Taxation Seminar organized
by
Madurai Branch of SIRC of ICAI
Income Computation and Disclosure
Standards
R Bupathy & Co.,
By
CA R Bupathy
Past President
ICAI
ICDS – FUNDAMENTAL RULES

Applicable only to computation of income.

AY 2017-2018

PGBP & Income from other Sources, if Mercantile System of
Accounting – Adopted

Conflict between Act & ICDS – Act will Prevail.

Conflict between Income Tax Rules & ICDS – IT rules will prevail.

Definitions in ICDS – Terms not defined in ICDS, definitions as
per Act shall apply.
R Bupathy & Co.,
ICDS – Notified by the department
Notification No.87 of 29.09.2016 – 10 ICDS notified

ICDS I – Accounting Policies

ICDS II – Inventories

ICDS III – Construction Contracts

ICDS IV – Revenue Recognition

ICDS V – Tangible Fixed Asset

ICDS VI – Effects of changes in foreign currency

ICDS VII – Government grants

ICDS VIII – Securities

ICDS IX – Borrowing Costs

ICDS X – Provisions, contingent liabilities and contingent assets
R Bupathy & Co.,
Points requiring attention

Prior to 2014, sec 145(1) states that either cash or Mercantile system of
accounting should be followed. Hybrid eliminated.

Sec 145(1) subject to sec 145(2) – Accounting Standards notified

Sec 145 (3) – Best judgment assessment if method of accounting /
accounting standards have not been followed.

Then under this section two standards were notified. That is called
(Income Tax Accounting Standards) – IT-AS I and IT-AS II .
IT –AS I : Disclosure of Accounting policies
IT- AS II : Disclosure of prior period items, extraordinary items and
changes in accounting policies.
R Bupathy & Co.,
Points requiring attention

Notification dated 29.09.2016 has not rescinded the earlier 2
accounting standards.
However those standards are not applicable because sec 145(2) has
been amended -“ACCOUNTING STANDARDS” have been substituted by
“ICDS”.

AY 2015-16 and AY 2016-17 – IT-AS and ICDS both are not applicable.

Different sources of income different methods can be adopted.

Reasoning:
 Case laws which held that it is permitted.
 Circular 717 dated 14.08.1995 – Intention is to avoid only hybrid
accounting
 Sec 70 permits adjustment of loss in one source against profit in
R Bupathy & Co.,
another source under the same head.
Points requiring attention

ICDS not applicable to Individual and HUF – NOT subject to Tax
Audit.

Hence if 44 AD/ADA/AE is applicable to Individual/ HUF, ICDS is
not applicable.

For other entities eg. Partnership firm where 44 AD is
applicable- Whether ICDS is applicable?

FAQ – Question 3: Answer =ICDS Applicable – Debatable Issue.
R Bupathy & Co.,
Disclosures under ICDS
In the ITR’s only the net adjustment to total income for each standard
has to be specified.

ITR-3 - Persons having income from proprietary business

ITR-5 - Firms, AOP and BOI

ITR-6 - For companies
The other disclosures specified in each standard has to be disclosed in
Form 3CD which is amended to include the disclosures under ICDS.
R Bupathy & Co.,
Consequences of failure to disclose

Best judgment assessment (BJA) u/s Sec 144 applicable only if
the income is not computed as per ICDS.

Sec 145(3) does not provide for BJA if disclosures under ICDS
are not made. However if the disclosures are not included in
form 3CD the tax auditor has not complied with the
requirements of tax audit.
R Bupathy & Co.,
ICDS not applicable in certain cases

Charitable Trust – Circular confirming that income exempted has to be
computed based on commercial profits. However if income is chargeable
to tax under PGBP or IOS, the provisions of ICDS will be applicable.

Determination of ALP u/s 92

Computation of Income u/s 68 to 69B – Refers to credits in books of
accounts or investments

Determination of applicability of tax audit – meaning of total sales, gross
receipts, Turnover.

Insurance companies

Impact on TDS

Impact on MAT u/s 115JB

However to determine AMT u/s 115JC- ICDS will have to be
considered.(FAQ-6)
R Bupathy & Co.,
ICDS I – Accounting Policies

The scope is limited to “Significant” Accounting policies. The
term “significant” is not defined in ICDS and in the Income tax
Act.

Is it a disclosure or computation standard?

Fundamental Accounting assumptions
 Going concern
 Consistency
 Accrual
R Bupathy & Co.,
Selection of Accounting policy

Concept of substance over form

Mark to market loss or expected loss shall not be recognised
unless permitted by another ICDS

Similarly Mark to market gains and expected gains has to be
ignored - FAQ 8

Accounting policy shall not be changed without reasonable
cause
R Bupathy & Co.,
Comparison of ICDS with IT- AS 1
ICDS with IT-AS 1

In the ICDS I – Prudence and materiality omitted.

ICDS I provides that MTM losses- not allowed, but it is silent on
provision for liabilities which is covered in ICDS X.

Deductibility has to be examined under chapter IV-D (Sec 30 to
43D) read with ICDS X.
R Bupathy & Co.,
Comparison of ICDS with AS 5
ICDS with AS 5

A change in accounting policy should be adjudged as “reasonable”
if it satisfies the criteria outlined in para 29 of AS 5.

If change is found to be bonafide, imperative and driven by
commercial, contractual or statutory compulsion.

FAQ 9- Reasonable cause- existing concept and has evolved well
over a period of time conferring desired flexibility to the tax payer
in deserving cases.
R Bupathy & Co.,
Disclosures in Tax Audit report as regards
ICDS I

All significant accounting policies.

Any change in accounting policy which has a material effect.

Quantification of the impact.

If it cannot be quantified such fact should be indicated.

If change has material effect in the subsequent yearsappropriately disclosed also in the previous year in which the
change has material effect for the first time.
R Bupathy & Co.,
Comparison of ICDS I with AS 1 and IT –AS 1
- Disclosure

Both do not mandate disclosure in the year in which such change
has material effect for the first time. ICDS deviates from the
disclosure norms of these two standards.

Disclosure of accounting policy or changes therein cannot remedy
a wrong or inappropriate treatment of the item.

Fundamental accounting assumptions are followed – No disclosure
required.

If not followed – the fact should be disclosed.
R Bupathy & Co.,
Transitional Provisions

Applicable to all contracts or transactions existing on 01st April
2016 after taking into account the income, expense or loss if
any recognised in respect of the said contract or transaction for
the earlier years.

This implies contracts or transactions reported as per AS-1 for
the earlier years would have to comply with ICDS I.

Applicable for all contracts or transactions entered into on or
after 01st April 2016.

Migration to ICDS would result in change in accounting policies
such as “Non recognition of MTM losses”.
R Bupathy & Co.,
Transitional Provisions

Debatable Issue

ICDS which is effective from 01st April 2016 cannot have a
retrospective effect.

Recognition of losses relating to earlier years should not be
reversed during the transitional year.
R Bupathy & Co.,
ICDS II – Valuation of Inventories

Scope of the Standard

This standard EXCLUDES
1.
Work in progress arising under construction contract including directly related
service contract
2.
Work in progress which is dealt with by any other ICDS. Capital WIP is not part
of inventory and hence this standard is not applicable.
3.
Shares, debentures and other financial instruments held as stock in trade. ICDS
VIII relating to securities applicable.
Revised AS 2 excludes all financial instruments held as stock in trade.
4.
Producers of inventory of livestock, agriculture and forest produce, mineral oils,
ores and gases to the extent these are measured at realisable value. However
exclusion is not applicable to traders.
R Bupathy & Co.,
Scope of the Standard (contd.)
5. Machinery spares that can be used only in connection with a
tangible fixed asset and the use is expected to be irregular –
ICDS V relating to Tangible Fixed Asset shall apply.
Revised AS 2 excludes spare parts, servicing equipment and
stand by equipment which can be classified as property,
plant and equipment – AS 10 shall apply.
R Bupathy & Co.,
ISSUES in ICDS II

Measurement


Para 3 of ICDS II – Cost or NRV whichever is lower –Same in revised AS 2.
Issue 1 :Cost of Inventories
 Para 4 of ICDS II – Cost of purchase+ Cost of services + Cost of conversion +
Other costs incurred in bringing the inventories to their present location and
condition.
 Revised AS 2 para 6 does not include cost of services.
 Hence adjustment is required.
R Bupathy & Co.,


Issue 2 : Cost of Purchase
 Para 5 of ICDS – Cost of purchase shall consist of purchase
price including duties and taxes, freight inward and other
expenditure directly attributable to the acquisition. Trade
Discount, rebates and similar items deductible.
 Para 7 of Revised AS 2– Duties and taxes subsequently
recoverable are excluded from cost of purchase.
 Hence adjustment is required.
 Same difference existed even earlier by virtue of Sec 145A of
the Act.
Issue 3 :Cost of Service
 Para 6 of ICDS II: Cost of service shall consist of labour and
other cost of personnel directly engaged in providing the
service including supervisory personnel and attributable
overheads.
R Bupathy & Co.,

Issue: Whether ICDS II is applicable to a service provider?
 Scope excludes WIP dealt with by any other ICDS
 Meaning of inventory in 2.1 (a)
 Further the ICDS II notified in March 2015 made a specific
reference to service provider as follows:
The cost of services “in relation to a service provider”. This
phrase is omitted in the revised ICDS II notified on 29.09.2016.
Hence the cost of service for a service provider will not form part
of inventory as per ICDS II.
R Bupathy & Co.,

Issue 4: Valuation of Inventory
 Para 22 of ICDS II - Valuation of opening inventory
 Existing Business – Value as on the last day of the
immediately preceding previous year.
 New Business – Value as on the date of commencement of
business –Revised AS 2 no such provision.
Where capital asset is converted into Stock in Trade:
 FMV as on the date of conversion is considered as sale value
of the asset for the purpose of computing capital gains u/s
45(2).
 The ICDS provides the cost of such asset will be considered
as the value of opening inventory.
R Bupathy & Co.,

Change in method of Valuation
Para 23 – Can be changed only for a reasonable cause.
A change in accounting policy should be adjudged as
“reasonable” if it satisfies the criteria outlined in para 29 of AS 5.

Valuation of inventory in case of certain dissolution – Para 24
 The inventory on the date of dissolution shall be valued at
NRV notwithstanding whether business is continued or not.
 Revised AS 2 does not have a corresponding provision.
R Bupathy & Co.,
 Valuation of inventory in case of certain dissolution – Para
24
 The Supreme court decision in Sakthi Trading Co., vs. CIT(250
ITR 871) – where business is continued after dissolution Stock in trade is not required to be valued at NRV.
Conflict between judicial pronouncement on interpretation of
valuation & accounting and ICDS – ICDS will prevail.
The term “Firm” includes LLP.
 The profits as per income tax will be higher and adjustments
has to be made while computing the total income of the
firm /LLP.
R Bupathy & Co.,
Disclosures in Tax Audit report as regards
ICDS II

Accounting policy adopted in measuring and cost formulae.
• Carrying amount of Inventory and its classification.
• Where standard cost has been used as a measurement details
of such inventories and a confirmation of the fact that standard
cost approximates the actual cost.
R Bupathy & Co.,
Other Aspects of ICDS are the same as given
in Accounting Standard
Cost of conversion
 Other Costs
 Exclusion from cost of inventories
 Cost Formulae
 Method
 Technique for measurement of cost
 Standard cost - permitted
 Net Realisable Value

R Bupathy & Co.,
ICDS IV – Revenue recognition

Method to be used – Percentage of Completion Method.

Service Contracts – Duration of not more than 90 days – Completed
contract Method

Indeterminate or multiple acts over a specified period. Revenue on
SLM Basis.

Construction contract – ICDS III.

Interest – on time basis – same as in AS 9

Interest on Refund of Tax, Cess, Duty - on receipt basis

COMPARISON BETWEEN AS 9 & ICDS IV

AS 9 specifically excludes Insurance Companies whereas ICDS IV is
silent on the same. (Refer comments on fundamental rules)
R Bupathy & Co.,

COMPARISON BETWEEN AS 9 & ICDS IV

AS 9 permits use of either POCM or Completed contract
method, whereas ICDS allows use of completed contract
method only when contract duration is less than 90 days.

However the impact is marginal since most of the service
contracts adopt POCM.
Transitional Provision
Revenue for a service transaction

Undertaken on or before 1st April, 2016 but not completed as
on 31st March, 2016 :
Recognised in accordance with this standard after considering
amount recognized in earlier years.
R Bupathy & Co.,
Disclosure – ICDS IV

Sale of goods total amount not recognised for lack of
reasonable certainty and nature of uncertainty.

Revenue from Service transaction recognised

Methods used to determine stage of completion of services.
 1.
Cost incurred and recognised profits
 2.
Advances received
 3.
Amount of retentions
R Bupathy & Co.,
ICDS III – CONSTRUCTION CONTRACTS
AS 7

Excludes developers

Distinction between
developer and contractor

Recognition of income
 Reliable estimate of
outcome of contract.
R Bupathy & Co.,
ICDS III

Draft ICDS on real estate
transactions issued on 11th May
2017.

Recognition of income
 Reasonable certainty of its
ultimate collection
Background for ICDS III

Methods as per AS 7
 Percentage Of Completion Method or
 Completed contract method

Revised AS 7 – Only POCM

For tax computation completed contract method was adopted.

Hence ICDS III is notified.

Reasonable certainty – Para 9.2 of AS 9
 Recognize revenue only if there is no doubt about collection
of such revenues.
R Bupathy & Co.,
ICDS III vs. Section 5



Section 5- Receipts are assessable only in the year of accrual
 Supreme Court in CIT vs. Excel Industries 358 ITR 295 – Three
tests for Accrual
 Whether income is real or hypothetical
 whether there is a corresponding liability of the other
party
 realistic probability of realization of such amount
Whereas for ICDS III only the third condition is applied.
Section 5 is supreme and decisions shall prevail.
R Bupathy & Co.,
Retention Money

ICDS III – Revenue includes retention money – FAQ 11.

Debatable Issue
 Year of taxability of retention money

Retention money is income for tax purpose. Subsequent nonrecovery – Tax Treatment:
To be written off in books and not to be adjusted against contract
revenue.
Second proviso to Sec 36(1)(vii) added.
R Bupathy & Co.,
AS 7 – Conditions to estimate outcome of construction
contract
 Contract revenue can be measured reliably
 Economic benefits will flow to enterprise
 Construction
cost to complete the contract & stage of contract
completion at the reporting date can be measured reliably
 Contract
costs attributable to the contract can be clearly
identified & measured reliably for proper comparison with prior
estimates
 This
is omitted specifically in ICDS III, since there is no
requirement to estimate outcome of construction contract.
R Bupathy & Co.,
ICDS III – Issues

Treatment of borrowing cost

Construction cost in ICDS III includes borrowing cost :

ICDS II – Inventories
Borrowing cost shall not be included unless it meets the criteria
for recognition of interest as a component of cost.

No such reference in ICDS III

Deductibility of such interest u/s 36

Section 36 amended - Interest on loan taken for purchase of
asset up to the date the asset is put to use not allowed as
deduction.
In this case the loan is utilized for construction and not for
purchasing a specific asset.
R Bupathy & Co.,
Determination of stage of completion of
contract

Proportion of contract cost incurred upto reporting date bear to
estimated total contract cost

Surveys of work performed

Completion of physical proportion of a contract work.
R Bupathy & Co.,
Where outcome cannot be measured reliably


AS 7

Revenue recognised to the extent of cost.

No quantitative threshold for stage of completion
ICDS III

Upto early stage of completion revenue may be recognized to the
extent of cost

Early stage shall not exceed 25% of stage of completion
Incidental Income

AS 7 – Reduced from contract cost

ICDS III - incidental income excluding interest, dividend & capital
gains only can be reduced from contract cost.
In other words such incidental income taxable under other sources.
R Bupathy & Co.,
Recognition of expected losses
ICDS III
AS 7

Para 35  expected losses shall be

No specific provision

Reference:
recognised fully and

not in proportion to
percentage of completion of
contract

R Bupathy & Co.,

Para 5.2.5 of tax accounting standard
committee report– only actual losses (and
not expected losses) are to be recognised.

ICDS I - expected losses shall not qualify as
a deduction unless otherwise specifically
permitted under any ICDS.

Thus only actual losses are allowable
under ICDS
In the absence of specific provisiondeductibility- governed by Sec 28 or Sec 37
Transitional Provisions

Contract revenue and contract cost in respect of contracts
which commenced on or after 01.04.2016- as per this ICDS i.e.
ICDS III.

Contract revenue and contract cost in respect of contracts
which commenced prior to 01.04.2016 but not completed on
01.04.2016 – as per the method regularly followed prior to the
previous year beginning on 01.04.2016.

If contractor has followed completed contract method for tax
computation, the same should be adopted even for the year
ended 31stmarch 17.
R Bupathy & Co.,
Disclosures

Contract revenue recognised

Methods used to determine stage of completion of contract for
contracts in progress.

For contracts in progress

Cost incurred and recognised profits

Amount of advances received

Amount of retentions
R Bupathy & Co.,
ICDS V – Tangible fixed Asset
AS 10
ICDS V

Fixed asset as well as goodwill

Only tangible fixed assets

Cost of fixed asset- purchase
price, non- refundable taxes,
any directly attributable cost
for bringing the asset to its
working condition for its
intended use.

Similar definition with the
change that “cost” is
substituted by “Actual Cost”
which is defined in Sec 43(1)
ISSUE:
Expenditure not covered under 43(1) treatment for tax purposes:
In the case of 1. Existing business & 2. New business
R Bupathy & Co.,
Machinery Spares – ICDS V
AS 10

AS 10 read with guidance
note on machinery spares
provides for charge to P & L.

Spares for specified asset to
be capitalised.
ICDS V

Machinery spares which can
be used only in connection
with item of tangible fixed
asset and their use is
expected to be irregular
shall be capitalised.
ISSUE:
Whether the spares would form part of the block?
R Bupathy & Co.,
Assets acquired for non monetary
consideration
AS 10

Exchange of fixed assets


ICDS V

FMV or NBV of fixed asset
given up adjusted for balance
payment is treated as cost.
Fixed asset acquired for
shares/ other securities –
FMV of asset or FMV of
securities whichever is more
clearly evident.
Issue :
ICDS V deviates from the normal practice.
R Bupathy & Co.,
Exchange of tangible fixed
assets

Fair value of assets
acquired is the actual cost

Tangible fixed asset is
acquired for shares /other
securities – Fair value of
asset acquired.
Assets acquired for a consolidated price
AS 10

Para 15.3 – Several assets
purchased for a consolidated
price, the consideration is
apportioned to various
assets on a fair basis as
determined by a competent
valuer.
ICDS V

Several assets purchased for
a consolidated price, the
consideration is apportioned
to various assets on a fair
basis.
ISSUE:
Apportionment on a fair basis is very subjective and will lead to litigation.
R Bupathy & Co.,
Transitional provision

Acquisition or construction of tangible fixed asset commenced
before 01.04.2016 but not completed by 31.03.2016 shall be
recognised as per this standard.

Acquisition or construction of tangible fixed asset completed
before 01.04.2016 shall be recognised as per this standard and
for this purpose the actual cost of such assets for the earlier
year/years has to be taken into account.
R Bupathy & Co.,
Other points

Depreciation on tangible fixed asset shall be computed as per
the provisions of the Act.

Income arising on transfer of tangible fixed shall be computed
as per the provisions of the Act.
R Bupathy & Co.,
Disclosure

Description of assets or block of assets

Rate of depreciation

Addition or deduction during the year with dates if asset is put
to use , including adjustment on account of CENVAT, Forex,
subsidy or grant.

Depreciation allowable

WDV at year end
R Bupathy & Co.,
ICDS IX- Borrowing Cost
ICDS IX
AS 16

QA – asset that takes
substantial period of time to
get ready for its intended use
or sale

QA means

tangible assets like land, plant &
machinery

Intangible assets like patents,
licenses.

Inventories which require 12 or
more months to bring them to
saleable condition.
Impact:
Specific – Tangible/ intangible asset- land cost will be increased by amount of
capitalisation of borrowing cost – depreciation will get reduced.
Capitalisation of general borrowing cost – QA ≥ 12 for its ACQ/ CONS/PRODN
R Bupathy & Co.,
Inclusions & Exclusions from ICDS IX

Expenditure disallowed under specific provisions of Income Tax
Act – Excluded.

Bills discounting charges – Included.

Capitalisation to be done - Asset by asset basis
R Bupathy & Co.,
Commencement of capitalisation
AS 16

Commencement of
capitalisation.
 Three conditions
 Capex should be incurred
ICDS IX

Specific borrowing -Date of
borrowing

General borrowing – Date of
utilisation.
 Borrowing cost- incurred
 Preparatory acts in
progress.
Impact
Capitalisation starts early in ICDS vis a vis AS 16.
R Bupathy & Co.,
ICDS IX
AS 16

Specific borrowing


 Actual borrowing cost less
income from temporary
investments.

General Borrowing
Actual borrowing cost

General borrowing

A* B/C

A = Borrowing cost other than specific
borrowing cost

B = Average cost of QA appearing on first
and last day of PY
 Capitalisation rate to
expenditure on asset.
 Weighted average rate of
borrowing cost applicable
to borrowing during the
period.
Assets acqd. during the year-Half of the cost of
QA not appearing on first day.
Assets completed during the year-Average cost
of asset appearing on first day of PY and on
the date of put to use or completion.

R Bupathy & Co.,
Income from temporary investments
taxable as IOS.
C = Average amount of total assets on first
day and last day of PY
Suspension & Cessation of Capitalisation
AS 16

Suspension of capitalisation


during period active
development is
interrupted.
Cessation of Capitalisation
 Substantial activity
completed to prepare the
QA for its intended use or
sale.
R Bupathy & Co.,
ICDS IX

Suspension of capitalisation


No such provision.
Cessation of Capitalisation

QA – is put to use

Inventory - Substantial
activity completed to
prepare inventory for its
intended sale.
Transitional Provision

Borrowing cost incurred on or after 01.04.2016 – in accordance
with provisions of this standard, after taking into account
amount capitalised for the same borrowing for any earlier PY.
Disclosure

Accounting policies adopted for borrowing cost

Amount of borrowing cost capitalised during the PY.
R Bupathy & Co.,
ICDS X – Provisions, contingent liabilities
and contingent assets
AS 29

Provision shall be recognised if
it is probable that outflow of
resources will be required.
ICDS X

Provision shall be made if it is
reasonably certain that
outflow will be required.
Impact: Provision for warranty
 Rotark control – 3141 ITR 62
• Present obligation arising from past events
• Settlement expected to result in outflow of resources
• Reliable estimate
 Himalaya Machinery (P) Ltd 334 ITR 64
 CIT vs. Luk India – 52 ITR 117
 Seimans communication 270 ITR 259
R Bupathy & Co.,
Provisioning for employee benefits

CBDT has clarified that provisioning of employee benefits which
are otherwise covered by AS 15 shall be governed by other
provisions of the Act and not with ICDS X. Answer to question
no. 24
Transitional Provision

Answer to question no.23 - transitional provision requires all
past
accumulated provisions to extent not recognised
should be recognised in the FY 2016-17.
R Bupathy & Co.,
Meaning of Obligation
AS 29

Clarifies that obligations may
be legally enforceable & may
also arise from normal
business practice, customs & a
desire to maintain good
business relations or act in an
equitable manner.
ICDS X

No specific guidance.
IMPACT:
Customary business practices or voluntary obligations may not be
allowed.
R Bupathy & Co.,
Onerous Executory Contracts
AS 29


Not applicable to “Executory
contract” except where
contract is “Onerous”
ICDS X

Not applicable to executory
contract .
No specific exclusion.
Requires upfront recognition
of liabilities.
Impact: Allowed only in the year the liability to pay arises.
R Bupathy & Co.,
Contingent assets and Reimbursement
claims
ICDS X
AS 29

Contingent assets/
reimbursement claims are
recognised if inflow of
economic benefits is
virtually certain.

Contingent assets/
reimbursement claims are
recognised if inflow of
economic benefits is
reasonably certain.
Impact: “Reasonably certain” is a lower threshold than “virtually
certain”
Answer to question no.23 - transitional provision requires all
past accumulated contingent assets after taking into
consideration assets recognised earlier, should be recognised in
the FY 2016-17.
R Bupathy & Co.,
Disclosures

For each class of provision
 Brief description of the nature of the obligation.
 Carrying amount at the beginning and the end of the PY
 Additional provisions during PY including increases in
existing provision
 Amount used/ charged against provisions
 Unused amounts reversed
 Expected reimbursement against contingent asset
R Bupathy & Co.,

For each asset and related income
 A Brief description of t he nature and related income
 Carrying amount at the beginning and the end of the
PY
 Additional amount of asset and related income recognised
during PY including increases to assets.
 Related income already recognised
 Unused amount reversed during PY
R Bupathy & Co.,
THANK YOU
R Bupathy & Co.,