAN (ST) 56]

The CBDT vide notification no. GSR 554 (E) dated 05/06/2017 gives Income Tax (11th Amendment) Rules2017. It came in to effect on the date of its publication.It amends rule 31A (3A) of Income Tax rules relatingto claim for refund for sum paid to the credit of theCentral Government under chapter XVII – B.

The Rule 31A (3A) provides for furnishing of Form 26Belectronically under digital signature. It now amendsto provide for furnishing of Form 26B electronicallyunder digital signature or verified through anelectronic process.

It also amends Form 26B. It inserts the following.

“Notes : In case of refund related to tax deductedunder section 194-IA of the Act for which Form No.26QB has been filed by the deductor, -

Permanent Account Number may be furnished inplace of tax deduction and collection amount number;

In column II, in sub-column (5) relating to the‘period’, may be left blank;

In column II, in sub-column (7) relating to the ‘Receiptnumber of relevant statement’, furnishacknowledgment number of Form No. 26QB.”

c.v.o. ca’s news & views vol. 21 no. 2 / august 2017 2017/fullissue.pdf · c.v.o. ca’s news...

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