Practical Application - ICDS
By –Direct Tax Team, JCAG
13th May 2017
JCAG-2nd RRC - Jaipur
Challenging year ahead !!!!!
ICDS
Cash
GAAR
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GST
RERA
Background
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Index
 Background
 ICDS 6 -Foreign exchange
 ICDS 1 -Accounting Policy
 ICDS -7 Government Grant
 ICDS 2 -Valuation of Inventories  ICDS-8 Securities
 ICDS 3 -Construction Contract  ICDS-9 Borrowing Cost
 ICDS 4 - Revenue Recognition
 ICDS 5 - Tangible Fixed Assets
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 ICDS-10 Provision, Contingent
liabilities and contingent assets
Accounting Standard – Concept and role
 J.K. Industries Ltd vs Union of India [2007] 80SCL 283 (SC) – Concept and
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objectives of accounting standards
An accounting standard is a policy document and an attempt to overcome some of
the deficiencies of accountancy i.e to reduce the subjectivity and lay down rules
Accounting income is real income
However, on account of artificial set of rules used in computation of taxable income
one finds that accounting income differs from taxable income
Looking to these problems, the evolution of Accounting Standards and their greater
application is necessary as it results in reducing the need for tax laws to depend upon
artificial rules
If accounting standards are capable of in determination of taxable income, the tax
laws do not have need to lay down the rules for computation
However, It is important to note that Accounting standards and taxation of income
are two independent subjects
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Background
 Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
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accounting for computation of income under the heads “Profits and gains of business
or profession” and “Income from other sources” can either be cash or mercantile
system of accounting.
Section 145(2) of the Act states that the Central Government may notify the
accounting standards to be followed by any class of assesses or in respect of any class
of income. Delegated Legislation . What is the limitation to it
Accordingly, two tax accounting standards had been notified until now:
1. Disclosure of accounting policies.
2. Disclosure of prior period and extraordinary items and changes in accounting
policies
Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting
standards” with “income computation and disclosure standards” (ICDS).
Easwar Committee – Deferment of ICDS – However it was not heeded
Revised ICDS mandated on 29th September 2016 – Retrospective ?
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Key features of ICDS
 Effective Date of ICDS is 01 st April, 2016 i.e. FY:2016-17 & AY: 2017-18.
 ICDS applicable to
 All Assesses i.e. Corporate & Non Corporate Assesses except individual & HUF not
required to get tax audit in PY ) +
 Mercantile System +
 PGBP/IFOS
 No Net Worth or Turnover Criteria Prescribed for applicability.
 Entity need not to maintain Books of accounts for ICDS. ICDS is only for
computation of income under the head “Profit and gains of business or profession” or
“Income from other sources” Q1
 ICDS is meant for normal computation of income and not for Minimum
Alternate Tax (MAT) Calculation. However, it is applicable for calculation under
AMT (Q6)
 Applicability to assesses covered by presumptive taxation u/s 44AD,44AE, 44ADA,
44B, 44BB, 44BBA ? Q3 – Relevant provisions shall apply. Practically ???
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Key features of ICDS
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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.
Case of conflict between HC / SC rulings and ICDS? – Q2 - The ICDS have been notified after due
deliberation and after examining judicial views for bringing certainty on the issues covered by it.
Certain judicial pronouncements were pronounced in the absence of authoritative guidance
on these issues under the Act for computing Income under the head “Profits and gains of business or
profession” or Income from other sources. Since certainty is now provided by notifying ICDS
under section 145(2), the provisions of ICDS shall be applicable to the transactional issues dealt
therein in relation to assessment year 2017-18 and subsequent assessment years.
Case of conflict between rules & ICDS ? Q4- Rules which deal with specific circumstances shall
prevail
How will ICDS apply to companies which adopted IND-AS ? Q5- No effect
In the event between ICDS and scope of total income (Section 5) what would prevail ? Can it bring
to charge any item which is not “Income” ?
Section145(3) – AO has the power to make best judgment assessment u/s 144 if he is not satisfied
about that – Income not computed as per ICDS
Removal of May, usually, Generally – Replaced by SHALL
Theme of ICDS - Preponement of Tax – So much working justified ??
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AS/IND-AS
(NACAS)
ICDS
(CBDT)
IT Act
(Parliament )
AS
(ICAI)
Confusion !!!!!
You have so many standards that it results in no standard !!!!!!
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Comparative Analysis
S.N
O
AS Notified by MCA
Notified as ICDS
1.
Disclosure of accounting policies
Accounting policies
2.
Valuation of Inventories
Valuation of Inventories
3.
Cash Flow
No
4.
Contingencies and events occurring after
the balance sheet date
It was proposed in 2012 Draft but
dropped in Jan 2015 Draft
5.
Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting
Policies
It was proposed in 2012 Draft but
dropped in Jan 2015 Draft
6.
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7.
Construction contracts
Construction contracts
8.
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9.
Revenue recognition
Revenue recognition
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Comparative Analysis
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AS Notified by MCA
Notified as ICDS
10.
Accounting for fixed assets
Tangible Fixed Assets
11.
The effects of changes in foreign
exchange rates
The effects of changes in foreign exchange
rates
12.
Accounting for government grants
Government Grants
13.
Accounting for investments
Securities
14.
Accounting for amalgamations
No
15.
Employees benefit (revised 2005)
No
16.
Borrowing costs
Borrowing Costs
17.
Segment reporting
No
18.
Related party disclosures
No
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Comparative Analysis
S.NO
AS Notified by MCA
Notified as ICDS
19.
Leases
It was proposed in 2012 and Jan 2015 draft
but dropped in notification of 31.03.2015
20.
Earning Per Share
No
21.
Consolidated financial statements
No
22.
Accounting for Taxes on income
No
23.
Accounting for investment in associates
in consolidated financial statements
No
24.
Discontinuing operations
No
25.
Interim financial report
No
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Comparative Analysis
S.No
AS Notified by MCA
Notified as ICDS
26.
Intangible assets
It was proposed in 2012 and Jan 2015
draft but dropped in notification
27.
Financial reporting of interest in Joint
Ventures
No
28.
Impairments of assets
No
29.
Provisions, contingent liabilities and
contingent assets
Provisions, contingent liabilities and
contingent assets
30.
Financial instruments; recognition and
measurements (issued by ICAI not
notified by MCA)
No
31.
Financial Instruments; presentation
(issued by
ICAI not notified by MCA)
No
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Extract of Form 3CD – Point 13d - f
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Extract of Income Tax Return
Extract of Income Tax Return
Computation
Narration
Amount
Profit/Loss as per books of Accounts
XXXXX
Add: Disallowance as per IT Act
XXX
: Income increased as per ICDS
Less: Allowance as per IT Act
: Income decreased as per ICDS
Taxable Income
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XXX
(XXX)
(XXX)
XXXX
ICDS – I – Accounting Policies
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ICDS – Accounting Policies
Considerations in selection and change of Accounting Policies
 Accounting policies adopted by a person shall be such so as to represent a true and fair view
of the state of affairs and income of the business, profession or vocation.
 For this purpose, the treatment and presentation of transactions and events shall be
governed by their substance and not merely by the legal form;
 marked to market loss or an expected loss shall not be recognised unless the recognition
of such loss is in accordance with the provisions of any other Income Computation and
Disclosure Standard. Q9 - Mark to market gain also not recognised unless specifically
provided
Materiality ?
 No concept of materiality in ICDS unlike, AS-1 orTAS-1
 As ICDS does not recognize materiality as an accounting policy the AO may try to make
additions of small items of expenses and try to levy penalty also on the ground that the same
is not disclosed.
 However – accounting policies should be such that discloses “true and fair view” and not “true
and correct” and only material impact needs to be disclosed during change of accounting
policy and therefore, no significant tax impact should be there
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ICDS – Accounting Policies
Prudence ?
 Based upon the concept of ‘prudence’, AS-1 precludes recognition of
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anticipated profits and requires recognition of expected losses.
Concept of Prudence was part of TAS-1 , Provision should be made for
all known liabilities and losses even if amount not ascertainable
In the absence of prudence as a fundamental assumption, there could be
several situations which could result in earlier recognition of income or
gains or later recognition of expenses as compared to that under AS. E.g.
provision for warranty expenses on sales made.
Specifically, ICDS provides that expected losses or mark to market
losses shall not be recognized unless permitted by any other ICDS to
avoid differential treatment for recognition of income and losses.
Theme of all the ICDS
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ICDS I – Accounting Policies
Example:
Year Loss
Computation
Anticipated
Income
Income
Tax
Books of
Accounts
1,000
(5,000)
Foreseeable loss is not
allowed as deduction in
Year 1 as per ICDS but
anticipated profit is taxed
and thus tax is required to
be paid as per Normal
Provisions on 1,000.
1,000
As per ICDS, the actual
loss will now be allowed in
year 2 and actual gain will
be regarded as income in
accounts. However, MAT
will apply and tax is
required to be paid as per
the provisions of MAT.
1
Expected loss Anticipated
= (5,000)
Income
1,000
2
Actual loss = Actual Income = (5,000)
(5,000)
1,000
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=
Remarks
ICDS – Accounting Policies
Accounting policies (AP)
AS permits change in AP when
1)Required by the statute
2)Compliance with AS
3)More appropriate presentation of FS
As per ICDS, AP shall not be changed without a reasonable cause
1) Change in statute (other than ITA) reasonable cause?
2) Change in AS reasonable cause?
3) Meaning of reasonable cause is a debatable issue. Q9 -Under the Act,
‘reasonable cause’ is an existing concept and has evolved well over a period of
time conferring desired flexibility to the tax-payer in deserving cases.
Accounting Policy or Income Computation Policy ?? It is case of legislative
misfire ??
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ICDS- Accounting Policy
 Whether ICDS -1 is legislative misfire
 Preamble of ICDS clearly states that ICDS are not for the
purpose for maintenance of books of accounts.
 One view – ICDS- 1 has gone beyond the mandate
 Second view – It is just a disclosure standards and provides a
theme where no other standard exist
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Disclosure
All significant accounting policies adopted by a person shall be disclosed.
 Any change in an accounting policy which has a material effect shall be
disclosed. The amount by which any item is affected by such change shall also be
disclosed to the extent ascertainable. Where such amount is not ascertainable,
wholly or in part, the fact shall be indicated. If a change is made in the
accounting policies which has no material effect for the current previous year
but which is reasonably expected to have a material effect in later previous
years, the fact of such change shall be appropriately disclosed in the previous
year in which the change is adopted and also in the previous year in which such
change has material effect for the first time.
 Disclosure of accounting policies or of changes therein cannot remedy a
wrong or inappropriate treatment of the item.
 If the fundamental accounting assumptions of Going Concern, Consistency and
Accrual (what if not required to be followed ? ) are followed, specific
disclosure is not required. If a fundamental accounting assumption is not
followed, the fact shall be disclosed.
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ICDS-II Valuation of Inventories
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ICDS-II Valuation of Inventories
Scope Expanded
 The committee report while issuing the Draft Standard (in August 2012) stated that
the scope has been expanded to include service sector.
 The Draft prescribed that the service sector assesse shall value the inventories at
cost
 Currently - “Inventories” are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale;
(iii) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Definition of inventory – does not include services ?
 The costs of services, in case of service providers, shall consist of labour and other
costs of personnel directly engaged in providing the service including supervisory
personnel and attributable overheads.
 Difficulty would arise in case of services whose chargeability depends on the
success of the service.
 It may not be possible to ascribe a value to WIP for certain types of service
revenues like commission .
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ICDS-II Valuation of Inventories
Value of opening inventory
 Value of opening inventory should be same as preceding year’s closing
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inventory.
In case of a newly commenced business, the value of the opening
inventory shall be the cost of the inventory.
If business is commenced with acquisition of running business on slump
sale, price paid will be ‘cost’ of opening inventory.
If partner takes over running business of firm/LLP, value agreed with
other partners for inter-se settlement shall be ‘cost’ for the partner.
However, as per CIT vs British Paints India Ltd., the correct
income for the year should be bought to tax and each year is an
independent and self contained unit of assessment
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ICDS-II Valuation of Inventories
Valuation of inventory in case of certain dissolutions
In case of partnership firm, AOP or BOI inventory on the date
of dissolution shall be valued at the net realizable value,
whether or not business is discontinued
 There is no specific provision for allowing such NRV as the
cost to the successor of the business – Double Taxation
 Also this is contrary to law settled by Apex court in the case
of Sakthi Trading Co. v. CIT & A.L.A. Firm v. CIT
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Disclosure
 The following aspects shall be disclosed, namely:—
 (a) 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; and
 (b) the total carrying amount of inventories and its
classification appropriate to a person.
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ICDS- III Construction Contract
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Key Pointers
 Income to be recognised on Percentage of completion method.
 Contract costs shall comprise of :
 (a) costs that relate directly to the specific contract;
 (b) costs that are attributable to contract activity in general and can be
allocated to the contract;
 (c) such other costs as are specifically chargeable to the customer under the
terms of the contract; and
 (d) allocated borrowing costs in accordance with the Income
Computation and Disclosure Standard on Borrowing Costs – not part of
accounting standard
 What about depreciation ? If yes, then which one ?
 43B expenditure – whether considered or not ?
 Fluctuations in Foreign exchange rate in case of foreign projects
 Contract started before 1st April 2016 will be considered as per
previous recognition method followed
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ICDS- III Construction Contract
Comparatives AS-7
S.NO
Relevant
Aspect
Position under AS-7
Position under ICDS
1.
Retention
money
Silent; Recognised only
when right to receive such
sum established
Recognised on POCM basis – Q9 –
subject to ultimate certainty of
collection (Angelique International Ltd.
vs Department of Income Tax,
Associated Cables, – Enforceable Debt)
2.
Revenue
When the outcome of a
recognition
construction contract can
during early
be estimated reliably ;
stage of contract
Early stage – contract revenue is
recognized only to the extent of costs
incurred . Cannot extend beyond 25%
3.
Recognition of
actual losses
Allowed on POCM basis CIT V/s.
Triveni Engineering & Industries Ltd &
CIT v. Advance Construction Co. (P)
Ltd
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Recognised fully upfront
ICDS- III Construction Contract
Comparatives AS-7
S.NO
Relevant Aspect
Position under AS-7
Position under ICDS
4.
Provision for anticipated
losses
Recognised fully
Not allowed (unless actually
incurred)
5.
Pre-construction income
(interest, dividend, capital
gains)
Reduced from the cost of
Construction
Not allowed to be reduced
from the cost of construction
(Taxed as Income ) – Bokaro
Steel Ltd
6.
Contract costs relating to
future activity
Recognised as asset if it is
probable that such costs are
recoverable
Recognised as asset
irrespective of recovery
probability
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Disclosure
 A person shall disclose:
(a) the amount of contract revenue recognised as revenue in
the period; and
(b) the methods used to determine the stage of completion of
contracts in progress.
24. A person shall disclose the following for contracts in
progress at the reporting date, namely:—
(a) amount of costs incurred and recognised profits (less
recognised losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
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ICDS IV- Revenue Recognition
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ICDS IV- Revenue Recognition
 Scope – Goods, Services, Interest, Royalty and Dividend
 Sale of Goods -Property Transferred + Significant risk & reward + Reasonable certainty
of ultimate collection (Not in others)
 Rendering of services – Percentage Completion method
Less then 90 days – Completed (Substantially Completed ) Contract –
 Indeterminate number of acts over specified period of time – May be Straight line method – Contract
wise or total ?
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 Interest – Time basis
 Q 13 - Even on NPA – Time Basis – Take deduction later –What about IFOS
 Interest on refund of any tax, duty or cess – Receipt basis
 Discount or premium on debt security – accrue over period of maturity
 Royalty – Agreement or systematic basis – Foreign payments – Many DTAA make it
taxable on paid basis. Then what will be applicability or TDS deduction/15CB ?
 Dividend - As per Section 8 of act
 Q 14 - Shall also apply for computation of these incomes on gross basis for
arriving at the amount chargeable to tax.
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ICDS IV- Revenue Recognition
 Export incentive –
 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.
 But it ideally should be part of Government Grant
 Transitional provision
 Service – started before 1st April 2016 – as per previous
method
 Goods – started before 1st April 2016 – as per ICDS
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ICDS IV- Revenue Recognition
S.
No
AS - 9
ICDS
1.
It does not apply to companies engaged in
insurance business
ICDS is silent on same.
2.
Revenue from service transactions are
recognised as percentage completion method
or by the completed service contract method.
Tax liability in earlier years and MAT liability
in year of recognition of income in books
ICDS provides only for percentage
completion method for recognition of
service transactions (Mutatis
mutandis as Contractor – May impact
professionals ) – Issues in TDS
matching.
3.
It postpones recognition of revenue till (i )
there is reasonable certainty
of ultimate collection of the revenue; and (ii)
the revenue can reliably be measured.
ICDS provides that recognition of
revenue cannot be postponed on
account of the inability to measure
the revenue reliably except in cases
where specific
Provision (contractor and service ) has
been made by ICDS. This is due to the
omission of ‘ prudence’ as a factor to
be taken into consideration while
selecting accounting policies.
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Disclosure
 Following disclosures shall be made in respect of revenue
recognition, namely:—
(a) in a transaction involving sale of good, total amount not
recognised as revenue during the previous year due to lack of
reasonably certainty of its ultimate collection along with nature of
uncertainty;
(b) the amount of revenue from service transactions recognised as
revenue during the previous year;
(c) the method used to determine the stage of completion of
service transactions in progress; and
(d) for service transactions in progress at the end of previous year:
(i) amount of costs incurred and recognised profits (less
recognised losses) upto end of previous year;
(ii) the amount of advances received; and
(iii) the amount of retentions.
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ICDS V- Tangible Fixed Assets
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ICDS – V- Tangible Fixed Assets
 Is there any need for the same ??
 Acquisition – Actual Cost defined under 43(1) – Act will
anyways prevails
 Depreciation – ICDS itself provides as per section 32
 Disposal – any gain or loss is under purview of CG which is not
under purview of ICDS –V
 Expenditure incurred on test runs, experimental production
and all the expenses till the plant has begun commercial
production shall be capitalized. Expenditure incurred after
the plant has begun commercial production shall be treated
as revenue expenditure. Q15
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ICDS V- Tangible Fixed Assets
AS- 10
ICDS
•It applies to tangible fixed assets as well as
goodwill
•It applies to only certain tangible fixed
assets namely land, building, machinery,
plant or furniture
•Cost of fixed asset comprises its purchase
price, non refundable taxes and any directly
attributable cost of bringing the asset to its
working condition for its intended use.
•It has similar definition to AS 10 but the
words used are actual cost as compared to
cost in AS -10. (Expenditure on acquisition
which is not part of actual cost should be
deductible as revenue instead of capitalising )
•AS – Inspection cost – Expensed
However, IND AS – cost of major inspection
is added to the carrying amount of property,
plant and equipment if recognition criteria is
satisfied
•ICDS is silent, but states that any
expenditure which increases future benefits
from an existing asset beyond its previously
assessed performance, the same can be
added to asset cost. Inspection cost does not
normally increase future cost benefits from
the asset
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ICDS V- Tangible Fixed Assets
AS- 10
ICDS
•When several assets are purchased for
consolidated price, the consideration is
apportioned on fair basis as determined by
competent valuer.
•When several assets are purchased for a
consolidated price, the consideration shall be
apportioned to the various assets on a fair
basis. – Increases subjectivity
•When a fixed asset is acquired in exchange
or in part exchange for another
asset/securities , the cost of acquired asset
should be recorded either at FMV or NBV of
asset given up, adjusted for any balancing
payment or receipt of cash or other
consideration.
•When a tangible fixed asset is acquired in
exchange for other asset, the fair value of the
tangible fixed asset so acquired shall be its
actual cost – Generally given is the value
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Disclosure
 Following disclosure shall be made in respect of tangible fixed
assets, namely:—
(a) description of asset or block 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 adjustments
on account of—
(i) Central Value Added Tax credit claimed and allowed
under the CENVAT Credit Rules, 2004;
(ii) change in rate of exchange of currency;
(iii) subsidy or grant or reimbursement, by whatever name
called;
(e) depreciation Allowable; and
(f) written down value at the end of year.
(c) JSCO
ICDS VI- The effects of changes in
foreign exchange
(c) JSCO
ICDS VI- The effects of changes in
foreign exchange
Revenue Items
 Revenue monetary items (like trade receivables, payables,
bank balance, etc.) – No impact - valued at closing rate
 Revenue non-monetary item – No impact – valued at
transaction date
(c) JSCO
Capital Monetary Items
Type of assets
Books of Accounts
Income Tax return
Domestic
P&L – AS-11
P&L – ICDS (Historical)
Domestic
Capitalized – Para 46A
P&L – ICDS (Historical)
Imported
P&L – AS-11
Capitalized – 43A
Imported
Capitalized – Para 46A
Capitalized – 43A
•No change as such
•However earlier in Domestic assets – no prescription given , therefore used to be
considered as Capital nature income /loss not taxable/deductable .
•Shell Company of China Ltd. [22 ITR 1 (CA)]
•Sutlej Cotton Mills Ltd., [(1979) 116 ITR 1 (SC)]
•Whether such exchange fluctuation gain or loss on capital monetary items (not relating
to imported assets) would be allowable as an income or expense as per ICDS or not ?
(c) JSCO
ICDS VII- Government Grant
(c) JSCO
Government Grant
 Assistance by Government
 In cash or kind to a person
 For past or future compliance with certain condition
 Can be called as subsidies, cash incentives, duty drawbacks,
waiver , concessions and reimbursement
(c) JSCO
ICDS VII- Government Grant
AS- 12
Particular
Recognition of grant
•
•
On reasonable
assurance of
compliance of
attached conditions
and reasonable
certainty of ultimate
collection
Mere receipt is not
sufficient
ICDS VII
•
•
On reasonable
assurance of
compliance of
attached conditions
and reasonable
certainty of ultimate
collection
Recognition cannot
be postponed beyond
date of actual receipt
Impact: If the grant is recognized on receipt basis, it would create DTA/DTL and
MAT mismatch also. Further, an issue may arise whether grants received in earlier
years but not recognized pending fulfillment of conditions will require recognition
on receipt basis as per ICDS in year of transition.
(c) JSCO
ICDS VII- Government Grant
AS- 12
Particular
ICDS VII
Grants other than those
covered by specific
provisions
Revenue grant to be
credited as income or
reduced from related
expense.
Same as AS-12 but no
clarification that it is
restricted only to revenue
grants
Relatable to depreciable
fixed assets
Requires reduction from the
cost of fixed asset or
recognition as deferred
revenue by systematic credit
to P&L A/c.
Consistent with Explanation
10 to Section 43(1), requires
reduction from the cost of
fixed asset.
Relatable to non
depreciable fixed assets
•
To be treated as income –
•
(c) JSCO
To be credited as capital
reserve, if no conditions
attached to the grant.
To be credited to P&L
A/c over period of
incurring cost of
meeting conditions of
grant
•
•
on an upfront basis, if
there are no conditions
attached to grant.
over period over which
cost of meeting
conditions is incurred.
ICDS VII- Government Grant
Particular
Grant in the nature of
promoter’s contribution
AS- 12
To be credited to capital
reserve and to be treated
as shareholders funds.
ICDS VII
No such clarity for grants
in the nature of promoter’s
contribution. Therefore, by
implication, requires
recognition as income.
Compensation for
To be recognised in P&L
expenses / loss incurred or A/c in the year in which it
for giving immediate
is receivable
financial support
Same as AS-12
Disclosure requirement
Disclosure of unrecognized
grants
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No disclosure of
unrecognized grants
Disclosure
 Following disclosure shall be made in respect of Government
grants, namely:—
(a) nature and extent of Government grants recognised during the
previous year by way of deduction from the actual cost of the asset
or assets or from the written down value of block of assets during the
previous year;
(b) nature and extent of Government grants recognised during the
previous year as income;
(c) nature and extent of Government grants not recognised during
the previous year by way of deduction from the actual cost of the
asset or assets or from the written down value of block of assets and reasons
thereof; and
(d) nature and extent of Government grants not recognised during
the previous year as income and reasons thereof.
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ICDS VII- Government Grant
 ICDS does not seek to recognize the need for assessing characterization
of subsidy into a revenue or a capital grant on the basis of motive test.
 To the extent ICDS requires recognition of any subsidy as income (for
example, subsidy of a capital nature relatable to non depreciable fixed
asset) will have conflict with the Act.
 To circumvent the same,definition of 'Income' under Section 2(24) has
been changed by inserting a new sub-clause (xviii) to provide that
assistance in the form of a subsidy or grant or cash incentive or duty
drawback or waiver or concession or reimbursement by the CG or a SG
or any authority or body or agency in cash or kind to the assesse [other
than one considered under Explanation10 to Section 43(1)] shall be the
income of an assessee. Subsidy which is reduced from the actual cost of
the asset as per Explanation 10 to Section 43(1) shall be not taxable as
revenue receipt.
 The said amendment is in line with the ICDS.
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Frequently Asked Questions
 Question 17 : For subsidy received prior to 1st day of April 2016 but
not recognised in the books pending satisfaction of related conditions
and achieving reasonable certainty of receipt, how shall the same be
recognised under ICDS on or after 1st day of April 2016?
Answer : Para 4 of ICDS-VII read with Para 5 to Para 9 of ICDS-VII
provides for timing of recognition of government grant. The transitional
provision in Para 13 of ICDS-VII provides that a government grant
which meets the recognition criteria on or after 1st day of April, 2016
shall be recognised in accordance with ICDS-VII. All government grants
actually received prior to 1st day of April 2016 shall be deemed to have
been recognised on its receipt in accordance with Para 4(2) of ICDS-VII
and accordingly will be outside the transitional provision and therefore
the government grants received on or after 1st day of April, 2016 and
for which recognition criteria provided in Para 5 to Para 9 of ICDS-VII
is also satisfied thereafter, the same shall be recognised as per the
provisions of ICDS-VII. The grants received prior to 1st day of April,
2016 shall continue to be recognised as per the law prevailing prior to
that date.
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For example, if out of total subsidy entitlement of 10 Crore an amount
of 6 Crore is recognised in the books of account till 31st day of March,
2016 and recognition of balance 4 Crore is deferred pending satisfaction
of related conditions and/or achieving reasonable certainty of receipt.
The balance amount of 4 Crore will be taxed in the year in which
related conditions are met and reasonable certainty is received. If these
conditions are met over two years, the amount of 4 Crore shall be taxed
over the period of two years. The amount of 6 Crore for which
recognition criteria were met prior to 1st day of April, 2016 shall not be
taxable post 1st day of April, 2016.
But if the subsidy is already received prior to 1st day of April, 2016, Para
13 of ICDS-VII shall not apply even if some of the related conditions are
met on or after 1 April, 2016. This is in view of Para 4(2) of ICDS-VII
which provides that Government grant shall not be postponed beyond
the date of actual receipt. Such grants shall continue to be governed by
the provisions of law applicable prior to 1st day of April, 2016.
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ICDS VIII- Securities
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ICDS VIII- Securities – PART A
 Scope:
 Applies to securities held as stock-in-trade
 Cost or NRV which ever is lower
 Does not affect the basis for recognition of dividend/interest
dealt with by ICDS on revenue recognition.
 Does not apply to securities held by insurance companies,
mutual funds, venture capital funds, banks and public
financial institution, etc.
 Shares of closely held company can be regarded as held as
stock in trade – Against CITADELL Agencies (P) Ltd v Asstt
Cit (2007)
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ICDS VIII- Securities
AS 13
This Standard deals with accounting for
investments in the financial statements of
enterprises.
ICDS
This ICDS deals with securities held as
stock-in-trade.
Assets held as stock-in-trade are not
‘investments’*
*However, as per AS 13, the manner in which they are accounted for and disclosed in the
financial statements is quite similar to that applicable in respect of current investments.
Accordingly, the provision of AS 13 in respect of current investments are applicable to
securities held as stock-in-trade.
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ICDS VIII- Securities
AS- 13
ICDS VIII
Carrying amount
Current
investments are
valued at lower of
cost and fair value.
Securities held as Stock-in-trade shall be valued at actual cost or
NRV, whichever is lower. (where the actual cost cannot be
ascertained by reference to specific identification, the cost shall be
determined on the basis of FIFO/ Weighted Average Cost )
Individual Scrip
wise Valuation
Category wise Valuation Classification into four categories namely, (a) shares; (b) debt
securities; (c) convertible securities; and (d) any other securities not
covered above.
Valuation of unlisted/ thinly traded securities (definition) at cost At the end of any previous year, securities not listed on a
recognized stock exchange; or listed but not quoted on a
recognized stock exchange with regularity from time to time, shall
be valued at actual cost initially recognized.
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ICDS VIII- Securities
ICDS
Scrip
wise
Category
Wise
Shares
Cost
ABC Ltd.
100
40
40
XYZ Ltd.
200
140
140
PQR Ltd.
300
150
150
EFG Ltd.
400
250
250
LMN Ltd.
100
500
100
1100
1080
680
Total
NRV
AS 13
1080
Impact: Category wise valuation results into accelerated taxation since
appreciation in the value of certain securities will be set off against diminution in
the value of other securities.
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ICDS VIII- Securities
AS- 13
If an investment is acquired by the issue of
shares or assets, the acquisition cost should
be the fair value of the securities
issued/fair value of the asset given
up. Alternatively, the acquisition cost of the
investment may be determined with
reference to the fair value of the investment
acquired if it is more clearly evident.
ICDS VIII
Where a security is
acquired in exchange for
other securities or asset,
the fair value of the
security so acquired
shall be its actual cost.
Usual Practice: Concept of cost should normally relate to what is
given up.
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ICDS IX- Borrowing Costs
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ICDS IX- Borrowing Costs
Particular
Qualifying assets
AS 16
ICDS
Qualifying Asset is an asset that
takes substantial period of time
to get ready for its intended use
or sale.
Qualifying Assets mean:
•Tangible Assets – land, plant,
•Intangible Assets – patents,
licenses, etc.
•Inventories –12 months
For general borrowing require 12 months or more for
its acquisition, construction or
production – Interplay with
36(1)(3) ??
Impact:
• ICDS includes ‘land’ also in the definition of qualifying assets, unlike AS-16. As per ICDS, the
borrowing cost in respect of land shall be capitalized. The depreciation shall not be allowed on the
same since the land is a non-depreciable asset. However, the capitalized cost shall form part of a
cost of asset while calculating Income from Capital Gain in respect of that land.
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ICDS IX- Borrowing Costs
Particular
Commencement of
capitalization - The
capitalization period starts
early under the ICDS as
compared to AS-16.
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AS 16
ICDS
The capitalization of
borrowing costs shall
commence from the date all
the following conditions are
satisfied.
i) Expenditure for a
acquisition construction
or production of a
qualifying asset is being
incurred.
ii) Borrowing costs are
being incurred and
iii) activities that are
necessary to prepare the
assets for its intended
use are in progress
The capitalization of
borrowing costs shall
commence:
a) In a case referred to in
funds specifically
borrowed for obtaining
a qualifying asset from
the date on which funds
were borrowed.
b) In a case referred to in
funds borrowed
generally and used for
obtaining a qualifying
asset from the date on
which funds were
utilized
ICDS IX- Borrowing Costs
Particular
AS 16
ICDS
Suspension of capitalization Borrowing cost- periods in
which active development of
the asset is interruptedcapitalised under the ICDS
Capitalization suspended
during extended periods in
which active development is
interrupted
No suspension of
capitalization under any
circumstances
Cessation of capitalization –
Cessation later in ICDS
Capitalization of borrowing
costs shall cease when
substantially all the activities
necessary to prepare such
inventory for its intended
sale are complete
Capitalization of borrowing
costs shall cease when asset
is first put to use in case of
qualifying asset other than
inventory
Income on temporary
investment of borrowed
funds which are specifically
borrowed for obtaining a
qualifying
(c) JSCO asset
To be netted off from
borrowing costs and
capitalized
No netting off from cost of
asset. Taxed as income –
Supporting SC ruling in
Tuticorin Alkali Chemicals
(227 ITR 172)- IFOS
Borrowing Costs Capitalisation- Timeline
Date of
borrowing
ICDS: Specific
borrowings
Asset
purchased
Asset
ready
to use
ICDS: General
borrowings
AS-16
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Asset
put to
use
Examples – Difference due to
definition of qualifying assets
 Total borrowings and interest costs of XYZ Ltd. For the year
ending 31st March 2017 are as follows:
Borrowings
18% Bank Loan
14% Debentures
16% Term Loan
Total
Date of
borrowings
01-05-2015
01-10-2016
01-07-2016
Amount of
borrowing
1000
2000
3000
6000
Interest
180
140
360
680
 Assets in which these borrowed funds are utilised are:-
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Assets
Amount
Factory Shed
Plant 1
Plant 2
2500
1500
1000
Period of
construction/acquisiti
on of asset
14 Months
9 Months
7 Months
Examples – Difference due to
definition of qualifying assets
 Computation of capitalisation rate = Borrowing Cost /
Weighted Avg. borrowing * 100
= 680 / 4250 * 100
= 16%
 Capitalisation of borrowing cost
Asset
Expenditure
Cost @ 16% for the No. of
months
Factory Shed
Plant 1
Plant 2
2500
1500
1000
12
9
7
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Borrowing
cost to be
capitalised
400
180
93.33
673.33
Examples – Difference due to
definition of qualifying assets
(As per ICDS – 9)
(A) General borrowing Costs – 680
(B) Avg. of cost of qualifying asset = 2500 / 2 = 1250 ( only assets having more
than 12 months will be qualified assets )
(C) Avg. amount of the total assets = 5000 /2 = 2500
Borrowing cost to be capitalised = 680 * 1250 / 2500 = 340
Will the same cost be disallowed u/s 36(1)(iii) and cost may not be added in fixed
asset ??
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Difference due to method suggested
 Information of XYZ Ltd. For the year ending 31st March
2017 are as follows:
 Balance Sheet (as on 31.3.16)
Liabilities
10 % Loan
Amount
2000
Assets
Non-Qualifying Assets
Amount
2500
Assets
Non-Qualifying Assets
Qualifying Assets
Amount
5000
2000
 Balance Sheet (as on 31.3.17)
Liabilities
10 % Loan
Amount
6000
 Additional borrowings were made in the following manner:  Rs. 2000 on 1.10.2016
 Rs. 2000 on 1.2.2017
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Difference due to method suggested
 Capitalisation of borrowing cost
 As per AS-16 –
 2000*10%*2/12 = 33.33
 As per ICDS – 9
 333 * 0 + 2000 / 2500 + 5000 = 70
2
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2
ICDS IX- Borrowing Costs
 Litigation point
The ICDS IX expects to achieve the objective of consistent
and rule based application and therefore make comparison
easier. However application of some of the provisions of
ICDS IX may distort the true picture particularly the fixed
formula for computation of borrowing cost to be capitalized
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Disclosure
 The following disclosure shall be made in respect of
borrowing costs, namely:—
(a) the accounting policy adopted for borrowing costs; and
(b) the amount of borrowing costs capitalised during the
previous year.
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Frequently Asked Questions
 Question 20 : There arc specific provisions in the Act read with
Rules under which a portion of borrowing cost may get disallowed
under sections like 14A, 43B, 40(a)(1), 40(a)(ia), 40A(2)(b), etc
of the Act. Whether borrowing costs to be capitalized under
ICDS-IX should exclude portion of borrowing costs which gets
disallowed under such specific provisions?
Answer : Since specific provisions of the Act override the
provisions of ICDS, it is clarified that borrowing costs to be
considered for capitalization under ICDS-IX shall exclude those
borrowing costs which are disallowed under specific provisions of
the Act. Capitalization of borrowing cost shall apply for that
portion of the borrowing cost which is otherwise allowable as
deduction under the Act. 36(1)(3) – not allowed as deduction –
therefore not an expense ?
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Frequently Asked Questions
 Question 21 : Whether bill discounting charges and other similar
charges would fall under the definition of borrowing cost?
Answer : The definition of borrowing cost is an inclusive
definition. Bill discounting charges and other similar charges are
covered as borrowing cost.
 Question 22 : How to allocate borrowing costs relating to
general borrowing as computed in accordance with formula
provided under Para 6 of ICDS-IX to different qualifying assets?
Answer : The capitalization of general borrowing cost under
ICDS-IX shall be done on asset-by-asset basis.
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ICDS X: Provisions, Contingent liabilities
and Contingent assets
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ICDS X: Provisions, Contingent liabilities
and Contingent assets
Points of comparison
AS-29
ICDS
Recognition
of Contingent assets are In ICDS the test is
contingent
asset
or recognized on the test of ‘reasonable
certainty’,
reimbursement claims
virtual certainty
bringing uniformity of
test for the provisions and
the assets
Revenue authorities may contend that ‘reasonably certain’ is a lower threshold than
‘virtually certain’. It is not made clear whether transitional provision requires
recognition of all past accumulated contingent assets in F.Y. 2015-16.
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ICDS X: Provisions, Contingent liabilities
and Contingent assets
Points of comparison
AS-29
ICDS
Recognition of provision
As per AS 29, provision is
recognized if the liability is
considered probable.
In ICDS,
the condition of ‘probable’ is
replaced with ‘reasonable
certainty’
Impact:
•The criteria for recognition of provisions on the basis of the test of ‘probable’ (i.e. more
likely than not criteria) replaced with the requirement of ‘reasonably certain’.
•In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity would
arise on assessment of ‘reasonably certain’ criteria.
•In the Act, there is no specific provision for recognition of provisions. However, provisions
are allowed based on accrued liabilities as per ordinary principles of commercial accounting.
•Provision for Warranty is allowed as an expenditure upholding the test of ‘probable’
warranty obligation in the various judgments. Rotork Controls India P. Ltd. (2009) 314
ITR 62 (SC) , Himalaya Machinery (P) Limited v DCIT 334 ITR 64, CIT vs. Luk India P.
Ltd. 52 DTR 117
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ICDS X: Provisions, Contingent liabilities
and Contingent assets
 Litigation point
Since the term “reasonable certainty” is not defined, there
would be different subjective approach by taxpayers on one
hand and the revenue on the other, resulting into litigations.
The more likely affected matters would be in respect of
liabilities or claims arising from civil or contractual
litigations.
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Disclosure
 Following disclosure shall be made in respect of each class of provision,
namely:(a) a brief description of the nature of the obligation;
(b) the carrying amount at the beginning and end of the previous year;
(c) additional provisions made during the previous year, including increases to
existing provisions;
(d) amounts used, that is incurred and charged against the provision, during the
previous year;
(e) unused amounts reversed during the previous year; and
(f) the amount of any expected reimbursement, stating the amount of any asset
that has been recognised for that expected reimbursement.
 21(2) Following disclosure shall be made in respect of each class of asset and
related income recognised as provided in para 11, namely:—
(a) a brief description of the nature of the asset and related income;
(b) the carrying amount of asset at the beginning and end of the previous year;
(c) additional amount of asset and related income recognised during the year,
including increases to assets and related income already recognised; and
(d) amount of asset and related income reversed during the previous year.
(c) JSCO
 Question 23 : What is the impact of Para 20 of ICDS-X
containing transitional provisions?
Answer : Para 20 of ICDS X provides that all the provisions
or assets and related income shall be recognised for the
previous year commencing on or after 1st day of April, 2016
in accordance with the provisions of this standard after taking
into account the amount recognised, if any, for the same for
any previous year ending on or before 31st day of March,
2016.
The intent of transitional provision is that there is neither
‘double taxation’ of income due to application of ICDS nor
there should be escape of any income due to application of
ICDS from a particular date. This is explained as under—
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Provision required as per ICDS on 31 March INR 3
2017 for items brought forward from 31st
Crores
day of March 2016 … (A)
Provisions as per ICDS for FY 2016-17 … (B)
INR 5
Crores
Total gross provision .. .(C) = (A) + (B)
INR 8
Crores
Less: Provision already recognised for computation INR 2
of taxable income in F Y 2016-17or earlier… (D) Crores
Net provisions as per ICDS in FY 2016-17 to be
INR 6
recognised as per transition provision… (E) = (C) - Crores
(D)
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Frequently Asked Questions
 Question 24: Expenditure on most post-retirement benefits
like provident fund, gratuity, etc. are covered by specific
provisions. There are other post-retirement benefits offered
by companies like medical benefits. Such benefits are covered
by AS-15 for which no parallel ICDS has been notified.
Whether provision for these liabilities are excluded from
scope of ICDS X?
Answer : It is clarified that provisioning for employee
benefit which are otherwise covered by AS 15 shall continue
to be governed by specific provisions of the Act and are not
dealt with by ICDS-X.
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Impact of ICDS
 Taxes will be levied on income which may not have been actually earned.
 Deduction for expenses/losses to be denied contrary to the age old




accounting principles of prudence /conservatism
Increased gap between book profits and taxable profits may cause deferred tax
assets or reduce deferred tax liabilities
Increased litigation and uncertainties contrary to the stated objectives
MAT liability will not be affected directly but the MAT credit will be impacted
In case of SPV companies, if anticipated losses (not allowed earlier in ICDS)
may actually occur, then no chance of setting them off ( no loss carry back
provision)
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Delegated legislation taken to far
 Sirpur Paper Mills and in Taj Mahal Hotels -notifications or rules notified
by the CBDT were meant only for the purpose of carrying out the
provisions of the Act and they could not take away what was conferred
by the Act or whittle down its effect ?
 The Legislature has to lay down the policy and principle to afford
guidance for carrying out the said policy before it delegates its subsidiary
powers in that behalf – Howver no such power policy and principle laid
by Section 145
 Therefore :
 Taxation on items that cannot be regarded as “income” under commercial
accounting principles – Dissolution of the firm
 Advance the taxable event even though no real income has accrued – Interest
on NPA
 Disallow expenses / losses for which there were court rulings in the past
favourable to the assesse – allowance of anticipated losses
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Way ahead
 Early start of tax audits
 271J – Penalty for auditors
 Under-reporting vs Mis-reporting
 Though ICDS does not mandate separate books of account, detailed
reconciliations between the book profit and taxable income will have to be
maintained increasing the compliance cost and at times leakage of revenue for
the tax department
 Additional burden on tax auditors – more onerous responsibilities
 More reading
 Busier season in this anyways challenging times for profession
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Have a nice evening !!!!!
Naman Shrimal
+91 9636111444
[email protected]
[email protected]
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