seminar on - association of corporate adviser & … computation and disclosure standards ( icds...
TRANSCRIPT
SEMINAR ON
Detailed discussion on Income Computation and Disclosure Standards (ICDS)
20th September, 2017
At
ACAE, Emami Conference Hall
6, Lyons Range, 3rd Floor, Unit-2
Kolkata-700 001
Organized by
ACAE Chartered Accountants Study Circle-EIRC
Income Computation and Disclosure Standards ( ICDS ) Page 2
Income Computation and Disclosure Standards
1.1 Original and Need
The Apex Court in the case of J.K.Industries Ltd Vs UOI(2008) 297 ITR 176(SC) in a long judgement
while considering the question as to “whether AS 22 entitled “accounting for taxes on income” in so
far as it relates to deferred taxation is inconsistent with and ultra vires the provisions of the
Companies Act,1956(“the Companies Act”) , the Income-tax Act,1961 (“the I.T.Act”) and the
constitution of India, While rejecting the arguments of the appellants, the supreme court observed in a
long judgement as follows:-
a) Meaning and purpose of Accounting Standards(AS)
In its origin, AS is a policy statement or document framed by the Institute. AS establish rules
relating to recognition, measurement and disclosures thereby ensuring that all enterprises that
follow them are comparable and that their financial statements are true, fair and transparent. AS
are based on a number of accounting principles. They seek to arrive at the true accounting income.
One such principle is matching principle. The other is the fair value principle. The aim of the
Institute is to go for a paradigm shift from the matching to the fair view principle.
The main object sought to be achieved by Accounting Standards which is now made mandatory is
to see that accounting income is adopted as taxable income and not merely as the basis from which
taxable income is to be computed. Thus if the rules by which inventories are to be valued are laid
down in the Accounting Standards and are followed in the determination of Accounting Income,
then tax laws doesn’t need to lay down the rules and the tax authorities do not need to examine
the computation of the value of inventories and its effect on computation of income. Similarly if
there is an Accounting Standard on depreciation which requires estimation of the useful life and
prescribes the appropriate method for apportionment of the cost of fixed asset over their useful life
, it is unnecessary for the tax laws to apply an artificial rule to decide the extent of allowance for
depreciation.
Finally, the adoption of Accounting Standards and of accounting income as taxable income would
avoid distortion of accounting income which is real income.
Under Section 211(3A) Accounting Standards framed by the National Advisory Committee on
Accounting Standards constituted under Section 210A are now made mandatory. Every Company
has to comply with the said standards. Similarly under Section 227(3)(d) every auditor has to certify
whether the profit and loss account and balance sheet comply with the accounting standards
referred to in Section 211(3C). Similarly, under section 211(1) the company accounts have to reflect
a “true and fair” view of the state of affairs. Therefore the object behind insistence on compliance
with the AS and “true and fair” accrual is the presentation of accounts in a manner which would
reflect the true income/profit. In our view, the provisions of the Companies Act together with the
rules framed by the Central Government constitute a complete scheme. Without the rules, the
Companies Act cannot be implemented. The impugned rules framed under section 642 are a
legitimate aid to construction of the Companies Act as contemporaneaexpositio. Many of the
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provisions of the Companies Act like computation of book profit, net profit etc cannot be put into
operation without the rules.
Para 79
In our view, it is the statutory function given to the central government to frame Accounting
Standards in consultation with the National Advisory Committee on Accounting Standards(NAC)
under Section 211(3C). It is not necessary for the Central Government to adopt in every case the
Accounting Standards issued by the Institute. Nothing prevents the Central Government from
enacting its own Accounting Standards which may not be in consonance with the standards
prescribed by the Institute. Similarly, nothing prevents the Central Government from adopting the
standards issued by the Institute as is the case in the present matter.
This seems to be genesis of the matter. The accounting Standards which were so far working fine were
done away with by the Central Government by enacting its own accounting Standards. There can be
difference in the Accounting profit and taxable income of a Company because of the differences in
reporting period and because of the fact that ICAI AS enabled an entity with flexibility of alternative
accounting treatments which made it possible for a taxpayer to avoid payment of correct taxes by choosing
a particular system.While accounting profit is computed based on the accounting standards, or generally
accepted accounting policies(GAAP), the taxable income is calculated using the provisions of Income-tax
Act,1961 and Rules and thus need was felt to standardise the alternatives in various standards so that the
income for tax purposes can be computed precisely as per the Act.
Matching Concept of Accounting
Matching concept is a very significant concept of accounting. According to this concept income and
expense must be recognised in the period to which they relate. In India Profit & Loss is computed with two
different set of provisions one set is profit and loss as per the Companies Act, 2013(earlier it was
Companies Act, 1956) and the second one is Profit & Loss as per Income-tax Act,1961. The root cause of
difference between Incomes as per these two acts is different treatment given to some items of income
and expenditure and transactions. Some of these items are as follows:-
1. Treatment of Interest during Construction period
2. Valuation of inventories
3. Depreciation rates
4. Accounting for changes in foreign exchange difference
5. Accounting for investment
6. Accounting for Impairment of assets
7. Revenue recognition
8. Deferred revenue expenditure
9. Prepaid expenses- claimable under the Income-tax in one year as against accounting where it can be claimed year to year- Recent Supreme Court judgement to give. Treatment of work-in-progress in case of construction companies. Morvi Industries ltd – 82 ITR 835(SC). Recognition of revenue causes problem where in reality it may not be feasible to account the same as income and this causes the problem.
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There can be other reasons also. Thus it has been seen that time and again courts have interpreted the
accounting standards in different manner as far as their effect is to be given for the purposes of
computation of Income under the Income-tax Act, 1961 and therefore the need for Income Computation
and Disclosure Standards can be said to have arisen.
1.2 Income Computation and Disclosure Standards- Details of Introduction
Chapter XIV of the Income Tax Act, 1961 deals with the “Procedure for Assessment”. The provisions of
Section 145 of the Income Tax Act, 1961 are contained in Chapter XIV as mentioned above.
As a matter of fact, Section 145 of the Income Tax Act, 1961 traces its history to the provisions of Section
13 of the Indian Income Tax Act, 1922, which read as follows:
“13. Method of accounting.—Income, profits and gains shall be computed, for the purposes of sections 10 11* and 12, in accordance with the method of accounting regularly employed by the assessee:
Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.”
The said section was incorporated as Section 145 in the new Act and the section had been divided into two sub–sections. Sub-section (1) covered the cases where the accounts were correct and complete. The first proviso empowered in case the method employed did not reveal proper income, an assessment on a different basis and manner thought fit by the Assessing Officer. Section 145 (2) dealt with situation where the accounts were not correct and complete, or where no method of accounting had been regularly employed by the assessee. In such cases, the Assessing Officer was empowered to make best judgment assessment in the manner provided in Section 144. The latter portion was not provided in the 1922 Act.
Hence, after a series of amendments in Section 145 of the Income Tax Act, 1961, the Finance Act, 1995 (w.e.f. 1-4-1997) brought into existence a substituted section which read as follows:
“Method of accounting.
145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.
The scope and effect of it have been elaborated by the department in Circular No. 717 dated 14th August, 1995. Paragraph number 44.1 of the circular read as follows:
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“Methods of accounting and accounting standards for computing income
44.1 Section 145(1) of the Income-tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assesses are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended section 145 of the Income-tax Act to provide that income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of section 145 has been deleted.”
After the above mentioned amendments, today we finally have Section 145 of the Income Tax Act, 1961 as amended by the Section 52 of the Finance (No. 2) Act, 2014 (w.e.f. 01.04.2015) wherein the words “accounting standards” have been substituted by “income computation and disclosure standards”. The term “income computation and disclosure standards” was introduced in clause 50 of the Finance (No.2) Bill, 2014. Clause 50 of the Finance (No.2) Bill reads as follows:
“Section 145 of the Act provides that the method of accounting for computation of income under the heads “Profits and gains of business or profession” and “Income from other sources” can either be the cash or mercantile system of accounting. The Finance Act, 1995 empowered the Central Government to notify Accounting Standards (AS) for any class of assesses or for any class of income. Since the introduction of these provisions, only two Accounting Standards relating to disclosure of accounting policies and disclosure of prior period and extraordinary items and changes in accounting policies have been notified.
The Central Government had constituted an Accounting Standard Committee vide Order dated 20thDecember, 2010 comprising of officials of the Tax authorities and professionals with the following terms of reference:
1. To study the harmonisation of the ICAI AS with the Indian Tax Laws and to suggest the accounting standards for tax compliance under the Income-tax Act, 1961 with suggestions for modifications
2. To suggest a method for determination of tax base for the purpose of computation of MAT in case of companies migrating to IND AS in the initial year of adoption and thereafter.
3. To suggest appropriate amendments to the Tax Laws in view of the transition to the IND AS.
The Committee has submitted its Final Report in August, 2012. The Committee recommended that the AS notified under the Act should be made applicable only to the computation of taxable income and a taxpayer should not be required to maintain books of account on the basis of AS notified under the Act. The Final Report of the Committee was placed in public domain for inviting comments from stakeholders and general public. After examining the comments/suggestions, the Committee inter alia recommended that the provisions of section 145 of the Act may be suitably amended to clarify that the notified AS are not meant for maintenance of books of account but are to be followed for computation of income.
In order to clarify that the standards notified under section 145(2) of the Act are to be followed for computation of income and disclosure of information by any class of assesses or for any class of income, it is proposed to provide that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of or in respect of any class of income. It is further proposed to provide that the Assessing Officer may make an assessment in the
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manner provided in section 144 of the Act, if the income has not been computed in accordance with the standards notified under section 145(2) of the Act.
This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.”
Earlier, Accounting Standard I and Accounting Standard II were notified under Section 145 (2) of the Income Tax Act, 1961 under NO. 9949 [F. NO. 132/7/95-TPL], DATED 25-1-1996.
Now we have a set of ten Income Computation and Disclosure Standards notified as on 31st March, 2015 by Notification no. 32/2015 F. No. 134/48/2010‐TPL.
1.3 Difference between Accounting Standards (AS), Indian Accounting Standards (IndAS), Tax Accounting Standards (TAS) and Income Computation and Disclosure Standards (ICDS)
In exercise of the powers conferred by section 133 read with section 469 of the Companies Act, 2013 (18 of 2013) and sub-section 210A of the Companies Act, 1956 (1 of 1956), the Central Government, in consultation with the National Advisory Committee on Accounting Standards came up with a notification on the 16th of February, 2015. The notification announced the Companies (Indian Accounting Standards) Rules, 2015. These rules came into force on the 1st day of April, 2015.
In rule 4 of the Companies (Indian Accounting Standards) Rules, 2015, it has been clearly that the companies and their auditors mentioned in this rule shall mandatorily comply with IndAS for preparation of their financial statements and audit respectively. The companies mentioned in this rule are:
(i) any company may comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning on or after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter;
(ii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1 st April, 2016, with the comparatives for the periods ending on 31st March, 2016, or thereafter, namely:- (a) companies whose equity or debt securities are listed or are in the process of being listed on
any stock exchange in India or outside India and having net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii) of subrule (1) and having net worth of rupees five hundred crore or more;
(c) holding, subsidiary, joint venture or associate companies of companies covered by sub-
clause (a) of clause (ii) of sub- rule (1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case may be; and
(iii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the
accounting periods beginning on or after 1 st April, 2017, with the comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees five hundred crore;
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(b) companies other than those covered in clause (ii) of sub- rule (1) and sub clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies having net worth of rupees two hundred and fifty crore or more but less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of companies covered under sub-clause (a) of clause (iii) of sub- rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the case may be:
Provided that nothing in this sub-rule, except clause (i), shall apply to companies whose securities are listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial public offering in accordance with the provisions of Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.”
Further, sub-rule 2 of Rule 2 of the Companies (Indian Accounting Standards) Rules, 2015 states that Accounting Standards as mentioned in the annexure to the Companies (Accounting Standards) Rules, 2006 shall be the Accounting Standards applicable to the companies other than the classes of companies specified in rule 4 (as given above). Hence, we can conclude that companies other than those mentioned in Rule 4 shall continue to apply the Accounting Standards notified in Companies (Accounting Standards) Rules, 2006.
Further we see that, the Government had constituted a committee in July 2002 for formulation of Accounting Standards for the purpose of notification under the Income Tax Act. This Committee recommended for notification of the Accounting Standards issued by the ICAI without any modification along with consequential legislative amendments to the Act for preventing any revenue leakage. Subsequently, the CBDT constituted another Committee to harmonize the Accounting Standards issued by the ICAI with the provisions of the Act for the purposes of notification under the Act and also to suggest amendments to the Act necessitated by transition to IndAS/IFRS. The Committee recommended that the Accounting Standards to be notified under the Act may be termed as "Tax Accounting Standards" (TAS), to distinguish the same from the Accounting Standards issued by the ICAI. The Committee examined all the thirty one Accounting Standards issued by the ICAI and noted that some of the Accounting Standards issued by the ICAI relate to 'disclosure' requirement, whilst some other contain matter that are adequately dealt within the Act. In view of this, the Committee recommended that Tax Accounting Standards need not to be notified in respect of seventeen Accounting Standards issued by the ICAI. The Committee then formulated the drafts of Tax Accounting Standards on the issues covered by the rest of the fourteen Accounting Standards issued by the ICAI. After continuous review, the CBDT again came up with a set of twelve draft Income Computation and
Disclosure Standards (TAS being renamed) on the 8th of January, 2015 which was open for public
comments until 8th of February, 2015. Hence, finally on the 31st day of March, 2015, CBDT came up with
notification no. 32/2015 [F. No. 134/48/2010 – TPL]/ SO 892(E) issuing ten Income Computation and
Disclosure Standards (ICDS) listed as below:
Serial No.
ICDS No. Name of the standard
1 I Accounting Policies
2 II Valuation of inventories
3 III Construction contracts
4 IV Revenue recognition
5 V Tangible fixed assets
6 VI Effects of changes in foreign exchange rates
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7 VII Government Grants
8 VIII Securities
9 IX Borrowing Costs
10 X Provisions, contingent liabilities and contingent assets
The chart below gives a detail of the Accounting Standards issued by the ICAI which were recommended
for notification under the Act by the Committee and the ones which were not recommended.
Serial No.
AS No. Recommended - Topic AS No. Not Recommended - Topic
1 1 Disclosure of Accounting Policies
3 Cash Flow Statements
2 2 Valuation of Inventories 14 Accounting for Amalgamations
3 4 Contingencies and Events Occurring After the Balance
Sheet Date
15 Employee Benefits
4 5 Net Profit or Loss for the Period, Prior Period Items and changes in Accounting
Policies
17 Segment Reporting
5 7 Construction Contracts 18 Related Party Disclosures
6 9 Revenue Recognition 20 Earnings Per Share
7 10 Property Plant and Equipment
21 Consolidated Financial Statements **
8 11 The Effects of Changes in Foreign Exchange Rates
22 Accounting for Taxes on Income
9 12 Accounting for Government Grants
23 Accounting for Investments in Associates in Consolidated
finance Statements
10 13 Accounting for Investments 24 Discontinuing Operations
11 16 Borrowing Costs 25 Interim Financial Reporting
12 19 Leases 27 Financial Reporting of Interests in Joint Ventures
13 26 Intangible Assets 28 Impairment of Assets
14 29 Provisions, Contingent Liabilities and Contingent
Assets
30 Financial Instruments : Recognition and Measurement
15 31 Financial Instruments : Presentation
16 32 Financial Instruments : Disclosures
1.3.1 Amendment in the Accounting Standard issued by Central Government and ICAI
The Central Government vide its notification dated 30.03.2016 has withdrawn AS -6 dealing with
Depreciation Accounting and amended AS 2, 4, 10, 13, 14, 21 & 29. Further the name of AS-10 Accounting
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for Fixed Assets has been changed to Property, Plant and Equipment. The said changes weremade effective
w.e.f accounting year commencing on or after 30.03.2016.
Further in view to harmonise Accounting Standard issued by ICAI for non corporate entities and the
amendment to the Accounting Standard notified by the central government, the council of ICAI also made
similar changes in the accounting standard. However the said changes will be applicable for non corporate
entities for accounting period starting on or after 01.04.2017
1.4.1Key Features of ICDS
1) Earlier effective date of ICDS was 01st April, 2015 i.e. FY: 2015-16 & AY: 2016-17. However later on
the same was deferred and made applicable from the assessment year 2017-18.
2) ICDS applicable to all assesses i.e. Corporate & Non Corporate Assesses.
3) No Net Worth or Turnover Criteria Prescribed for applicability.
4) ICDS is meant for giving clarity in certain contentious tax issues and disclosures thereof. It does not
mandate requirement of separate books of accounts to be maintained. Even though, all the ICDS
say that ICDS is not for the purpose of maintenance of accounts, however, ICDS deals with
i) Fundamental accounting assumptions
ii) Accounting policies
iii) Consideration in selection and change of policy.
Is it not contradictory?
5) In the case of conflict between the provisions of the Income‐tax Act, 1961 and Income Computation
and Disclosure Standard, the provisions of the Act shall prevail to that extent.
6) ICDS requires certain disclosures to be made in Tax Audit Report(Form 3CD) and Income Tax Return
Deferment of applicability of ICDS
The CBDT vide press release dated 06.07.2016 has deferred the applicability of ICDS by one year. The
reason for such deferment was that the expert committee has recommended amendments to the
notified ICDS and also issuance of clarification in respect of certain points raised by the stakeholders.
The CBDT finally by notification no 87/2016 dated 29.09.2016 has issued the new 10 ICDS which more
or less are same with the ICDS which were issued earlier. However the changes made in the new ICDS
vis-à-vis in old ICDS are stated in ANNEXURE–A
Further in order to clarify some points the CBDT had issued Clarification on Income Computation and
Disclosure Standards (ICDS) notified under section 145(2) of the Income Tax Act, 1961 by circular no
10/2017 dated 23.03.2017 which is enclosed in ANNEXURE-B
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Even after issuing 10 ICDS some doubts were prevailing that whether these ICDS are applicable to
entities engaged in real estate transaction. However all these doubt were put to rest by CBDT when it
had invited comments of public on Draft Income and Computation Standard on Real Estate
Transactions vide press release dated 11.05.2017. The copy of draft ICDS on Real estate transactions is
enclosed in ANNEXURE-C
1.4.2 ICDS- Can it make a receipt income even though it may not be an income under the Act.
a) Though it has been specified that in case of divergence between the ICDS and the Act, the provisions of the Act will prevail. The Act- Will it cover the interpretations laid down by the judgements of various Courts over the years since the enactment of the 1922 Act and thereafter the 1961 Act?
b) Section 145 by virtue of which ICDS has been enacted is a computation section and not a charging section and thus cannot override Section 4 and 5 of the Act by simply enacting the Income computation and disclosure standards(ICDS). ICDS is meant for computation of income and not for defining what is income. In this regard, it may be noted that the ICDS which have been enacted by CBDT are by virtue of powers available with it u/s 145 of the Income-tax Act,1961 i.e., by way of a delegated legislation. In the following cases, it has been held that delegated legislation cannot override the statute.
i) CIT Vs Sirpur Paper Mills Ltd (1999) 3 SCC 596(SC) ii) CIT Vs Taj Mahal Hotel (1971) 3 SCC 550(SC) There has to be limitation on statute which is enacted by way of delegation. In the case of State Bank of Travancore v. CIT, (1986) 2 SCC 11 : 1986 SCC (Tax) 289 at page 25, it was held that
Though these provisions provide for charging the income by way of profits and gains of business and prescribe the manner of computation the question as to at what point of time its chargeability arises is answered by Section 5 of the Act which states that the total income of a resident assessee from whatever source derived becomes chargeable either when it is received by him or when it accrues or arises to him during the previous year. In other words taxability is attracted even when income has accrued and it is clear that the receipt of income is not the sole test of taxability under the Act; but whether on receipt basis or accrual basis it is the real income and not any hypothetical income which may have theoretically accrued that is subjected to tax under the Act.
An acceptable formula of correlating the notion of real income in conjunction with the method of accounting for the purpose of computation of income for the purpose of taxation is difficult to evolve. Besides, any straitjacket formula is bound to create problems in its application to every situation. It must depend upon the facts and circumstances of each case. When and how does an income accrue and what are the consequences that follow from accrual of income are well settled. The accrual must be real taking into account the actuality of the situation. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual non-charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only.
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What has really accrued to the assessee has to be found out and what has accrued must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made “no income”.
The extension of such a value judgment to such a field is pregnant with the possibility of misuse and should be treaded with caution; otherwise one would be on sticky grounds. One should proceed cautiously and not fall a prey to the shifting sands of time.
As a result of the aforesaid discussion, the following propositions emerge:
“(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
(2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue.
(3) Where a debt has become bad deduction in compliance with the provisions of the Act should be claimed and allowed.
(4) Where the Act applies the concept of real income should not be so read as to defeat the provisions of the Act.
(5) If there is any diversion of income at source under any statute or by overriding title then there is no income to the assessee.
(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.
(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry — but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or treated as such by the assessee.
(8) The concept of real income is certainly applicable in judging whether there has been income or not but in every case it must be applied with care and within well recognised limits.”
c) There was no need for a separate ICDS but the divergence between the policies could have been
laid to rest by saying that the accounting policies which are followed in preparation of the accounts must be followed. MAT is continued to be levied on the basis of the Accounting Standards which was followed by the company and the taxes will have to be paid upon this.
d) Moreover, the regular tax will have to be paid as per the ICDS which may have acceleration in the form of pre-ponement of the income (even though it may not have accrued) and in such a situation there may be double taxation with no clarity over setoff of the MAT Credit and/or backward adjustment of the losses against the taxes paid in earlier years. There cannot be any double taxation across different years. ICDS is not a deeming fiction. Already Section 40(a)(ia),44BB,etc are there in the statute which levy taxes on deeming fiction.
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e) ICDS is followed only if the Mercantile System of accounting is employed. Moreover, Section 145A overrides the provisions of Section 145 and thus even ICDS can be bypassed in such cases.
1.5 A short detailed comparison between AS and ICDS has been stated below:
1. AS 1 and ICDS I: Accounting Policies
The AS specified that the primary consideration for selection of accounting policies by an
enterprises is that the financial statements prepared and presented on the basis of such
accounting policies should represent a true and fair view of the state of affairs of the
enterprise as at the balance sheet date and of the profit or loss of the period ended on that
date and criterion for selection in the Accounting Standard 1 was three fold:-
a) Prudence
b) Substance over form
c) Materiality
The above three contours of principles are well accepted principles.
Prudence means cautious, seeing ahead. It Is the rule of becoming carefulness. In
accounting ,w e become careful from future losses.
The concept of materiality has not been expressly stated in ICDS but can be said to be there
by implication.
In the case of Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 at page 455
In the case of CIT, Bombay City [AIR 1959 SC 82 : 1959 Supp (1) SCR 45 : 35 ITR 298] v. ShoorjiVallabhdas of Co. [46 ITR 144] Hidayatullah, J., (as he then was) speaking for the Court observed: “Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though, an entry to that effect might, in certain circumstances, have been made in the books of account”.
However, ICDS does not recognizes the concept of prudence and rather only mentions
about the disallowance of recognition of expected losses or marked to market losses unless
specifically permitted by any other standard.It may be noted that currently no ICDS provides
for dealing with mark to market losses on derivatives. Moreover, without prudence being
recognised in ICDS, there is a likely hood that income may be recognised earlier than when it
should have been or expenses may be delayed from recognised.In this regard, it may be
noted that ICDS II provides for valuation of inventories at cost or lower of net realisable
value, whichever is lower. ICDS has remained silent on the treatment of mark-to-market
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unrealized gains.As opposed to this, under the Indian AS, mark to market losses are
provided in view of the concept of prudence. Expected losses are also provided in
accordance with the relevant Indian GAAP standards. In this regard, the apex court
judgement of Vazir Sultan Tobacco is relevant.
Also, a major concept – materiality has also been removed in the current ICDS I. In auditing
materiality pertains to the largest number (threshold) of uncorrected errors, misstatements,
or erroneous disclosures or omissions that exist in the financial statements and yet are not
misleading. The auditor plans and executes an audit with a reasonable expectation of
detecting material misstatements. Keeping the above in mind, ICDS I might cause
implementation problems in the treatment of unadjusted audit differences which may need
to be considered in computing the taxable income.
Another change which might slightly affect the tax authorities is that ICDS does not define
the term “reasonable cause”. Hence, since it does not permit a change in the accounting
policy without any reasonable cause, it might end up into litigations and thereafter
judgments of the authorities. The present AS has been interpreted by several courts and
have held certain fundamental principles underlying change of accounting policies.
However, whether they will fit into the parameters of “reasonable cause” is to be seen in
coming days and months and years. The existing AS allows change in accounting policy if it is
i) Required by a Statute
ii) Compliance with Accounting Standard
iii) More appropriate presentation
However, since ICDS doesn’t specify them and states “reasonable cause” one can interpret
that the reason for change could be other than these also.
The AS 1 specifies that all significant accounting policies adopted in the preparation and
presentation of financial statement should be disclosed. The disclosure of the significant
accounting policies as such should form part of the financial statements and the significant
accounting policies should normally be disclosed at one place. However under the ICDS
there is no such mandate as to the place of disclosure. It has also been specified that the
disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item. Often it is seen that the accounting policies state that
this is the policy adopted which is though consistently followed but not in accordance with
the Accounting Standards issued by ICAI or now may be CBDT.
AS 1 recognises that in the following areas different accounting policies may be adopted by
different enterprises:
a) Methods of depreciation, depletion and amortisation
b) Treatment of expenditure during construction
c) Conversion or translation of foreign currency Loans
d) Valuation of inventories
Income Computation and Disclosure Standards ( ICDS ) Page 14
e) Treatment of goodwill
f) Valuation of investments
g) Recognition of profits on long term contracts
h) Valuation of fixed assets
i) Treatment of contingent liabilities
Though the above list is not an exhaustive list and there can be other items too.
Important cases
1. [1959] 37 ITR 1 (SC) SUPREME COURT OF INDIACalcutta Co. Ltd.v.Commissioner of
Income-tax
Section 28(i) , read with section 145 of the Income-tax Act, 1961 (Corresponding to section
10(1), read with section 13 of the Indian Income-tax Act, 1922) - Business deductions -
Allowable as - Assessment year 1948-49 - Assessee dealt in land and property and carried on
land developing business - It maintained its accounts in mercantile method - In relevant
accounting period it sold certain plots and even though assessee received only a portion of
sale price, it entered in credit side of its account books whole of sale price of plots - Under
terms of side deeds assessee undertook to carryout developments within six months from
date of sale - Accordingly, it estimated a sum as expenditure for developments to be carried
out in respect of plots sold out during relevant year and debited said sum in its books of
account as accrued liability - Department did not take any exception to said estimated
expenditure in regard to quantum but disallowed assessee's claim for deduction of that sum
by relying upon provisions of section 10(2) of 1922 Act - Whether estimated expenditure
which had to be incurred by assessee in discharging a liability which it had already
undertaken under terms of sale-deeds of lands in question was an accrued liability which
according to mercantile system of accounting assessee was entitled to debit in its books of
account for accounting year as against receipts which represented sale proceeds of said
lands - Held, yes
2. AS 2 and ICDS II: Valuation of Inventories
ICDS II specifies various categories of inventories which are not to be valued as per ICDS II
and they are :-
a) Work in progress arising under construction contract including directly related to service
contract which is dealt with by Income Computation and Disclosure standard on
construction contracts.
b) Work in progress dealt with by any other ICDS
c) Shares, debentures and other financial instruments held as stock in trades which are
dealt with by ICDS on securities.
d) Producers inventories of livestock, agriculture and forest products, mineral oils, ores and
gases to the extent that they are measured at net realisable value.
Income Computation and Disclosure Standards ( ICDS ) Page 15
e) Machinery spares, which can be used in conjunction with a tangible fixed asset and their
use is expected to be irregular, shall be dealt with in accordance with ICDS on tangible
fixed assets. In this regard, Accounting Standards Interpretation(ASI) 2 has been issued
which deals with which machinery spares are covered under AS 2 and AS 10 and what
should be the accounting for machinery spares under the respective standards.
The definition of inventory remains the same under both the standard.
The cost of purchase under the ICDS includes duties and taxes even if subsequently
recoverable from taxing authorities. This is in line with the provisions of Section 145A of the
Income-tax Act,1961. However, under the AS, the cost of purchase doesn’t include duties
and taxes if subsequently recoverable from taxing authorities, though Section 145A
overrides Section 145. Thus it can be safely argued that for the purchase and sales, ICDS can
not be applied, since Section 145A starts with a non-obstante clause.
As per AS-2 duty drawback is deducted in determining the cost of purchases, However ICDS
doesn’t specify this.
Valuation of opening inventory- Conflict of Section 45(2)
As per ICDS II- the value of the inventory as on the beginning of the previous year shall be (i)
the cost of inventory available, if any, on the day of the commencement of the business
when the business has commenced during the previous year and (ii) the value of the
inventory as on the close of the immediately preceding previous year, in any other case.
As against this, Section 45(2) says that the profits and gains arising from the transfer by way
of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade
of a business carried on by him shall be chargeable to income-tax as his income of the
previous year in which such stock-in-trade is sold or otherwise transferred by him and, for
the purposes of Section 48, the fair market value of the asset on the date of such conversion
or treatment shall be deemed to be the full value of the consideration received or accruing
as a result of the transfer of the capital asset.
Thus, as per ICDS-2 whether the value on which capital gains has already been paid will be
considered as cost of inventory or otherwise- there is no clarity.
ICDS provides that the inventory of a service provided is to be valued at cost or net
realisable value whichever is lower and cost of services to consist of labour and costs of
personnel directly engaged in providing the services including supervisory personnel and
attributable overheads. Under the AS-2 which did not provide for valuation of work in
progress arising in ordinary course for the service providers.These Chartered
Accountantsnow have to value inventory of services provided and report the same which
until now was not being done. Difficulty may arise where the changeability itself depend on
success of the services.
Another major issue which might arise due the effective changes is the rise of litigations due
to the unexplained term “reasonable cause”. ICDS II says that method of valuation of
inventory shall not be changed without a reasonable cause. It has not given any description
on the meaning of the phrase “reasonable cause” which shall again lead to the interruption
of tax authorities for analyzing the reasonability of the change in method by any assessee.
AS 2 specify that the method of valuation of inventories may be changed if it is considered
that the change would result in a more appropriate presentation.
Income Computation and Disclosure Standards ( ICDS ) Page 16
ICDS II deals with valuation of inventory in case of certain dissolutions and says that in case
of dissolution of a partnership firm or association of persons or body of individuals,
notwithstanding whether business is discontinued or not, the inventory on the date of
dissolution shall be valued at net realisable value. There being no specific provision to allow
such NRV as cost to the successor of the business, there may be difficulties. In this regard,
the decision of the Apex Court in the case of ALA Firm 189 ITR 225(SC) in this regard may be
referred to. Also the decision of the Apex Court in the case of Sakthi Trading Co Ltd Vs CIT
(2001) 250 ITR 871 may be looked into. The existing AS 2 has no such mechanism because of
the assumption of going concern.
Regarding interest and borrowing cost, Para 11 of the ICDS II states that interest and
borrowing costs shall not be included in the cost of inventories , unless they meet the
criteria for recognition of interest as a component of the cost as specified in ICDS on
borrowing cost. In this regard, it may be noted that ICDS on borrowing costs defines
qualifying asset interalia as “inventories that require a period of twelve months or more to
bring them to a saleable condition and thus only these types of inventory is eligible for
inclusion of borrowing cost in the inventory. However, in Para 25 of this ICDS dealing with
transitional provisions it has been stated that the interest and borrowing costs, which do
not meet the criteria for recognition of interest as a component of the cost as per para11
but included in the cot of opening inventory as on the 1st day of April, 2015 shall be taken
into account for determining costs of such inventory for valuation as on the close of the
previous year beginning on or after 1stday of April, 2015 if such inventory continue to
remain part of inventory as on the close of the previous year beginning on or after 1st day of
April, 2015.
The disclosure requirement specifies that the accounting policies adopted in measuring
inventories including the cost formulae used and the total carrying amount of inventories
and its classification appropriate to a person.
Important Cases
1. [1991] 54 TAXMAN 499 (SC)SUPREME COURT OF INDIACommissioner of Income-tax
v.British Paints India Ltd.
Section 145 of the Income - tax Act, 1961 - Method of accounting - Valuation of closing stock
- Assessment years 1963-64 and 1964-65 - Assessee - company was engaged in business of
manufacture and sale of paints - It had valued goods in process and finished products
exclusively at cost of raw materials and totally excluding overhead expenditure, i.e., stock-
in-trade was valued at 84.49 per cent representing actual cost of raw material and overhead
charges representing 15.51 per cent of total cost had been excluded from assessee's
valuation of stock - Whether ITO was justified in rejecting assessee's method of valuation
and in holding that assessee's goods in process and Finished products were liable to be
valued at 100 per cent of cost which included overhead expenditure and not at 84.49 per
cent as claimed by assessee - Held, on facts, yes
Income Computation and Disclosure Standards ( ICDS ) Page 17
2. [1991] 55 TAXMAN 497 (SC)SUPREME COURT OF INDIAA.L.A. Firmv.Commissioner of
Income-tax
Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment
year 1961-62 - On dissolution of assessee-firm, its stock-in-trade was revalued and certain
amount was shown as 'difference on revaluation' in the profit and loss account - Whether,
having valued stock-in-trade at market price, partners of assessee could not contend that
valuation should be on some other basis and, thus, such surplus on valuation was to be
charged to tax as profits of firm - Held, yes
3. [2007] 161 TAXMAN 162 (SC)SUPREME COURT OF INDIACommissioner of Income-tax,
Udaipur v.Hindustan Zinc Ltd.
Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock -
Assessment year 1996-97 - Whether correct principle of accounting is to enter stock in
books of account at cost unless value is required to be reduced by reason of fall in market
value of goods below original cost - Held, yes - Whether therefore, goods should not be
written down below cost price except where there is an actual or anticipated loss - Held, yes
- Whether if fall in price is only such as it would reduce merely prospective profit, there
would be no justification to discard initial valuation at cost - Held, yes - Assessee- company
was engaged in business of producing zinc concentrate which was utilised by it captively -
During assessment year 1996-97, certain stock of zinc concentrate got accumulated - Since
domestic consumption of accumulated stock was not possible, assessee decided to export
same - Assessee estimated/valued net realisable value of stock by adopting London Metallic
Exchange Price which was lower than Weighted Average Cost (WAC) on 31-3-1996, by Rs.
27.08 crores, while in past, it had been valuing closing stock of zinc concentrate for captive
consumption at WAC - Assessing Officer observed that auditors’ report indicated that if
accounting policy of earlier years was to be followed, then in that event, profits would have
increased by Rs. 27.08 crores and, accordingly, added back Rs. 27.08 crores to income of
assessee - Whether on facts, assessee’s valuation could not be sustained - Held, yes
4. [2001] 118 TAXMAN 301 (SC)SUPREME COURT OF INDIASakthi Trading
Co.v.Commissioner of Income-tax
Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of closing
stock - Assessment year 1984-85 - Whether where on dissolution of assessee-firm
because of death of one partner business is taken over by remaining partners without
discontinuance of its business and value of closing stock on date of dissolution
determined under regular method of accounting is accepted by partners in settlement of
accounts for dissolution purposes, it is impermissible for Assessing Officer to substitute
market value in respect of closing stock alone for purpose of determining income of firm
up to date of dissolution - Held, yes
Income Computation and Disclosure Standards ( ICDS ) Page 18
5. [1991] 55 TAXMAN 497 (SC) SUPREME COURT OF INDIA, A.L.A. Firv.Commissioner of
Income-tax
Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment
year 1961-62 - On dissolution of assessee-firm, its stock-in-trade was revalued and
certain amount was shown as 'difference on revaluation' in the profit and loss account -
Whether, having valued stock-in-trade at market price, partners of assessee could not
contend that valuation should be on some other basis and, thus, such surplus on
valuation was to be charged to tax as profits of firm - Held, yes
3. AS 7 and ICDS III: Construction Contracts
AS 7 specify that it doesn’t deal with Real Estate Developers for which there is a separate
guidance note by ICAI. However, ICDS III doesn’t clarify this.
AS 7 provides for the recognition of losses including probable or expected losses to be
recognized fully and not as an asset when it is probable that these costs are recoverable.
ICDS C does not permit the recognition of expected losses on onerous contracts.
AS 7 provided that contract revenue to be recognised if it is possible to reliably estimate the
outcome of a contract. However, ICDS III has omitted this criteria. ICDS III says that contract
revenue shall comprise of:
a) The initial amount of revenue agreed in the contract, including retentions; and
b) Variations in contract work, claims and incentive payments
I. To the extent that it is probable that they will result in revenue; and
II. They are capable of being reliably measured.
It is also specified that where contract revenue already recognised as income is subsequently
written off in the books of accounts as uncollectible, the same shall be recognised as an
expense and not as an adjustment of the amount of contract revenue.
AS 7 does not permit the recognition of revenue during the early stages of a contract but
ICDS III provides for recognition of revenue only to the extent of cost incurred in the early
stages of a contract where the outcome cannot be estimated reliably. Also, this early stage
of contract shall not extend beyond 25% of the stage of completion.
These changes will happen to affect the accounting of various entities because where earlier
recognition of revenue not being allowed at all and now being allowed partially. Also, the
disallowance of recognition of expected losses on onerous contracts will lead to accounting
discrepancies among entities.
Incidental income –interest etc-whether the decision of Karnal Cooperative and Bokaro Steel-Still Valid or overruled. ICDS dealing with the Recognition of revenue deals with this in Para 7 of that ICDS and makes it taxable.
Retention money- to be recognised on POCM basis.As per Clause 10 –Contract revenue shall comprise of the initial amount of revenue agreed in the contract including retention. Taxed only upon fulfilment of contractual conditions
[Simplex Concrete Tiles India Pvt. Ltd (179 ITR 8) (Calcutta HC)]
MAT mismatch:
Income Computation and Disclosure Standards ( ICDS ) Page 19
In case of taxpayer following Completed Contract method in books of accounts-
Year % of project completed in
the year
Income under ICDS
Book profits under MAT
Remarks
1 20 NIL NIL Higher income under normal computation
2 20 80,000 NIL
3 30 60,000 NIL
4 20 40,000 NIL
5 10 20,000 2,00,000 Taxable under MAT
Total 100 2,00,000 2,00,000
4. AS 9 and ICDS IV: Revenue Recognition
AS 9 doesn’t apply to Companies engaged in Insurance business. ICDS is silent on the same
and
AS 9 permits the use of both percentage completion method and completed service
contract method but ICDS IV permits only the use of percentage completion method.
Although, completed contract method does not accurately reflect revenues, expenses and
profits in the period in which they are incurred and earned, the tax advantages of this
method were obvious – the deferral of tax liability of future years. This cannot be availed
now due to the applicability of ICDS IV. Accounting entries shall also slightly change in the
percentage completion method.
Another change which has taken place is AS 9 provides for the postponement of recognition
of revenue in relation to any claim if the ability to assess the ultimate collection with
reasonable certainty is lacking. ICDS IV provides that where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any claim for escalation
of price and export incentives, revenue recognition in respect of such claim shall be
postponed to the extent of uncertainty involved. With regard to this what people could do
was postpone the recognition of revenue and thereby artificially reduce the amount of net
profit after tax, reserves and surpluses of the year and the net current assets leading to an
effect on taxes also but ICDS has limited the postponement only to escalation of price and
export incentives.
Revenue from Service transactions shall be recognised by percentage completion method.
Under this method, revenue from service transactions is matched with the service
transaction costs incurred in reaching the stage of completion, resulting in the
determination of revenue, expenses and profits which can be attributed to the proportion
of work completed. ICDS on construction contract also requires the recognition of revenue
on this basis. The requirements of that standard shall mutatismutandis apply to the
recognition of the revenue and the associated expenses for a service transaction.
Important cases
1. [2013] 38 taxmann.com 100 (SC)SUPREME COURT OF INDIACommissioner of Income-
taxv.Excel Industries Ltd.*
Income Computation and Disclosure Standards ( ICDS ) Page 20
Section 28(iv) of the Income-tax Act, 1961 - Business income - Value of any benefit or
perquisite, arising from business or exercise of profession [Advance license and duty
entitlement pass book] - Whether until imports are actually made by assessee, benefits
under advance license or under duty entitlement pass book represent only hypothetical
income which cannot be brought to tax by applying provisions of section 28(iv) - Held, yes
[Paras 20 & 21] [In favor of assessee]
2. [1999] 104 TAXMAN 547 (SC)SUPREME COURT OF INDIAUCOBankv.Commissioner of
Income-tax
Section 5, read with sections 119 and 145, of the Income-tax Act, 1961 - Income -
Accrual of - Assessment year 1981-82 - Whether in view of CBDT circular, dated 9-10-
1984, interest on a loan whose recovery is doubtful and which has not been recovered
by assessee-bank for last three years but has been kept in a suspense account and has
not been brought to profit and loss account of assessee, cannot be included in income of
assessee - Held, yes - Whether CBDT circular dated 9-10-1984 is in conflict with
provisions of section 145 - Held, no
Section 119 of the Income-tax Act, 1961 - Central Board of Direct Taxes - Power to issue
circulars, etc. - Whether, since Board has considered it necessary to lay down a general
test for deciding what is a doubtful debt in circular dated 9-10-1984 and directed that all
ITOs should treat such amounts as not forming part of income of assessee until realised,
this direction by way of a circular cannot be considered as travelling beyond powers of
Board under section 119 and such a circular is binding under section 119 - Held, yes
3. [1971] 82 ITR 835 (SC)SUPREME COURT OF INDIAMorvi Industries Ltdv.Commissioner of
Income-tax
Section 37(1) , read with section 5 of the Income-tax Act, 1961 [Corresponding to section
10(2)(xv), read with section 4(1)(b)(ii), of the Indian Income-tax Act, 1922] – Business
expenditure – Allowability of – Assessment years 1956-57 and 1957-58 – Assessee-
company, being managing agent of its subsidiary company and maintaining its accounts
on mercantile system, relinquished certain amounts representing fixed monthly officer
allowance and commission on sales, payable to it by managed-company in view of heavy
financial losses suffered by managed company – Amounts of commission were
relinquished after they had become "due" but before they were "payable" in terms of
managing agencies agreement – Tribunal held that relinquishment by assessee of its
income after it had become due was of no effect and that relinquishment was not for
benefit of assessee so as to allow assessee's claim for amounts relinquished as
permissible deduction under section 10(2)(xv) of 1922 Act – Whether postponement of
date of payment did not affect accrual of income, and fact that amount of income was
not subsequently received by assessee would not also detract from or efface accrual of
income – Held, yes – Whether since amounts of income for years in question were given
up unilaterally by assessee after they had accrued to it, assessee-company could not
Income Computation and Disclosure Standards ( ICDS ) Page 21
escape liability to tax on those amounts – Held, yes – Whether since there was nothing
to show that amounts were relinquished on grounds of commercial expediency or for
advancing assessee's business interests, assessee was not entitled to claim deduction of
said amounts as business expenditure under section 10(2)(xv) of 1922 Act – Held, yes
4. [1986] 24 TAXMAN 337 (SC)SUPREME COURT OF INDIAState Bank of
Travancorev.Commissioner of Income-tax
Section 5, read with section 145, of the Income-tax Act, 1961 - Income - Accrual of -
Assessee-bank, following mercantile system of accounting, charged interest on advances
considered doubtful of recovery, called sticky advances by debiting concerned parties
but, instead of carrying it to profit and loss account, credited it to separate account
styled 'Interest suspense account' In its return assessee disclosed such interest
separately and claimed that same was not taxable in its hands as income of concerned
years - Whether in view of concept of real income, impugned interest, which had
accrued to assessee, could be excluded from assessee's taxable income of concerned
years - Held, no
5. [1997] 091 TAXMAN 351 (SC)SUPREME COURT OF INDIAGodhra Electricity Co.
Ltd.v.Commissioner of Income-tax
Section 5 of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1969-70
to 1972-73 - Assessee-company a licensee to generate and supply electricity to its
consumers, from 1963 enhanced tariff - Suit was filed by consumers which was decreed
against assessee ultimately - Supreme Court decided dispute in favour of assessee-
company in 1969 - During pendency of litigations assessee though accounting for
enhanced tariff could not recover same and even after decisions in its favour in view of
Government's advice assessee was prevented from realising amounts in question -
Ultimately, company was taken over by Government and later transferred to Electricity
Board - Whether in above circumstances, since assessee was not able to collect
enhanced charges, necessary entries made in its books of account represented only
hypothetical income and it could not be brought to tax as it did not represent income
which had really accrued even though assessee-company was following mercantile
system of accounting - Held, yes
5. AS 10 and ICDS V: Tangible Fixed Assets
ICDS V provides that “tangible fixed asset” is an asset being land, building, machinery, plant
or furniture held with the intention of being used for the purpose of producing or providing
goods or services and is not held for the sale in the normal course of business. The definition
is same except that the AS 10 refers to the word “asset” as against the specific items of land,
building, machinery, plant or furniture referred to in ICDS V. Moreover, the AS specifically
Income Computation and Disclosure Standards ( ICDS ) Page 22
says that the standard doesn’tdeal with the following items to which special consideration
applies i.e.,
a) Forests, plantations and similar regenerative naturalresources;
b) Wasting assets including mineral rights , expenditure on the exploration for and
extraction of mineral oil, natural gas and similar non regenerative resources;
c) Expenditure on real estate development
d) Livestock
Though it has been specified in AS that expenditure on individual items of fixed assets used
to develop or maintain the activities covered in (i) to (iv) above, but separable from those
activities are to be accounted for in accordance with the AS 2.
AS 10 applies to Good will but ICDS doesn’t
One difference which can be highlighted majorly is the value at which an asset shall be
acquired in exchange for another fixed asset or shares or securities. AS 10 says to record the
fixed asset at the fair value of the asset given or acquired whichever is more clearly evident
while ICDS V says to record the asset acquired in exchange at the actual cost of the asset so
acquired. This although may not cause difficulties in accounting but shall mandatorily lead
to discrepancies in valuation of the fixed asset and thereby shall affect the balance sheet
also.
There is no concept of revaluation of fixed assets under ICDS whereas the AS 2 provides for
revaluation of the fixed assets.
ICDS V says that depreciation on tangible fixed asset shall be computed in accordance with
the provisions of the Act and again specifies that income arising on transfer of a tangible
fixed asset shall be computed in accordance with the provisions of the Act. AS 10 provides
for guidance on retirements and disposals of the fixed assets.
ICDS V specifically provides that the following disclosures shall be made regarding the
tangible fixed assets, namely:-
a) Description of asset or blocks of assets
b) Rate of depreciation
c) Actual cost or written down value, as the case may be
d) Additions or deductions during the year with dates, in the case of any addition of an
asset, date put to use, including adjustment on account of-
-Central Value added tax credit claimed and allowed under the Cenvat Credit Rules, 2004
-change in rate of currency
-subsidy or grant or reimbursement, by whatever name called.
e) Depreciation allowable
f) Written down value at the end of the year.
The existing AS 10 has also disclosure requirement but not exactly in the above manner.
There is no mention regarding maintenance of ICDS specific FA register, which was though
proposed earlier.
Income Computation and Disclosure Standards ( ICDS ) Page 23
6. AS 11 and ICDS VI: Effects of Changes in foreign exchange rates
ICDS requires premium, discount or exchange differences on forward contracts that are
intended for trading or speculation purposes, or that are entered into to hedge the foreign
currency risk of a firm commitment of a highly probable forecast transaction to be
recognized at the time of settlement. This is different from the recognition of gains and
losses on mark to market basis or recognition of only losses in line with the principle of
prudence. Due to this the recognition of losses stands delayed thereby leading to a rise in
income and taxes because the settlement of the losses on foreign currency and forward
contracts usually takes time.
AS 9 provides for accumulation of exchange differences arising from the translation of
financial statements of non-integral foreign operations in a foreign currency translation
reserve in a balance sheet while ICDS VI provides for recognition of such differences as
income or expense. This implies that now since we have to route the exchange differences
through the profit and loss account, taxes shall be levied on the same and the income shall
be accordingly higher on a positive exchange difference and lower on a negative exchange
difference.
Section 43A of the Income Tax Act, 1961 as well as Rule 115 of the Income-tax Rules, 1962 are to be followed in supersession of even ICDS and has been specifically stated in the ICDS itself.
Important Cases
1. [1979] 116 ITR 1 (SC)SUPREME COURT OF INDIASutlej Cotton Mills Ltd. VsCommissioner
of Income-tax
Section 28(1) of the Income-tax Act, 1961 (Corresponding to section 10(1) of Indian
Income-tax Act, 1922) – Business loss/ deductions – Allowable as - – Assessment years
1957-58 and 1959-60 – Assessee-company after remitting certain amounts from
Pakistan where it was doing business in fabrics, claimed that it suffered business loss
due to devaluation of Pakistani rupee – Revenue authorities rejected assessee’s claim –
High Court also took view that it was not a business loss as it was caused by devaluation
of rupee which was an act of state – Whether where profit or loss arises to an assessee
on account of appreciation or depreciation in value of foreign currency held by him, on
conversion into another currency, such profit or loss would ordinarily be trading profit or
loss if foreign currency is held by assessee on revenue account or as a trading asset or as
part of circulating capital embarked in business – Held, yes – Whether, however, if
foreign currency is held as a capital asset or as fixed capital, such profit or loss would be
of capital nature – Held, yes – Whether therefore, matter was to be remanded to
Tribunal to firstly determine as to whether amounts in question were held in Pakistan as
capital asset or as trading asset – Held, yes
2. CIT Vs Woodward Governor India P Ltd (2009) 312 ITR 254(SC)
3. ACIT Vs EleconEngg. Co Ltd (2010) 189 Taxman 83(SC)
4. Oil & Natural Gas Corporation Ltd Vs CIT(2010) 322 ITR 180(SC)
Income Computation and Disclosure Standards ( ICDS ) Page 24
7. AS 12 and ICDS VII: Government Grants
A major difference which ICDS VII has brought in is the disallowance of the use of capital
approach method for recording of government grants. Thus, with the effect of ICDS, grants
cannot be anymore treated as a part of the shareholder’s funds. It has to be either treated
as revenue receipt or reduced from the cost of the fixed asset depending on the purpose
for which the grant or subsidy is given. Thus, the theory of recognizing government grants
outside the profit and loss account merely because it represents an incentive provided by
the government without related costs stands dismissed in the newly formulated ICDS.
ICDS VII mentions that recognition of government grants shall not be postponed beyond
the date of actual receipt even though all the recognition conditions in accordance with the
accounting standards are not met. This has been done in order to reduce litigations
regarding the recognition criteria and also to provide certainty on the topic. Under the AS
12 it is provided that mere receipt of a grant is not necessarily conclusive evidence that
conditions attaching to the grant have been or will be fulfilled.
AS provides that Government Grant in the nature of promoters’ contribution (i.e. they are
given with reference to the total investments in an undertaking or by way of contribution
towards its total capital outlay and no repayment is ordinarily expected, are credited
directly to shareholders funds. There is no such mention in the ICDS.
Important cases
1. [1997] 94 TAXMAN 368 (SC)SUPREME COURT OF INDIASahneySteel& Press Works
Ltd.v.Commissioner of Income-tax
Section 4 of the Income-tax Act, 1961 - Income - Assessable as - Assessment year 1974-75 -
According to a notification issued by Government of Andhra Pradesh, certain facilities and
incentives were to be given to new industrial undertakings which commenced production
on or after 1-1-1969 with investment capital not exceeding 5 crores for five years from date
of commencement - Production incentives were not available unless and until production
had commenced - In terms of said notification assessee received refund of sales tax -
Whether refund of sales tax was a revenue receipt - Held, yes
2. [2009] 185 TAXMAN 409 (SC)Mepco Industries Ltd. v.Commissioner of Income-tax
Section 154 of the Income-tax Act, 1961 - Rectification of mistakes - Apparent from
record - Assessment years 1993-94 and 1994-95 - Assessee, engaged in business of
manufacture of potassium chlorate, received power subsidy for two years, which it
initially offered as revenue receipt in its returns of income - However, thereafter, it
sought revision of assessment orders contending that subsidy amount was a capital
receipt and, hence, not liable to be taxed - Commissioner allowed revision petitions -
Subsequently, in case of Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/ 94
Taxman 368 (SC), Supreme Court held that incentive subsidy admissible to that
company was a revenue receipt and, hence, it was liable to be taxed under section 28 -
Following said judgment, Commissioner passed order of rectification on ground that
power tariff subsidy given to assessee was admissible only after commencement of
Income Computation and Disclosure Standards ( ICDS ) Page 25
production and, consequently, it constituted operational subsidies and not capital
subsidies - Whether in each case one has to examine nature of subsidy and this exercise
cannot be undertaken under section 154 - Held, yes - Whether, on facts, when
Commissioner, while passing orders under section 264, had taken view that subsidy in
question was a capital receipt not taxable under Act, he was justified in invoking section
154 and holding subsidy in question to be revenue in nature based on judgment of
Supreme Court in case of Sahney Steel & Press Works Ltd. (supra) - Held, no
8. AS 13 and ICDS VIII:Accounting for Investments
This ICDS deals with securities held as stock in trade.
Accounting Standard 13 (Accounting for Investments) deals with current investments, long
term investments and property but excludes shares, debentures or other securities which
are held as stock in trade by any assessee. ICDS VIII (Securities) on the other hand deals
only with securities held as stock in trade. Hence, since both the AS 13 and ICDS VIII deal
with two totally irreconcilable topics, collation of both shall stand unjustified. ICDS VIII
requires the comparison of cost and net realizable value for securities held as stock-in-trade
to be assessed category wise and not for each individual security. ICDS VIII also quotes that
securities that are not quoted or are quoted irregularly shall be valued at cost. This could
represent a change in practice for some entities.
ICDS provides that cost shall be determined on FIFO basis.
At the end of the previous year, securities held as stock in trade shall be valued at actual
cost initially recognised or net realisable value at the end of the previous year whichever is
lower.
Securities are attached importance in a sense that ICDS 2 does not deal with securities and
a specific standard has been provided for the securities.
Net realisable value is not defined in this Standard even though it is defined in the ICDS 2.
There are bound to be disputes in this regard. Only fair value is defined as the amount for
which an asset could be exchanged between a knowledgeable, willing buyer and a
knowledgeable willing seller in an arm’s length transaction.
Key differences between AS-13 and ICDS VIII-The key basis and change are disclosed herein
below.
Basis AS – 13 ICDS – VIII
Applicability AS 13 includes long term investments and current investments but excludes securities held as stock-in-trade
It deals only with securities held as stock-in-trade
Approach for year-end valuation
Individual security wise Portfolio approach(see example below)
Method of valuation of unlisted securities at the year-end
Lower of Cost or NRV Actual cost method
Method of Weighted Average method FIFO method
Income Computation and Disclosure Standards ( ICDS ) Page 26
determination of cost where specific identification is not possible
Key issues that may be involved are:
a) Portfolio approach vis-a-vis individual security wise valuation-
Individual Security Cost NRV Valuation
Company A 100 20 20
Company B 105 30 30
Company C 145 40 40
Company D 100 300 100
Valuation as per AS-13 190
Valuation as per ICDS 450 390 390
b) Practical difficulty in valuing securities on FIFO basis vis-a-vis weighted average method
Also, with respect to pre-acquisition period interest, ICDS allows the same to be
reduced from actual cost. It is not treated as income and hence, is in parity with the
prevalent industry practice.
9. AS 16 and ICDS IX: Borrowing Costs
The major changes which have taken place in AS 16 with regard to ICDS IX is in the method
of capitalisation of borrowing costs. In AS 16 we are supposed to suspend the capitalisation
of borrowing costs during extended periods in which active development is interrupted
while in that of ICDS IX, nothing about the same has been mentioned hence we assume that
capitalisation of borrowing costs should not be suspended even where active development
of a capital asset is interrupted. Also, in AS 16, capitalisation of borrowing cost is to be done
only on incurrence of expenditure on qualifying asset, incurrence of borrowing cost and on
activities that are necessary to prepare the asset for its intended use or sale while in ICDS IX
it is mentioned to commence to capitalise the borrowing costs from the date on which the
funds have been borrowed. There has also been some changes in the capitalisation of
general borrowings. These changes in the method and timing of capitalisation can bring
about some discrepancies in accounting.
Also, in AS 16, income from temporary investments was to be deducted from borrowing
costs but in ICDS IX, no mention has been made about the same hence we assume it as non-
deductible and thereby a taxable income.
Borrowing in AS 16 specifies that exchange difference arises from foreign currency
borrowing to the extent that they are regarded as an adjustment to interest costs may be
included in borrowing cost. However these are not covered in ICDS IX.
Hindustan Lever Ltd has taken a loan of USD 10 Million on April 1, 2015, for a specific
project @3% p.a., payable annually. On April 1, 2015 the exchange rate Rs. 60/USD. The
Income Computation and Disclosure Standards ( ICDS ) Page 27
exchange rate, as at March 31, 2016, is Rs. 46/USD. The corresponding amount could have
been borrowed by HLL. in local currency @11% p.a. on April 1, 2015. In this case, AS 16
prescribed the calculation of difference attributable as interest.
Qualifying asset is defined in a simple manner in the AS 16 as an asset which takes
substantial period of time to get ready for its intended use or sale. In this regard the ASI
explains the meaning of the term “Substantial period of time”. The following assets
ordinarily take 12 months or more to get ready for intended use or sale unless the contrary
is proved by the enterprise:
a) Assets that are constructed or otherwise produced for an enterprise’s own use e.g.
assets constructed under major capital expansions.
b) Assets intended for sale or lease that are constructed or otherwise produced as discrete
projects for example ships or real estate developments.
In case of inventories, substantial period of time is considered to be involved where time is
the major factor in bringing about a change in the condition of the inventory. For example,
liquor is often required to be kept in store for more than 12 months for maturing.
ICDS however, says that qualifying asset means
a) Land, building, machinery, plant or furniture being tangible assets.
b) Know-how, patents, copy rights, trade marks, licences , franchises or any other business
or commercial rights of similar nature, being intangible assets.
c) Inventories that require a period of 12 monthor more to bring them to a saleable
condition.
Thus, as per ICDS all assets other than inventories (excluding inventories as given
hereinabove) are considered for capitalisation of borrowing costs. Until now , the Act
required that capitalisation of borrowing cost only when there was an extension of business.
This condition of extension is now removed by the Finance Act, 2015. Thus ICDS is now in
line with the Act.
Amendment in Section 36(1)(iii) – Finance Act, 2015 The Finance Act 2015 had omitted the Words “for extension of existing business or profession” in first proviso from 1/4/2016 thereby meaning that any amount of interest paid, in respect of capital borrowed for acquisition of an asset for any period beginning from the date when the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, is not allowable as a deduction. Para 6 ,7 8 and 9 deals with the capitalisation part in ICDS. Interest costs pertaining to acquisition of asset now to be capitalised.
Income from temporary deployment of surplus funds – Not to be reduced from borrowing cost Treatment aligned with Tuticorin Alkali decision (227 ITR 172)(SC) already discussed hereinabove.
Important Cases
Income Computation and Disclosure Standards ( ICDS ) Page 28
1. [1975] 98 ITR 167 (SC)SUPREME COURT OF INDIAChallapalli Sugars Ltd.V.Commissioner
of Income-tax
Section 43(1) , read with section 32 of the Income-tax Act, 1961 (Corresponding to section
12B(1) of the Indian Income-tax Act, 1922) – Actual cost – Whether for purpose of
deduction on account of depreciation and development rebate, interest paid before
commencement of production on amount borrowed for acquisition and installation of plant
and machinery can be considered to be part of actual cost of assets to assessee - Held, yes
2. [1997] 93 TAXMAN 502 (SC)SUPREME COURT OF INDIATuticorin Alkali Chemicals
&Fertilizers Ltd.v.Commissioner of Income-tax
Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as -
Assessment year 1980-81 - Whether interest earned on short-term investment of funds
borrowed for setting-up of factory during construction of factory before commencement of
business-has to be assessed as income from other sources and it cannot be said that interest
income is not taxable on ground that it would go to reduce interest on borrowed amount
which would be capitalised - Held, yes
3. [1999] 102 TAXMAN 94 (SC)SUPREME COURT OF INDIACommissioner of Income-
taxv.Bokaro Steel Ltd.
Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment
years 1965-66 to 1971-72 - Assessee-company was in process of constructing and erecting
its plant and had not started any business during relevant assessment years - It received
certain amounts through (i) rent charged by assessee from its contractors for housing
workers and staff employed by contractor for construction work of assessee, (ii) hire
charges for plant and machinery given to contractors for use in construction work of
assessee, (iii) interest from advances made to contractors for purpose of facilitating work of
construction, and (iv) royalty for excavation and use of stones lying on assessee’s land for
construction work - First three receipts had been adjusted against charges payable to
contractors and, thus, had gone to reduce cost of construction - Whether first three receipts
being intrinsically connected with construction of assessee’s plant, would be capital receipt
and not income of assessee from any independent source - Held, yes - Whether similarly
royalty received for stone excavated from assessee’s land would go to reduce cost of plant
and could not be taxed as income - Held, yes
4. [2008] 167 TAXMAN 206 (SC)SUPREME COURT OF INDIADeputy Commissioner of
Income-taxv.Core Health Care Ltd.*
Section 36(1)(iii) , read with Explanation 8 to section 43(1), of the Income-tax Act, 1961 -
Interest on borrowed capital - Assessment year 1992-93 - Whether proviso inserted in
section 36(1)(iii) with effect from 1-4-2004 has to be read as prospectively - Held, yes -
Whether what section 36(1)(iii) emphasises on is user of capital and not user of asset
Income Computation and Disclosure Standards ( ICDS ) Page 29
which comes into existence as a result of borrowed capital, unlike section 37(1) which
expressly excludes an expense of a capital nature - Held, yes - Whether Legislature has,
therefore, made no distinction in section 36(1)(iii) between ‘capital borrowed for a
revenue purpose’ and ‘capital borrowed for a capital purpose’ and an assessee is
entitled to claim interest paid on borrowed capital provided that capital is used for
business purpose irrespective of what may be result of using such borrowed capital -
Held, yes - Whether Explanation 8 to section 43 as well as concept of determination of
‘actual cost’ have no application to section 36(1)(iii) as this section does not incorporate
concept of depreciation - Held, yes - Assessee had a running business of manufacturing
and selling of intravenous solutions - It installed new machineries on which production
was not started during relevant year - Assessee claimed deduction of interest on
borrowings made for purchasing these machineries - Whether assessee’s claim was to
be allowed - Held, yes
10. AS 29 and ICDS X: Provisions, Contingent Liabilities and Contingent assets
ICDS X specifically says that the standard deals with provisions, contingent liabilities and
contingent assts, except those
a) Resulting from financial instruments
b) Resulting from executory contracts
c) Arising in insurance business from contracts with policyholders; and
d) Covered by another ICDS
An important point to be noted is that the ICDS provides that the term provision is also used
in the context of items such as depreciation, impairment of assets and doubtful debts which
are adjustments to the carrying amounts of assets and are not addressed in this ICDS. Thus,
the issues relating to the provisions of bad and doubtful debts which have been held to be
not eligible for being deducted while computing book profit are sought to be taken care of
by this exception.
Unlike the existing AS 29, ICDS X requires the recognition of provisions only if it is reasonably
certain that an outflow of resources embodying economic benefits will be required to settle
the obligation and a reliable estimate can be made of the amount of the obligation.The
phrase “reasonably certain” has not been defined. As against this, AS 29 uses the word
“Probable”. This might cause a certain delay in the recognition of provisions although not
much.
The definition of the term Present obligation also uses the phrase “reasonably certain” as
against “Probable” used in AS 29.
AS 29 clarify that “obligation” may be legally enforceable and may arise from normal
commercial business practice or to act in a desirable business atmosphere. However, the
ICDS does not define the term “obligation”. Thus, provisions made in order to follow normal
business practices arising out of good customer relationship may not be allowed. Take the
example of MNCs who are generally in the forefront in this.
Income Computation and Disclosure Standards ( ICDS ) Page 30
Contingent Assets and reimbursement claims are recognised if inflow of economic benefits/
reimbursement is “virtually certain” as against “reasonably certain”. The term “reasonably
certain” has not been defined and thus prone to disputes.
Important judgement.
1. Rotork Controls India P Ltd (2009) 314 ITR 62(SC)
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of -
Assessment years 1991-92 to 1994-95 - Whether for a provision to qualify for
recognition, there must be a present obligation arising from past events, settlement of
which is expected to result in an outflow of resources and in respect of which a reliable
estimate of amount of obligation is possible - Held, yes - Whether if historical trend
indicates that in past large number of sophisticated goods were being manufactured and
defects existed in some of items manufactured and sold, then provision made for
warranty in respect of army of such sophisticated goods would be entitled to deduction
from gross receipts under section 37(1), provided data is systematically maintained by
assessee - Held, yes
1.5 ICDS and MAT Computation
1. In case of MAT income- even though accounts are prepared as per AS- you are assuming that to be correct for the purposes of payment of taxes. In the case of MAT you are assuming that the accounts must be prepared as per the Accounting Standards where as for normal computation you would not be doing so. Levying tax on book profit which is determined as per the AS and again asking companies to restate the accounts using ICDS appears to be a tedious task. May be the coming budget will see changes in the provisions relating to MAT by including ICDS in Section 115JB and 115JC dealing with MAT and AMT.
1.6 Some other Cases in relation to the Computation vis-à-vis accounting Standards a) Taparia Tools Ltd (2015) 55 taxmann.com 361(SC) b) Madras Industrial Investment Corporation Ltd Vs CIT(1997) 225 ITR 102(SC)
Thanking You,
CA Ramesh Kumar Patodia
Disclaimer: The analysis in this booklet is solely for information purposes. We are not offering it as a legal, accounting or other professional service advice. While best efforts have been made in this preparation, we assume no liabilities of any kind with respect to the accuracy or completeness of the contents, and specifically disclaim from any loss caused, is alleged to have been caused directly or indirectly by the information contained herein. Readers are advised not to take expert opinion.
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
1
ICDS 1 (NOTIFICATION: 32/2015) ICDS 2 (NOTIFICATION: 87/2016)
Main Paragraph In exercise of the powers conferred by
subsection (2) of section 145 of the
Income tax Act, 1961 (43 of 1961) and
in supersession of the notification of
the Government of India in the
Ministry of Finance, Department of
Revenue, published in the Gazette of
India, Part II, Section 3, Subsection
(ii), vide number S.O 69(E) dated the
25th January, 1996, except as respects
things done or omitted to be done
before such supersession, the Central
Government hereby notifies the
income computation and disclosure
standards as specified in the Annexure
to be followed by all assessees,
following the mercantile system of
accounting, for the purposes of
computation of income chargeable to
income tax under the head "Profit and
gains of business or profession" or "
Income from other sources". This
notification shall come into force with
effect from 1st day of April, 2015, and
shall accordingly apply to the
assessment year 2016-17 and
subsequent assessment years.
In exercise of the powers conferred
by subsection(2) of section 145 of
the Income tax Act, 1961 (43 of
1961, the Central Government
hereby notifies the income
computation and disclosure standards
as specified in the Annexure to this
notification to be followed by all
assessees (other than an individual or
a Hindu undivided family who is not
required to get his accounts of the
previous year audited in accordance
with the provisions of section 44AB
of the said Act) following the
mercantile system of accounting, for
the purposes of computation of
income chargeable to income tax
under the head "Profits and gains of
business or profession" or "Income
from other sources".
2. This notification shall apply to the
assessment year 2017-18 and
subsequent assessment years.
Annexures-B: Income Computation and Disclosure Standard II relating to valuation of inventories Clause-18 Retail Method
18. Where it is impracticable to use
the costing methods referred to in
paragraph 16, the retail method can be
used in the retail trade for measuring
inventories of large number of rapidly
changing items that have similar
margins. The cost of the inventory is
determined by reducing from the sales
value of the inventory, the appropriate
percentage gross margin. The
percentage used takes into
consideration inventory, which has
been marked down to below its
original selling price.
Techniques for the Measurement
of Cost
18(1). Techniques for the
measurement of the cost of
inventories, such as the standard cost
method or the retail method, may be
used for convenience if the results
approximate the actual cost. Standard
costs take into account normal levels
of consumption of materials and
supplies, labour, efficiency and
capacity utilisation. They are
regularly reviewed and, if necessary,
revised in the light of the current
conditions.
(2) The retail method can be used in
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
2
the retail trade for measuring
inventories of large number of
rapidly changing items that have
similar margins and for which it is
impracticable to use other costing
methods. The cost of the inventory is
determined by reducing from the
sales value of the inventory, the
appropriate percentage gross margin.
The percentage used takes into
consideration inventory, which has
been marked down to below its
original selling price. An average
percentage for each retail department
is to be used. Clause-26(a) the accounting policies adopted in
measuring inventories including the
cost formulae used;
the accounting policies adopted in
measuring inventories including the
cost formulae used. Where Standard
Costing has been used as a
measurement of cost, details of such
inventories and a confirmation of the
fact that standard cost approximates
the actual cost
Annexure-C: Income Computation and Disclosure Standard III relating to construction contracts. Clause-22 22. Contract revenue and contract
costs associated with the construction
contract, which commenced on or
before the 31st day of March, 2015 but
not completed by the said date, shall
be recognised as revenue and costs
respectively in accordance with the
provisions of this standard. The
amount of contract revenue, contract
costs or expected loss, if any,
recognised for the said contract for
any previous year commencing on or
before the 1st day of April, 2014 shall
be taken into account for recognising
revenue and costs of the said contract
for the previous year commencing on
the 1st day of April, 2015 and
subsequent previous years.
22.1 Contract revenue and contract
costs associated with the
construction contract, which
commenced on or after 1st day of
April, 2016 shall be recognised in
accordance with the provisions of
this standard.
22.2 Contract revenue and contract
costs associated with the
construction contract, which
commenced on or before the 31st
day of March, 2016 but not
completed by the said date, shall be
recognised based on the method
regularly followed by the person
prior to the previous year beginning
on the 1st day of April, 2016.
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
3
Annexure-D: Income Computation and Disclosure Standard IV relating to revenue recognition Clause-6 & 7(2016)
6. Revenue from service transactions shall
be recognised by the percentage
completion method. Under this method,
revenue from service transactions is
matched with the service transactions
costs incurred in reaching the stage of
completion, resulting in the determination
of revenue, expenses and profit which can
be attributed to the proportion of work
completed. Income Computation and
Disclosure Standard on construction
contract also requires the recognition of
revenue on this basis. The requirements of
that Standard shall mutatis mutandis apply
to the recognition of revenue and the
associated expenses for a service
transaction.
6. Subject to Para 7, revenue from
service transactions shall be recognised
by the percentage completion method.
Under this method, revenue from service
transactions is matched with the service
transaction costs incurred in reaching the
stage of completion, resulting in the
determination of revenue, expenses and
profit which can be attributed to the
proportion of work completed. Income
Computation and Disclosure Standard
on construction contract also requires
the recognition of revenue on this basis.
The requirements of that Standard shall
mutatis mutandis apply to the
recognition of revenue and the
associated expenses for a service
transaction. However, when services are
provided by an indeterminate number of
acts over a specific period of time,
revenue may be recognised on a straight
line basis over the specific period.
7. Revenue from service contracts with
duration of not more than ninety days
may be recognised when the rendering
of services under that contract is
completed or substantially completed.
Clause-7 (2015) corresponding to 8(2016)
7. Interest shall accrue on the time
basis determined by the amount
outstanding and the rate applicable.
Discount or premium on debt
securities held is treated as though it
were accruing over the period to
maturity.
8. (1) Subject to sub paragraph (2),
interest shall accrue on the time basis
determined by the amount
outstanding and the rate applicable.
(2) Interest on refund of any tax,
duty or cess shall be deemed to be
the income of the previous year in
which such interest is received.
(3) Discount or premium on debt
securities held is treated as though it
were accruing over the period to
maturity.
Annexure-E: Income Computation and Disclosure Standard V relating to tangible fixed assets Clause- 14 Where a person owns tangible fixed
assets jointly with others, the
proportion in the actual cost,
accumulated depreciation and written
down value is grouped together with
similar fully owned tangible fixed
Where a person owns tangible fixed
assets jointly with others, the
proportion in the actual cost,
accumulated depreciation and written
down value is grouped together with
similar fully owned tangible fixed
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
4
assets. Details of such jointly owned
tangible fixed assets shall be indicated
separately in the tangible fixed assets
register.
assets.
Annexure-F: Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates Clause- 2(1) (k) "Integral foreign operation" is a
foreign operation, the activities of
which are an integral part of the
operation of the person.
(m) "Non-integral foreign operation" is
a foreign operation that is not an
integral foreign operation.
-
Clause- 4(d) - Nonmonetary item being inventory
which is carried at net realisable
value denominated in a foreign
currency shall be reported using the
exchange rate that existed when such
value was determined. Clause-7-10 Classification of Foreign Operations
7. (1) The method used to translate the
financial statements of a foreign
operation depends on the way in
which it is financed and operates in
relation to a person. For this purpose,
foreign operations are classified as
either "integral foreign operations" or
"non-integral foreign operations".
(2) The following are indications that
a foreign operation is a non-integral
foreign operation rather than an
integral foreign operation:
(a.a) while the person may control the
foreign operation, the activities of the
foreign operation are carried out with
a significant degree of autonomy from
the activities of the person;
(a.b) transactions with the person are
not a high proportion of the foreign
operation's activities;
(a.c) the activities of the foreign
operation are financed mainly from its
own operations or local borrowings;
(a.d) costs of labour, material and
7. The financial statements of a
foreign operation shall be translated
using the principles and procedures
in paragraphs 3 to 6 as if the
transactions of the foreign operation
had been those of the person himself.
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
5
other components of the foreign
operation's products or services are
primarily paid or settled in the local
currency;
(a.e) the foreign operation's sales are
mainly in currencies other than Indian
currency;
(a.f) cash flows of the person are
insulated from the day-to-day
activities of the foreign operation;
(a.g) sales prices for the foreign
operation's products or services are not
primarily responsive on a Short-term
basis to changes in exchange rates but
are determined more by local
competition or local government
regulation;
(a.h) there is an active local sales
market for the foreign operation's
products or services, although there
also might be significant amounts of
exports.
Integral Foreign Operations
8. The financial statements of an
integral foreign operation shall be
translated using the principles and
procedures in paragraphs 3 to 6 as if
the transactions of the foreign
operation had been those of the person
himself.
Non-integral Foreign Operations
9. (1) In translating the financial
statements of a non-integral foreign
operation for a previous year, the
person shall apply the following,
namely:
(a.h.1.a) the assets and liabilities, both
monetary and nonmonetary, of the
non-integral foreign operation shall be
translated at the closing rate;
(a.h.1.b) income and expense items of
the non-integral foreign operation
shall be translated at exchange rates at
the dates of the transactions; and
(a.h.1.c) all resulting exchange
differences shall be recognised as
income or as expenses in that previous
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
6
year.
(2) Notwithstanding anything stated in
subparagraph 1, translation and
recognition of exchange difference
in cases referred to in section 43A of
the Act or Rule 115 of Income tax
Rules, 1962 shall be carried out in
accordance with the provisions
contained in that section or that Rule,
as the case may be.
Change in the Classification of a
Foreign Operation
10(1) When there is a change in the
classification of a foreign operation,
the translation procedures applicable
to the revised classification should be
applied from the date of the change in
the classification.
(2) The consistency principle requires
that foreign operation once classified
as integral or non-integral
Is continued to be so classified.
However, a change in the way in
which a foreign operation is financed
and operates in relation to the person
may lead to a change in the
classification of that foreign operation.
Annexure-H: Income Computation and Disclosure Standard VIII relating to securities Clause- 3(1) (b) "Securities" shall have the meaning
assigned to it in clause (h) of Section 2
of the Securities Contract (Regulation)
Act, 1956 (42 of 1956), other than
derivatives referred to in sub-clause
(1a) of that clause.
(b) "Securities" shall have the
meaning assigned to it in clause (h)
of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42
of 1956) and shall include share of a
company in which public are not
substantially interested but shall not
include derivatives referred to in sub-
clause (ia) of that clause (h).
Part-B - Scope
1. This part of Income Computation
and Disclosure Standard deals with
securities held by a scheduled bank
or public financial institutions
formed under a Central or a State Act
or so declared under the Companies
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
7
Act, 1956 (1 of 1956) or the
Companies Act, 2013 (18 of 2013).
Definitions
2(1) The following terms are used in
this part of Income Computation and
Disclosure Standard with the
meanings specified:
(a) "Scheduled Bank" shall have the
meaning assigned to it in clause (ii)
of the Explanation to clause (viia) of
subsection (1) of section 36 of the
Act.
(b) "Securities" shall have the
meaning assigned to it in clause (h)
of section 2 of the Securities
Contract (Regulation) Act, 1956 (42
of 1956) and shall include share of a
company in which public are not
substantially interested;
2(2) Words and expressions used and
not defined in this part of Income
Computation and Disclosure
Standard but defined in the Act shall
have the meaning respectively
assigned to them in the Act.
Classification, Recognition and
Measurement of Securities
3. Securities shall be classified,
recognised and measured in
accordance with the extant guidelines
issued by the Reserve Bank of India
in this regard and any claim for
deduction in excess of the said
guidelines shall not be taken into
account. To this extent, the
provisions of Income Computation
and Disclosure Standard VI on the
effect of changes in foreign exchange
rates relating to forward exchange
contracts shall not apply."
Annexure-I: Income Computation and Disclosure Standard IX relating to borrowing cost Clause-5 To the extent the funds are borrowed
specifically for the purposes of
Subject to paragraph 8, the extent to
which funds are borrowed
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
8
acquisition, construction or production
of a qualifying asset, the amount of
borrowing costs to be capitalised on
that asset shall be the actual borrowing
costs incurred during the period on the
funds so borrowed.
specifically for the purposes of
acquisition, construction or
production of a qualifying asset, the
amount of borrowing costs to be
capitalised on that asset shall be the
actual borrowing costs incurred
during the period on the funds so
borrowed.
Clause-6 To the extent the funds are borrowed
generally and utilised for the purposes
of acquisition, construction or
production of a qualifying asset, the
amount of borrowing costs to be
capitalised shall be computed in
accordance with the following formula
namely :-
A x B/C
Where A = borrowing costs incurred
during the previous year except on
borrowings directly relatable to
specific purposes;
B = (i) the average of costs of
qualifying asset as appearing in the
balance sheet of a person on the first
day and the last day of the previous
year;
(ii) in case the qualifying asset does
not appear in the balance sheet of a
person on the first day or both on the
first day and the last day of previous
year, half of the cost of qualifying
asset;
(iii) in case the qualifying asset does
not appear in the balance sheet of a
person on the last day of previous
year, the average of the costs of
qualifying asset as appearing in the
balance sheet of a person on the first
day of the previous year and on the
date of put to use or completion, as the
case may be ,
other than those qualifying assets
which are directly funded out of
specific borrowings; or
C = the average of the amount of total
Subject to Para 8, in respect of
borrowing other than those referred
to in Para 5, if any, the amount of
borrowing costs to be capitalised
shall be computed in accordance
with the following formula namely
:—
A x B/C
Where A = borrowing costs incurred
during the previous year except on
borrowings referred to in Para 5
above;
B = (i) the average of costs of
qualifying asset as appearing in the
balance sheet of a person on the first
day and the last day of the previous
year;
(ii) in case the qualifying asset does
not appear in the balance sheet of a
person on the first day, half of the
cost of qualifying asset; or
(iii) in case the qualifying asset does
not appear in the balance sheet of a
person on the last day of the previous
year, the average of the costs of
qualifying asset as appearing in the
balance sheet of a person on the first
day of the previous year and on the
date of put to use or completion, as
the case may be, excluding the extent
to which the qualifying assets are
directly funded out of specific
borrowings;
C = the average of the amount of
total assets as appearing in the
balance sheet of a person on the first
day and the last day of the previous
year, other than assets to the extent
Differences between ICDS as Notified in 2016 and ICDS as Notified in 2015
9
assets as appearing in the balance
sheet of a person on the first day and
the last day of the previous year, other
than those assets which are directly
funded out of specific borrowings;
they are directly funded out of
specific borrowings;
Explanation — For the purpose of
this paragraph, a qualifying asset
shall be such asset that necessarily
requires a period of twelve months or
more for its acquisition, construction
or production.
Note:
There is an apparent mistake in the Transitional Provision clause 12 of Annexure D: Income
Computation and Disclosure Standard IV relating to revenue recognition where the reference
made to an earlier paragraph has been mistakenly printed as Para 10 instead of Para 11.
Government of India Ministry of Finance
Department of Revenue Central Board of Direct Taxes
PRESS RELEASE
New Delhi, 11th May, 2017.
Request for stakeholders comments on Draft Income Computation and Disclosure Standards on Real Estate Transactions
Section 145(2) of the Income-tax Act, 1961 („the Act‟) provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. Accordingly, Central Government notified 10 ICDS vide Notification No. S.O. 3079 (E) dated 29th September, 2016. These ICDS inter-alia contains provisions relating to valuation of inventory; construction contracts; Effects in changes of foreign exchange rates, borrowing costs etc. These ICDS are applicable from assessment year 2017-18 (previous year 2016-17) in respect of specified assessees for computation of income under the head “Profits and gains of business or profession” or “Income from other sources”.
The Finance Minister had constituted a committee comprising of experts from accounting field; departmental officers and representatives from Institute of Chartered Accountants of India (ICAI) to suggest the areas in respect of which further ICDS may be notified under the Act.
The Committee suggested notification of ICDS in respect of Real Estate Transactions and submitted the draft of the same. The draft ICDS submitted by the committee is based on the Guidance Note issued on Real Estate Transactions issued by ICAI. For the purposes of providing uniformity and certainty and harmonising the same with provisions of the Act, the committee suggested certain changes in draft ICDS.
The draft ICDS on Real Estate Transactions along with the significant changes suggested in ICDS vis-à-vis the Guidance Note issued by ICAI are uploaded on the Income-tax website at http://www.incometaxindia.gov.in. The stakeholders are requested to submit their comments on draft ICDS on Real Estate Transactions by 26th May, 2017 to Director TPL-III by e-mail at [email protected].
(Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy)
Official Spokesperson, CBDT.
DRAFT INCOME COMPUTATION AND DISCLOSURE STANDARD
ON
REAL ESTATE TRANSACTIONS
MAY 2017
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Draft Income Computation and Disclosure Standard [ICDS]
Real Estate Transactions
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income
chargeable under the head “Profits and gains of business or profession” or “Income from
other sources” and not for the purpose of maintenance of books of account.
In case of conflict between the provisions of the Income Tax Act, 1961 (‘the Act’) and this
Income Computation and Disclosure Standard, the provisions of the Act shall prevail to
that extent.
Scope
1. This Income Computation and Disclosure Standard shall be applicable for
determination of income from all forms of transactions in real estate, which refers to
land as well as buildings and rights in relation thereto. This will include:
a) Sale of plots of land (including long term sale type leases) without any
developments.
b) Sale of plots of land (including long term sale type leases) with development
in the form of common facilities.
c) Development and sale of residential and commercial units, row houses,
independent houses, with or without an undivided share in land.
d) Acquisition, utilization and transfer of development rights.
e) Redevelopment of existing buildings and structures.
f) Joint development agreements for any of the above activities.
Definitions
2 (1) The following terms are used in this Income Computation and Disclosure Standard
with the meanings specified:
(a) “Fair value” is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s
length transaction.
(b) “Project” means the smallest group of units, plots or saleable spaces, as the
case may be, which are linked with a common set of basic facilities, if any, in
such a manner that unless the facilities are made available and functional,
these units, plots or saleable spaces cannot be put to their intended effective use.
A larger venture shall be split into smaller projects when these basic conditions
are fulfilled.
(c) “Project Costs” in relation to a project
A. shall comprise of :-
(i) Cost of land and cost of development rights - All costs related to the
acquisition of land, development rights in the land or property including
cost of land, cost of development rights, rehabilitation costs, registration
charges, stamp duty, brokerage costs and incidental expenses.
(ii) Borrowing costs – Costs which are incurred directly in relation to a project
or which are apportioned to a project in accordance with Income
Computation and Disclosure Standard IX relating to Borrowing Costs.
(iii) Construction and development costs – Costs that relate directly to the
specific project and costs that may be attributable to project activity in
general and allocated to the project.
B. shall exclude costs that cannot be attributed to any project activity or cannot be
allocated to a project.
(d) “Project revenues” include revenue on sale of plots, undivided share in land,
sale of finished and semi-finished structures, consideration for construction,
consideration for amenities and interiors, consideration for parking spaces and
sale of development rights.
2(2) Words and expressions used and not defined in this Income Computation and
Disclosure Standard but defined in the Act shall have the meaning assigned to
them in the Act.
Real Estate Projects
3(1) Project revenue and project cost shall be recognised as revenue and cost
respectively by reference to the stage of completion of the project on the last date
of the previous year for projects where the economic substance is similar to
construction contracts. The recognition of revenue and expenses by reference to
the stage of completion of a project is referred to as the percentage of completion
method.
3(2) Indicators that economic substance of a project is similar to a construction
contract are:
(a) The duration of such projects is beyond 12 months and the project
commencement date and project completion date fall into different
previous years.
(b) Project involves activities similar to construction contracts such as land
development, structural engineering, architectural design, construction or
activities of similar nature.
(c) While individual units of the project are contracted to be delivered to
different buyers these are interdependent upon or interrelated to
completion of a number of common activities with or without provision
of common facilities.
(d) The construction or development activities form a significant proportion
of the project activity.
3(3) In case of a project where the economic substance is not similar to construction
contract, revenue shall be recognised in accordance with Income Computation
and Disclosure Standard IV relating to Revenue Recognition and provisions of
para 3, para 4 and para 5 of the said standard shall apply mutatis mutandis,
provided :–
(a) the seller has transferred to the buyer all significant risks and rewards of
ownership and the seller retains no effective control of the real estate to a
degree usually associated with ownership or the seller has effectively
handed over possession of the real estate unit to the buyer forming part of
the transaction;
(b) no significant uncertainty exists regarding the amount of consideration
that will be derived from the real estate sales;
(c) there is a reasonable certainty that the revenue will be ultimately
collected from buyers.
Application of Percentage of Completion Method
4(1) The revenue in respect of a project shall be recognised under the percentage of
completion method when:-
(a) the expenditure incurred on construction and development costs is 25 % or
more of the construction and development costs;
(b) 25% or more of the saleable project area is secured by contracts or
agreements with buyers; and
(c) 10 % or more of the total revenue as per the agreements of sale or any other
legally enforceable documents are realised in respect of each of the contracts
and it is reasonably certain that the parties to such contracts will comply
with the payment terms as defined in the contracts.
4(2) Revenue shall be recognised in respect of such units which satisfy the condition
mentioned in para 4(1)(c) with reference to the percentage of completion of the
project.
4(3) For applying the percentage of completion method in respect of a project, the
provisions of ICDS III on Construction Contract shall apply mutatis mutandis.
Transferable Development Rights
5(1) Transferable Development Rights are acquired in different ways as mentioned
hereunder:
(a) Direct purchase.
(b) Development and construction of built-up area.
(c) Giving up of rights over existing structures or open land.
5(2) When development rights are acquired by way of direct purchase or on
development or construction of built-up area, cost of acquisition would be the
cost of purchases or amount spent on development or construction of built- up
area, respectively. Where development rights are acquired by way of giving up of
rights over existing structures or open land, the development rights shall be
recorded at fair value of the development rights so acquired.
5(3) When development rights are utilised in a real estate project by a person, the cost
of acquisition shall be added to the project costs.
5(4) When development rights are sold or transferred, revenue shall be recognised
when both the following conditions are fulfilled:
(a) title to the development rights is transferred to the buyer; and
(b) it is reasonable to expect that the revenue will be ultimately collected.
Transactions with multiple elements
6(1) A person may contract with a buyer to deliver goods or services in addition to the
construction or development of real estate. In such cases, the contract
consideration shall be split into separately identifiable components including one
for the construction and delivery of real estate units.
6(2) The consideration received or receivable for the contract shall be allocated to each
component on the basis of the fair value of each component.
6(3) The recognition of revenue of each of the components shall be in accordance with
provisions of relevant ICDS.
Transitional Provisions
7(1) Project revenue and project costs associated with the real estate project, which
commenced on or after 1st day of April, 201X shall be recognised in accordance
with the provisions of this standard.
7(2) Project revenue and project costs associated with the real estate project, which
commenced on or before the 31st day of March, 201X but not completed by the
said date, shall be recognised based on the method regularly followed by the
person prior to the previous year beginning on the 1st day of April, 201X.
Disclosure
8(1) A person shall disclose:
(a) the amount of project revenue recognised as revenue in the period;
(b) the methods used to determine the project revenue recognised in the period;
and
(c) the method used to determine the stage of completion of the project.
8(2) A person shall also disclose each of the following for projects in progress at the
end of the previous year:
(a) the aggregate amount of costs incurred and profits recognised (less recognised
losses) to date;
(b) the amount of advances received;
(c) the amount of work in progress and the value of inventories; and
(d) Excess of revenue recognised over actual bills raised (unbilled revenue).
******
Significant changes made in the draft ICDS on Real Estate transactions
vis-à-vis
Guidance Note on Real Estate transactions issued by the ICAI
The draft ICDS on Real Estate Transactions is based on Guidance Note on Accounting for
Real Estate Transactions issued by the ICAI. While recommending the ICDS, the
Committee suggested the following significant changes in the Guidance Note:
(i) Definition of project – As per the Guidance Note, the set of units which are connected
by a common set of amenities will constitute a single project. To bring certainty in this
matter, the Committee recommends use of term ‘Basic facilities’ in place of common
amenities. This would ensure restricting the definition of the term Project to the smallest
possible group of units. Accordingly, the revenue will be required to be recognised on
such smallest group of units without linking the same to peripheral common amenities
like club-house, entertainment, sports, gymnasiums, health club, restaurants etc,.
(ii) Definition of project cost – The Guidance Note contains illustrative list of items to be
included, allocated or excluded in the project cost. Consistent with the framework of
ICDS, the illustrations have been excluded in the standard while retaining the main
principle that costs that cannot be attributed to any project activity or allocated to project
shall be excluded from project cost. This is also consistent with ICDS III relating to
Construction Contracts.
(iii) Real estate projects – As per the Guidance Note, the revenue in respect of real estate
projects is required to be recognised based on principles of either AS 9 or AS 7
depending on the economic substance of the project. The Guidance Note further
provides that in cases where economic substance of the project is in the nature of
construction contract, the revenue is required to be recognised as per percentage of
completion method (POCM) in accordance of AS 7. The proposed ICDS retains the
same principles for recognition of revenue and cost without usage of illustrative
language of the Guidance Note to provide simplicity and certainty.
(iv) Application of POCM for Real estate projects – The Guidance Note in para 5.3
contains four conditions to be satisfied for recognition of revenue including the
condition of obtaining all critical approvals. Since the recognition of revenue under
other conditions is deferred upto incurrence of 25% of construction and development
cost (which does not include land cost), the condition in respect of obtaining critical
approval is not found by the Committee to be very relevant for recognition of revenue
under ICDS in view of the newly enacted ‘The Real Estate (Regulation and
Development) Act, 2016’ (RERA). All other conditions have been retained in the
proposed ICDS.
Further, the Guidance note permits all methods for determination of stage of completion
like cost incurred, survey of work done, technical estimation, etc,. The Guidance Note
however puts a cap on recognition of revenue based on stage of completion determined
with reference to project cost incurred. In order to make it consistent with the provisions
of ICDS III relating to Construction contract, the proposed ICDS does not provide for
capping the recognition of revenue based on stage of completion determined with
reference to project cost incurred.
(v) Transferable Development Rights (TDRs) – In case of acquisition of TDRs, the
Guidance Note provides that where development rights are acquired by way of giving up
of rights over existing structures or open land, the development rights shall be recorded
at the fair market value or net book value. To bring certainty and consistency with other
ICDSs, the Committee recommends that in this situation, the development rights shall
be recorded at the fair value of the development rights so acquired.
*****