income computation and disclosure standard

INCOME COMPUATION AND

DISCLOSURE STANDARDS KEY CHANGES AT A GLANCE

BY CA VENKATESAN MURALI

Utility of Accounting Standards

J.K. Industries Ltd. v. Union of India [2008] 297 ITR 176 (SC)

Accounting Standards help in –

•Codification of Accounting rules

•Application of the fundamental rules

•Reduce the subjectivity

•Arrive at best possible estimate

•Reduces the need for tax laws dependency upon artificial

rules

Existing Scenario

Under the Provisions of Section 145(2) , Two Accounting

Standards have been notified on 25-January 1996 :

Accounting Standard I – Disclosure Of Accounting Policies

Accounting Standard II – Disclosure of Prior Period Items

and Extraordinary items and changes in Accounting

Policies.

Introduction of ICDS

Ten - Income computation and disclosure standards have been introduced by CBDT on 31-March 2015 by Notification No. 33/2015 dated 31/03/2015 under the provisions of Section 145(2) of The Income Tax , 1961.

Pandora Box

Introduction of Accounting standard under Income Tax act after 18 years

The effect of ICDS is that the computation of Taxable Income which was already tedious becomes more complicated for small and medium level Assessee

Modification in ITR , Tax Audit reports are expected.

Shifting of AS to Ind AS may make changes in ICDS also.

No Specific Exclusions for Insurance , banking and Electricity Companies

Absence of Clarity on Sec 44AA and Presumptive Income sections with ICDS.

Judicial pronouncement vs. ICDS.

ICDS – Objective and Idea

1. Filling Gaps that are existing in the current direct taxation

regime

2. Bringing Consistency and clarity in computation of

Taxable Income and providing stability on tax treatments

of various items

3. Tax neutral framework in facilitation of smooth

implementation of Ind AS

List of ICDS & Corresponding Accounting Standards

ICDS Particulars Accounting Standard

I Accounting Policies AS 1

II Valuation of Inventories AS 2

III Construction Contracts AS 7

IV Revenue Recognition AS 9

V Tangible Fixed Assets AS 10

VI The Effects of Changes in Foreign

Exchange Rates AS 11

VII Government Grants AS 12

VIII Securities AS 13

IX Borrowing Costs AS 16

X Provisions, Contingent Liabilities and

Contingent Assets AS 29

Heads of Income

ICDS is applicable for Income computed under the Heads

“Profit and Gains of Business or profession” and “Income

from Other Sources” .

It is not applicable for computation of Taxable Income

under other heads of Income.

it does not apply to provisions of section 115JB (MAT) for

which purpose the AS issued by ICAI will continue to apply.

Applicability

1. Applicable to All Assesses following Mercantile system of

accounting and chargeable to tax under the head

“Profits and Gains of Business or Profession” or “Income

from Other Sources”

2. Applicable to all assesses

a. Irrespective of applicability of Tax audit

b. Irrespective of Turnover

c. Irrespective of Status of Assessee vis-à-vis (Individual,

AOP , firm and Resident , Non Resident Etc)

d. Applicable from Assessment year 2016-17

Books of Accounts

•No Separate books of accounts are to be

maintained by the Assessee for compliance with

ICDS.

•Entities following accounting standards issued by

ICAI shall maintain additional records ,

reconciliation statements and computations for

differences / distinction between accounting

standards issued by ICAI and ICDS.

Computation

Corporate Assessee(s) & Non Corporate Assessee(s)

Taxable Profits as per ICDS

= Profits computed under IND AS(once applicable) or existing Accounting

standards

+/-

Adjustments for difference between ICDS and existing accounting standard / IND

AS.

Applicability for FY 2015-16

ICDS is from FY 2015-16 , which would make

following impacts with immediate effect

1. Computation of Advance Tax for FY 2015-16

2. Tax Expenses on quarterly results of the

Company

Non Compliance

Non Compliance with ICDS can be

ground for an assessing officer to

complete the Assessment under “Best

Judgment Assessment” under Section

144.

Act Vs ICDS

It has been specially provided before every

standard , in case of conflict between ICDS and Act

, Act will prevail

However , Interplay of Judicial pronouncements vs.

Act vs. ICDS would open more litigations.

Going Forward

• Changes in ITR – Expected to

accommodate disclosure for Non Tax

audit Assessee

• TAX Audit is expected to change again

• Black Money Bill and Disclosures

comparison

ICDS I – Accounting Policies – AS 1

Scope: Deals with the disclosure of significant accounting policies

Significant Similarities Significant Distinctions

Fundamental Accounting Assumptions

being Going concern , Accrual and

consistency are applied

No Concept of Prudence recognized.

- Mark to Market loss or expected loss are

not to be recognized

True and Fairness of the state of affairs and

income of the business

Change in Accounting Policy is only on

account of “reasonable cause” – What is

reasonable cause ??? – Not Defined.

Comparison with AS 1:

ICDS I – Accounting Policies – AS 1

Transitional Provisions

Transactions or contracts existing as on 1st of April 2015 , entered into on or after 1st

of April 2015 – Shall comply with standard

Disclosures:

All significant accounting policies adopted by a person shall be disclosed.

Qualms

1. What are Significant Policies ?

2. Place of Disclosure ?

3. Individual and Firms – Preparing Accounting Policy Disclosure.

ICDS 2 – Valuation of Inventory – AS 2

Scope: Deals with Valuation of Inventory


Definition of Inventory for Raw

materials , WIP and Finished

goods are same as AS 2

Borrowing cost on inventory allowed

Exclusions from the standard is in

line with Accounting standard

except for WIP of Service

Provider.

Standard Cost not recognized as method of valuation –

Companies operating in SAP – Standard cost environment

should work on the changes

Definition of Net realizable value

is the same.

Duties and tax recoverable specifically excluded from cost of

Purchases

In case of dissolution(Not Change in Constitution) of a

partnership firm or an AOP or body of individuals, the inventory

on the date of dissolution shall be valued at the NRV


ICDS 2 – Valuation of Inventory – AS 2


Inventory lying on 1st of April 2015 , if continued to exist on 31st March 2015 Shall

comply with standard

Disclosures:

1. The accounting policies adopted in measuring inventories including the

cost formulae used

2. The total carrying amount of inventories and its classification.

Related Judicial Pronouncements

1. Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC)

2. Kwality Steel Suppliers v. CIT [2004] 141 Taxman 177 (Guj.)

ICDS 3 – Construction Contracts – AS 7

Scope: Determination of Income in respect of construction contracts


Definition of Construction contracts –

Same with AS 7

Contract Revenue Specially Includes Retention

Treatment of change in estimates – IN

line with accountings standards.

Cost = Revenue , Till POC is 25%

Determination of Stage of

Completion

(a) Ratio of “Cost incurred to Total

Estimated Cost” or (b) Surveys of work

performed; or

(c) Completion of a physical

proportion of the contract work. Is in

line with Accounting Standard.

An expected loss on the construction contract should not

be recognized as an expense immediately and can be

allowed only on actual loss.

Incidental income in the nature of interest, dividend and

capital gains shall not be reduced from the cost of

construction but shall be offered to tax separately.

Treatment of reduction in Revenue vs Bad debts




All contracts running as on 31.03.2016 shall be complying with the standard.

Disclosures:

1. The amount of contract revenue recognized.

2. The methods used to determine the percentage of completion of

contract.

3. In case of contract in progress,

i. Amount of costs incurred and profits or losses recognized up to the

reporting date;

ii. The amount of advances received; and iii. The amount of retentions.



1. Amarshiv Construction (P.) Ltd. v. Dy. CIT [2014] 45 taxmann.com - Annulled

2. CIT v. Simplex Concrete Piles India (P.) Ltd. [1989] 45 Taxman 370 (Cal.)]

3. Champion Construction Co [5 ITD 495 (Mumbai ITAT)]

4. Bhagyanagar Constructions Private Limited vs.. ITO [46 ITD 236 (Hyd)]

5. Shivshahi Punarvasan Prakalp Ltd. v. ITO [2011] 15 taxmann.com 352 (Mum.)

6. CIT v. Triveni Engg. & Industries Ltd. [2010] 8 taxmann.com 146

Qualms

1. Small Non Corporate Assessee has to mandatorily follow Percentage of completion as no

completed contract method is allowed

2. Guidance notes of ICAI on real estate transactions on point of risk reward transfers not

dealt.

3. Silent on Treatments on Joint Development agreements.

4. Huge Outflow of Tax expected on account of transitional provisions in the first

5. Treatment of Escalations and Non tendered items are subject matter of litigations

6. Treatment of reduction in revenue in Accounting standard vs ICDS Treatment of Bad

debts

ICDS 4 – Revenue recognition – AS 9

Scope: Deals with recognition of Revenue from Sale of goods , Rendering of services , Interest , Royalties or dividends.


Definition of Revenue and point of

Recognition in line with AS 9

Revenue related to Rendering of Services only

Percentage of completion is allowed.

Dividend recognized in accordance with the

provisions of act.

Recognition of revenue can be deferred

if there is an uncertainty in its ultimate

collection

In an agency relationship, the revenue is the

amount of commission and not the gross inflow of

consideration.




Any contracts running as on 01.04.2015 shall be in line with ICDS 9

Disclosures:

(a) Total amount not recognized as revenue during the year due to lack of reasonable certainty of

its collection along with nature of uncertainty; (b) The amount of revenue from service transactions recognized as revenue during the year;

(c) The method used to determine the stage of completion of service transactions in progress;

and

For service transactions in progress at the end of year:

(a) Amount of costs incurred and recognized profits (less recognized losses) up to end of year;

(b) The amount of advances received; and (c) The amount of retentions.


Qualms:

1. Disclosure of revenue deferred would invite litigation on acceptance of

such treatment.

2. Turnover norms for Tax Audit for Agency Principle relationship

3. Treatment of escalations , export incentives on actual receipt would be

a subject matter of opinion

4. Certain industry’s point of revenue recognition should be time tested /

Clarity has to be provided – Shipping , Telecommunications and etc.


1. Kerala State Industrial Products Trading Corporation Ltd. v. Asst. CIT [2012] 22

taxmann.com 78 (Cochin)

ICDS 5 – Tangible Fixed Assets – AS 10

Scope: Deals with the treatment of tangible fixed assets.


Cost of Fixed Asset same as AS 10 Specific Identification of Fixed Assets as against

inclusive definition in AS 10.

If the amount is not material, it can be written off

as laid down in AS 10.

Recognition of revenue can be deferred

if there is an uncertainty in its ultimate

collection

Revaluation is not permitted under ICDS V.

In case of exchange of asset with another asset,

shares or other securities, fair value of asset

acquired alone shall be recorded as actual cost of

the asset as against fair value of asset acquired or

given up


ICDS 5 – Tangible Fixed Assets – AS 10

Transitional Provisions The actual cost of the assets shall be recognized in accordance with the provisions of this Standard if the acquisition or construction has commenced before 1st April,

2015 but not completed by the said date and cost incurred before 1st April 2015

shall be considered

Disclosures:

a. Description of block of assets; b. Rate of depreciation;

c. Actual cost or written down value;

d. Additions or deductions during the year with dates

e. Depreciation Allowable; and

f. WDV at the end of the year.

(Already being disclosed as part of Form 3CD and ITR for additions of assets)

Qualms:

1. Asset Value/ Cost – Distinction or additive of Section 43(1) and 32 Definitions

ICDS 6 – Effects of changes in Foreign

Exchange Rates - AS 11 Scope: Treatment of transactions in foreign currencies;, Translating the financial statements of foreign operations; Treatment of foreign currency transactions for forward

exchange contracts.


Point of Initial recognition on

foreign currency transaction ,

Conversion at last date of the

year is same as per AS 11.

Only on certain conditions , Forex loss will be capitalized

along with the Asset in AS 11 , but the capitalization is

governed by 43A

Forex loss arising on account of Non Integral operations will

be treated as Revenue item , as against creation of Forex.

Flux reserve in AS 11

Definition of Integral Foreign

operations Treatment on such

exchange rate flux. Is similar to AS

11 Gains or losses on forward exchange entered into for trading

or speculation contracts shall be recognized only on

settlement and will not be marked to market.


ICDS 7 –Government Grants – AS 12

Scope: Deals with the treatment of Government grants (subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements)


Definition of Government grants same Recognition of grants cannot be beyond on

actual Receipt as against adherence of conditions

stipule on grant

No Grant can be treated Promoters’ contribution

under ICDS , Either reduced on valued of Asset or

treated as income on a periodic basis.


ICDS 7 –Government Grants – AS 12

Transitional Provisions Government grants, which meet the recognition criteria after 31st March, 2016, shall be recognized in accordance with the provisions of this Standard after taking into

account the amount of the grant recognized on or before 31st day of March, 2016.

Disclosures:

• Grants reduced from the actual cost of the asset or from the WDV of block of assets during the

year;

• Government grants recognized during the year as income;

• Government grants not recognized during the year by way of deduction from the actual cost

of the asset or assets or from the WDV of block of assets and reasons thereof; and

• Government grants not recognized during the year as income and reasons thereof.

Qualms:

1. Even Grants in Capital form if received in lieu promoter contribution are to be

offered as income.

2. Judicial Pronouncements on treatment of capital grants vs. ICDS will lead way to

more litigations

ICDS 8 –Securities – AS 13

Scope: Deals only with securities held as stock-in-trade.


Significant Distinctions

•If a security is acquired in exchange for other securities, the fair value of the

security so acquired shall be its actual cost as against the option available in AS

13. • Cost should be determined based only on FIFO method as category based

valuation •Disposal of investments is not dealt in ICDS •Unlisted or Listed but rarely quoted securities shall be valued only at cost.

ICDS 8 –Securities – AS 13

Qualms:

1. Point of treatment of Sale of securities as stock in trade or

capital asset is still governed by judicial pronouncements.

ICDS 9 –Borrowing Cost – AS 16

Scope: Deals with treatment of borrowing costs but does not include the actual or imputed cost of owners’ equity and preference share capital.

Significant

Similarities

Significant Distinctions

Recognition of

Borrowing cost is in

similar parlance

with AS 16.

Exchange rate flux on account of foreign loans are not treated as

component of Borrowing cost.

No Substantial period of time required for an asset to qualify as qualifying

asset.

Inventory also considered for borrowing cost along with Fixed assets.

Temporary Income if any shall not be reduced from Borrowing cost.

General Borrowing – Point of commence of Capitalization if utilization of

funds

Suspension of capitalization is not referred to in ICDS.


ICDS 9 –Borrowing Cost – AS 16

Transitional Provisions All the borrowing costs incurred after 31st March 2015 shall be capitalized in accordance with the provisions of this standard after taking into account the

amount of borrowing costs capitalized for the same borrowing for any year ending

before 31st March, 2015.

Disclosures:

• The accounting policy adopted for borrowing costs;

• The amount of borrowing costs capitalized during the year.

Qualms:

1. Cumbersome formula for computation of borrowing cost on general borrowings

2. No Clarity provided on existing qualms of Section 36(1)(iii).

3. In case, asset is not put to use, capitalization under ICDS will be higher than that

under AS16 which stops capitalization when all activities to prepare asset for its use

are complete.

ICDS X –Provisions, Contingent Liabilities and

Contingent assets– AS 29 Scope: Provisions, Contingent Liabilities and Contingent Assets but excludes few clause of contracts/ Assessee


Definition of Provisions ,

Contingent liabilities and

assets are the same.

Provision can be recognized only if it is reasonably certain there will be

an outflow as against probable outflow provided in AS 29

No Future losses /cost to be provided

Treatment of Contingent

liability is the same Contingent asset shall be recognized as income on reasonable

endurance of income

Measurement of

Provisions are in line with

AS 29


ICDS X –Provisions, Contingent Liabilities

and Contingent assets– AS 29 Transitional Provisions All provisions and assets shall be recognized for the year commencing after 31st

March 2015 in accordance with the provisions of this standard after taking into account the amount recognized before the said date

Qualms:

1. Reasonably certain is not defined , which would trigger litigations

2. Treatment of asset and such disclosure would be a subject matter of litigations


1. Calcutta Co. Ltd v. CIT [1959] 37 ITR1 (SC)

ICDS X –Provisions, Contingent Liabilities

and Contingent assets– AS 29

Disclosure Provisions

a. A brief description of the nature of the obligation;

b. The carrying amount at the beginning and end of the year; c. Additional provisions made

during the year;

d. Amounts used, that is incurred and charged against the provision, during the year;

e. Unused amounts reversed during the year; and f. The amount of any expected

reimbursement

Asset

a. A brief description of the nature of the asset and related income; b. The carrying amount

of asset at the beginning and end of the year;

c. Additional amount of asset and related income recognized during the year; and d.

Amount of asset and related income reversed during the year.

Final Précis

Introduction of ICDS with the connotation of proviso(s) will

have wider parlance and implications. It’s not out of place

to mention that taxation is always been a fertile area of

litigation and the help of accountants shall always be of

pertinent both for taxman and tax payers. The standards

discussed above is of no difference which require in depth

understanding, interpretation and application in practice

which we shall provide to the length and breadth to the

clientele and society.

Questions ??

Thank You

Venkatesan Murali ACA.,

9566133594

[email protected]

income computation and disclosure standard

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