income computation and disclosure standardsludhiana-icai.org/docs/icdsparulmittal.pdficds overview...

Income Computation and Disclosure Standards

CA Parul Mittal

ICDS Overview

2NIRC | ICDS CA PARUL MITTAL

• In Finance Act 2014, vide amendment made in section 145(2), power granted to CentralGovernment to notify ‘income computation and disclosure standards (‘ICDS’)’, substituting‘accounting standards’

• A committee was formed that issued 14 accounting standards in 2012, subject to publiccomments

• On March 31, 2015, vide Notification No. 32/ 2015, Central Government notified 10 out of 14draft ICDS effective from April 01, 2015

• Vide Press Release dated July 6th, 2016, CBDT deferred by one year. Accordingly, ICDS applicablefrom April 01, 2016 i.e. for computing Advance tax liability from previous year 2016-17 onwards(Assessment Year 2017-18)

• CBDT rescinded old ICDS through Notification No. 86/ 2016 dated September 29, 2016 and issuedrevised ICDS vide Notification No. 87/ 2016 and amended Tax Audit Form 3CD

• Per revised ICDS, no change in ICDS I (Accounting policies), ICDS VII (Government Grants) andICDS X (Provisions, Contingent Liabilities and Contingent Assets)

• CBDT issued FAQs dated March 25, 2017

ICDS Overview


Section 145(2)

Effective date w.e.f. AY 2017-18

Income heads covered -PGBP and other sources-If accounts are on mercantile basis

No. of standards 10 vide CBDT Notification dated September 29, 2016

Disclosure requirements Para 13 of Form 3CD & ITR

Individuals and HUF - ICDS applicable only if covered under tax audit provisions u/s 44AB

Whether provisions of ICDS IV applicable for computing turnover threshold of INR one crore?

ICDS Overview – Disclosure under clause

13 of TAR


ICDS* Name of ICDS Increase in profits Decrease in profits Net (Rs.) Description

I Accounting Policies

II Valuation of Inventories

III Construction Contracts

IV Revenue Recognition

V Tangible Fixed Assets

VI Changes in Foreign Exchange Rates

VII Government Grants

VIII Securities

IX Borrowing Costs

X Provision, Contingent liab & Assets

(d) Whether any adjustment is required to be made to profits or loss for complying with ICDS notified u/s 145(2)(e) If yes(f) Disclosure as per ICDS* - No disclosure requirements for ICDS VIII – Securities and ICDS VI –Change in Forex

ICDS – Consequences of non-compliance

Section 145(3)

• AO has the power to make best judgement assessment under section 144 if he is not satisfied about the :-

• correctness or completeness of the accounts of the assessee ; or • method of accounting is not regularly followed ;or• Income not computed as per ICDS

• Hence, on not complying with ICDS, the AO can ignore the books of the assessee and do abest judgement assessment.

• Therefore, in case of any deviation from the ICDS, there should be a proper disclosure givingthe reasoning for such deviation in the computation.


Key concerns/ points to ponder• ICDS are authoritative guidance.• Non adherence of single ICDS leads to BJA u/s 144?

6CA PARUL MITTAL NIRC | ICDS

ICDS II – Inventory Valuation

• Inventory shall be valued at cost or net realizable value, whichever is lower

• Three methods of valuation recognized:• First-in first-out;• Weighted average• Retail method

• Inventory valuation and disclosure mandatory for service providers. Para 6 statesthat cost of services shall consist of labour, other cost of personnel and attributableoverheads*

*As per erstwhile ICDS II, a service provider needed to maintain inventory record forWIP. However, ICDS IV read with ICDS III, service providers are required to recognizerevenue on POCM basis. Accordingly, as per revised Notification 87/ 2016, the revisedICDS has done away with this requirement for a service provider to value inventory ofwork in progress. ICAI affirms this view in its guidance note



• Revised ICDS II (vide Notification 87 of 2016) recognizes both standard costingmethod** or retail method*** for measuring cost of inventories if the resultapproximately arrives at the actual cost.

• Method of valuation once adopted should not be changed without reasonablecause.

** Erstwhile ICDS de-recognized standard costing method of valuation. Revised ICDSallow standard costing method if results approximates actual cost. Adequatedisclosure should be made confirming that standard cost approximates actual cost

***Per revised ICDS, an average percentage of each retail department is to be usedwhile applying retail method for large number of rapidly changing items with similarmargins



• In case of newly commenced business, value of opening inventory shall be cost of available inventory

• No impact on conversion of capital asset into stock in trade for commencement of business - section45(2)

• ICDS II recognizes inventory to be valued at Net Realizable Value (‘NRV’) on dissolution of partnershipfirm/ AOP/ BOI, with or without discontinuance of business. Accordingly, profit/ loss should bechargeable to income tax. However, in cases where dissolution is followed with continuation of business,since inventory will be valued on NRV, the differential profit will be offered to tax, creating artificialincome and leading to generation of timing difference

Key concerns/ points to ponder• Taxpayers to maintain parallel inventory record

• Firm/ AOP/ BOI - Inventory valuation based on NRV on dissolution, may give rise to deferred tax assets ifbusiness continues and the NRV is more than actual inventory cost. Under AS, inventory valued at costand as per ICDS, it is valued at NRV, leading to differential profit being subject to tax*. Besides, no specificprovision for allowing NRV as cost to successor of business

*Contrary to Supreme Court decision in case of Shakti Trading Co. (250 ITR 871) wherein it was held that if businesscontinues after dissolution, inventory to be valued at NRV or cost, whichever is less. To be seen whether SC rulings prevailover ICDS

9CA PARUL MITTAL

ICDS IV – Revenue Recognition

NIRC | ICDS

• Applicable on recognition of revenue from:• Sale of goods;• Rendering of services; and• Interest, royalty and dividend

• Revenue recognized on POCM basis on the reporting date. ICDS IV does not apply on revenue dealt by other ICDS

• Sale of goods - Revenue recognized when property in goods and all risks and rewards of ownership are transferredalong with reasonable certainty of its ultimate collection of revenue

• Service transaction - As per the revised ICDS IV, following points should be applied for recognizing service revenue:• Where services are provided by an indeterminate number of acts over a specific period of time, revenue may be

recognized on a straight line basis over that period• Revenue from service transactions recognized by POSM method, in accordance with ICDS III• Revenue from service contracts of not more than ninety days may be recognized on completion/ substantial

completion of contract• Lack of clarity on transitional provisions – whether service contracts commenced by not completed before April

01, 2016 shall be recognized based on ongoing accounting principles or POCM?

• Dividend – revenue recognized from date of declaration of dividend

• Royalty – revenue recognized on the basis of terms of agreement unless some more appropriate basis is identified onbasis of substance of transaction

• Interest – revenue recognized on time basis not on due basis. Per revised ICDS IV, interest on refund of any tax, duty orcess taxable on receipt basis

10CA PARUL MITTAL

ICDS IV – Revenue Recognition

NIRC | ICDS

Example: In a project spanning 3 years with revenue of INR 600 each year will result in taxation of INR 200 ineach of 3 years under ICDS IV and taxation on INR 600 in 3rd year under MAT provisions, resulting in thetaxpayer paying tax on taxable income of INR 1,000 (200+200+600)

ICDS IV applicable to income assessable on both net basis and gross/ presumptive incomes with specific sectionsunder the Act. E.g.: interest, royalty and FTS for non-residents u/s 115A also being covered

Key concerns/ points to ponder

• Postponement of revenue recognition – postponement of revenue recognition due to uncertainty is restrictedto claims for price escalation and export incentives

• Interplay of ICDS IV and MAT provisions may lead to double taxation

• Interest income – time based recognition conflicting with legal precedents* which advocate taxation of intereston maturity in case of time deposits

* SC in case of ED Sasson & Co. (26 ITR 27), Godhra Electricity Co. ltd. (225 ITR 746)


ICDS VI – Effects of changes in foreign

currency rates• ICDS VI does not apply to banks and other authorized dealers which offer derivative products to their

customers

• Provisions of ICDS VI subject to section 43A of Income Tax Act and Rule 115 of Income Tax Rules

• Monetary items – ‘Monetary items’ are money held and assets to be received or liabilities to be paid infixed or determinable amounts of money. E.g.: receivables, payables,. ICDS VI allows exchange differenceon monetary items to be transferred to revenue account (subject to section 43A of the Act pertaining toforeign exchange difference on acquisition of imported asset).

• MTM losses not allowed - Gains/ losses arising from foreign exchange contracts in nature of trading orspeculation purposes should be recognized on settlement since mark to market gains or losses areunrealized in nature

• Non integral foreign operation – As per revised ICDS Notification 87 dated September 29, 2016, theconcept of integral and non-integral foreign operations has been removed

• Treatment of opening balance of FCTR on April 01, 2016 – the opening balance of FCTR may haveaccumulated over several years and should not be taxable in entirety in FY 2016-17


ICDS IX – Borrowing Costs

• Qualifying asset defined in para 2(b) to include:• Tangible assets – land, plant etc.• Intangible assets - know-how, patents, copyrights, commercial rights etc.• Inventory – that requires period of 12 months or more time period for being in saleable condition

• Exchange difference – not to be included as part of borrowing cost

• Time of commencement of capitalization of borrowing cost:• For specified borrowing – from date on which funds are borrowed• For general borrowing – from the date on which funds are utilized

• Valuation of borrowing cost:• For specific borrowing – actual borrowing cost incurred during the period on borrowed funds• For general borrowing – specified formula

• No suspension of capitalization of borrowing cost, even if active development of asset is interrupted

• Cessation of capitalization:• Inventory – when all activities necessary for preparing the inventory for sale are complete• Other qualifying asset – when asset is first put to use;

ICDS X – Provisions, Contingent Liabilities

and Contingent Assets

13CA PARUL MITTAL

Recognition of provision• Present obligation as a result of past event;• Reasonably certain that outflow of resources embodying economic benefits to settle obligation;• Reliable estimate can be made for amount of obligation

Contingent Liabilities/ assets• Contingent liabilities and contingent assets not to be recognized• When it becomes reasonably certain that inflow of economic benefit will arise, asset and related

income are recognized in the year in which change occurs

Recognition of reimbursement for provisions• When it is reasonably certain that reimbursement will be received

Retirement benefits• CBDT clarified that post retirement benefits like medical benefits covered by AS-15 are not covered

Key features:• Test of probability (more likely than not) replaced with reasonable certainty• Onerous executory contracts not excluded• Provision for depreciation/ doubtful debt not covered• Provision for impairment of asset not covered

NIRC | ICDS

ICDS X – Provisions, Contingent Liabilities

and Contingent Assets

14CA PARUL MITTAL

Provision for warranty allowed as expenditure in following cases:

• Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC)• Provision to qualify for recognition, there must be a present obligation arising from past events,

settlement of which is expected to result in an outflow of resources and in respect of which a reliableestimate of amount of obligation is possible

• Himalaya Machinery (P) Ltd. Vs DCIT 334 ITR 64• CIT vs Luk India P. Ltd. 52 DTR 117• Siemens Public Communication Networks Limited vs CIT• CIT vs Indian Transformers Limited 270 ITR 259

Key issues:

• Whether insurance claims/ compensation against insurance claim is contingent asset• Prohibition of discounting of provision amount (Contrary to IND AS 37)• No clarity on restructuring provisions. Act should be referred

NIRC | ICDS

CA Parul Mittal

15

Mobile:+91 9811205855

Email: [email protected]

Office Address:

A-211, Defence Colony, New Delhi – 110024

D-10, 2nd Floor, South Extension, Part 2,

New Delhi - 110049

Parul Mittal is a practicing Chartered Accountant, sole proprietorship, ParulMittal & Associates. She formed the firm in year 2015.

Parul’s experience spans over 12 years, specializing in tax and regulatoryadvisory with Big4 firms, Ernst & Young and Price Waterhouse Coopers.

During her stint with Big4 firms, she worked extensively with domestic andmultinational corporations, and handled various kinds of assignments rangingfrom advisory on accounting and taxation matters to ongoing complianceunder direct, international tax, transfer pricing and exchange control. Parul hasassisted clients in establishing new business ventures, and assisted them onvarious initial compliances and entity formation procedures.

Parul holds a Bachelors degree in Commerce from University of Delhi and is aqualified Chartered Accountant.

NIRC | ICDS

income computation and disclosure standardsludhiana-icai.org/docs/icdsparulmittal.pdficds overview...

Documents