1. Northern India Regional Council, ICAI Seminar on
Phoenix Legal
Northern India Regional Council, ICAI
Seminar on
Income Computation and Disclosure Standards
Aseem Chawla
Partner, Phoenix legal
August 19, 2017
New Delhi

2. Draft for discussion purposes only
Evolvement: Notable Developments
The CBDT notified 2 IT-AS viz. (i) Disclosure of Accounting Polices and Prior Period & Extra Ordinary items and changes in accounting standards
Finance Act, 1995
January, 1996
The concept of Accounting Standards was introduced for the first time under Income Tax Act by amending section 145 of the Act.
The committee formulated draft 14 Tax Accounting Standards (TAS) and submitted its report.
December, 2010
The CBDT Constituted a Committee to harmonize Accounting Standards (AS) issued by ICAI with Income Tax Act and suggest amendments.
August, 2012
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3. Draft for discussion purposes only
Evolvement: Notable Developments (Contd…)
The CBDTvide its Notification no. 86/2016 rescinded the ICDS issued vide notification no. 32 /2015 and issued revised ICDS on 29 September 2016 effective from AY
March, 2015
Post seeking public comments on drafts of TAS, the CBDT issued 10 ICDSs vide notification No. 32/ dated March, 31, 2015 u/s 145(2) of the Act. Effective from AY
September, 2016
CBDT has issued Clarifications on ICDS, vide Circular No. 10/2017 dated March 23, 2017
March, 2017
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4. Income Computation and Disclosure Standard: An Overview
Objectives of the Accounting Standard Committee constituted vide Order No.134/48/2010-SO (TPL) dated 20th December 2010
To study the harmonization of Accounting Standards issued by ICAI with the direct tax laws in India, and suggest Accounting Standards which need to be adopted under section 145(2) along with the relevant modifications;
To suggest method for determination of tax base (book profit) for the purpose of Minimum Alternate Tax (‘MAT’) in case of companies migrating to IFRS in the initial year of adoption and thereafter; and
To suggest appropriate amendments to the Act in view of transition to Ind-AS regime
Principles adhered to by the Accounting Standard Committee:
Reduction of litigation;
Minimization of alternatives; and
Certainty to issues.
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5. Scheme of ICDS: An Overview (Contd…)
Section 145 of the Income Tax Act, 1961 (‘Act’), mandates computation of Business Income & Income from other sources, in accordance with accounting policy regularly followed, mercantile or cash basis of accounting is permitted.
Need felt by Central Board of Direct Taxes (‘CBDT’) to harmonize Indian Accounting Standards issued by Institute of Chartered Accountants of India (‘ICAI’) with income tax framework for effective tax compliance.
Income Computation and Disclosure Standards notified to be followed by all the assessees (other than Individuals or HUF who are not required to get their accounts audited in terms of provisions of Section 44AB of the Act), following the mercantile system of accounting for computing Profits and Gains from Business and Profession & Income from Other Sources.
Not Applicable for assessees following cash system of accounting.
As the ICDS were framed taking into consideration AS issued by the ICAI significant departures exist between ICDS and Indian AS (‘Ind AS’).
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6. Scheme of ICDS: An Overview (Contd…)
If the scheme of ICDS is in conflict with the provisions of the Income Tax Act, provisions of the Act ought to prevail.
ICDS does not mandate maintenance of separate books of accounts according to the provisions of ICDS.
However if there is difference between the scheme of ICDS and the Accounting Policies and Standards on basis of which the books of accounts are maintained, the difference to be adjusted in the Computation of Income.
Creation of huge deferred tax assets in initial years of implementation.
ICDS would have the effect of increasing the scope of taxation; upfront recognition of revenue for tax purposes.
Though, ICDS does not focus on maintenance of separate books of accounts convergent with ICDS, the same is practically difficult and complex re-conciliations would necessitate.
The CBDT issued Clarifications by way of 25 Nos. FAQs on it’s ‘Revised Income Computation and Disclosure Standards (ICDS 1 to 10)’ notified earlier under section 145(2) of the Income-tax Act, 1961, based on reference received from stakeholders in respect of certain provisions of ICDS, vide Circular No. 10/2017 dated March 23, 2017
Question no. 2 of clarifications issued by CBDT read as, Whether inconsistent judicial precedents shall prevail over ICDS? The CBDT clarified that “The ICDS have been notified after due deliberation and after examining judicial view for bringing certainty on the issues covered by it. Since certainty is now provided by notifying ICDS, the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to AY and subsequent AYs.” therefore, arguably ICDS would prevail despite the inconsistency with the judicial precedents.
Further, the preamble of ICDS mentions that where there is a conflict between the provisions of the act and the ICDS, the provisions of the Act shall prevail to that extent but it can be argued that the ICDS have been included through section 145 which also forms part of the statue proving that ICDS forms a part of such statute.
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7. Scheme of ICDS: An Overview (Contd…)
Complex calculations / adjustments required
In case of conflict, Act with apply
Tax payers following cash system of accounting not required to comply with ICDS
Parameters of level of turnover, net-worth etc. not applicable
No minimum threshold
Applicable where mercantile system is followed
No separate books of accounts
Provisions of Act shall prevail
The CBDT issued Clarifications by way of 25 Nos. FAQs on it’s ‘Revised Income Computation and Disclosure Standards (ICDS 1 to 10)’ notified earlier under section 145(2) of the Income-tax Act, 1961, based on reference received from stakeholders in respect of certain provisions of ICDS, vide Circular No. 10/2017 dated March 23, 2017
Question no. 2 of clarifications issued by CBDT read as, Whether inconsistent judicial precedents shall prevail over ICDS? The CBDT clarified that “The ICDS have been notified after due deliberation and after examining judicial view for bringing certainty on the issues covered by it. Since certainty is now provided by notifying ICDS, the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to AY and subsequent AYs.” therefore, arguably ICDS would prevail despite the inconsistency with the judicial precedents.
Further, the preamble of ICDS mentions that where there is a conflict between the provisions of the act and the ICDS, the provisions of the Act shall prevail to that extent but it can be argued that the ICDS have been included through section 145 which also forms part of the statue proving that ICDS forms a part of such statute.
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8. Scheme of ICDS: An Overview (Contd…)
Considering a situation where a judicial pronouncement interprets a provision of the Act whether overriding such pronouncement would end up being in conflict with the provision of the Act.
The scheme of the Act provides that total income shall include income accruing or arising during the year. In this regard, Hon’ble Supreme Court in the cases of Godhra Electricity Co. Ltd v. CIT (1997) 225 ITR 746 (SC),etc and Delhi High Court in Saraswati Insurance Co. Ltd v. CIT (2001) 252 ITR 430 (DELHI) have held that
The accrual of any income is to be determined in light of the terms of a contract under which such income arises, and
a mere accounting entry or the following of the mercantile system of accounting is not conclusive of the accrual of income etc. which are required to be fulfilled before an “income” can be said to have “accrued or arisen” under the Act.
Thus, where ICDS prescribes for revenue recognition in contradiction with these principles, whether the jurisprudence in such cases read with basic fundamental provisions of recognition of income under the the Act would be overridden by ICDS or not.
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9. Income Computation and Disclosure Standard-Framework
S.No
Income Computation and Disclosure Standards AS
IND AS I
Accounting Policies
AS-1
1/8 II
Valuation of Inventories
AS-2 2
III
Construction Contracts
AS-7
115 IV
Revenue Recognition
AS-9 V
Tangible Fixed Assets
AS-10 16 VI
The Effect of Changes in Foreign Exchange Rates
AS-11 21
VII
Government Grants
AS-12 20
VIII
Securities
AS-13
32/109 IX
Borrowing Cost
AS-16 23 X
Provisions, Contingent Liabilities and Contingent Assets
AS-29 37
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10. ICDS I: Accounting Policies
Supersedes IT-AS 1 issued by CBDT in 1996.
Fundamental accounting assumptions of Going Concern, Consistency and Accrual remains in vogue;
The major considerations governing selection and application of accounting policies are ‘prudence’, ‘substance over form’ and ‘materiality’.
This ICDS does not consider ‘prudence’ and ‘materiality’ as the major consideration in selection and application of accounting policies;
Changes in accounting policy permitted only if there is a reasonable cause, whereas AS/ Ind AS framework permits the same when the same results in a more appropriate presentation of the financial statements, or if other law / AS requires such change
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11. ICDS I Accounting Policies: Key Highlights
Any change in an accounting policy which has a material effect along with the amount by which any item is affected should be disclosed
Where such amount is not ascertainable, wholly or in part, the fact be indicated and If any fundamental accounting assumption not followed, the fact shall be disclosed.
The concept of materiality is absent from this ICDS and if the ICDS are applied in a strict manner, there may be tax impact on low value items. For instance, under post ICDS regime, even small and non-material assets may need to be capitalized.
Due to absence of concept of prudence, the loss will only be allowed on actual basis. Further, if the expected loss is recognized as per AS in books of accounts, the same shall be disallowed at the time of making provision and in turn be allowed only on actual basis in the income computation which will lead to timing difference and creation of deferred tax asset.
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12. Comparative analysis ICDS I & AS-1, Ind AS-1/8
The table describes some of the key differences between ICDS I, Indian GAAP (including the provisions of Schedule III to the Companies Act, 2013, where considered necessary) and Ind AS.
Particulars
ICDS I
AS Framework
Ind AS Framework
Accounting Policies,
Changes in Accounting
Estimates and Errors
Accounting Policies
AS 1 – Disclosure of Accounting Policies
AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Ind AS 1-Presentation of Financial Statements
Ind AS 8-Accounting Policies, Changes in Accounting Estimates
and Errors
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13. Comparative analysis ICDS I & AS-1, Ind AS-1/8 (Contd…)
Topic
ICDS I
AS Framework
Ind AS Framework
Consideration in
selection of accounting policies
To represent a true and fair view of the state of affairs and income of the business, profession or vocation.
The treatment and presentation of transactions and events shall be governed vis-à-vis substance and not merely by the legal form.
The major considerations governing the selection and application of accounting policies are:-
Prudence
Substance over Form
Materiality
Selection and Application of accounting policies depends upon different IND AS covering different transactions, events or conditions.
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14. Comparative analysis ICDS I & AS-1, Ind AS-1/8 (Contd…)
Topic
ICDS I
AS Framework
Ind AS Framework
Changes in accounting
policies
Changes in accounting policy will not be done unless for a ‘reasonable cause’. However, ‘reasonable cause’ is not defined. The guidance for the same shall be taken from judicial precedents.
Changes in accounting policies be made only if it is required by statute, for compliance with an AS or for a more appropriate presentation of the financial statements on a prospective basis (unless transitional provisions, if any, of an accounting standard require otherwise) together with a disclosure of the impact of the same, if material.
Requires retrospective application of changes in accounting policies by adjusting the opening balance of each affected component of equity or the earliest prior period presented and the other comparative amounts for each period presented as if the new accounting policy had always been applied.
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ICDS VIII: Securities
Income Computation and Disclosure Standard VIII on Securities is divided into two Parts.
Part A deals with securities held as stock in trade.
Part B of ICDS VIII deals with the securities held by a scheduled bank or public financial institutions under a Central or State Act or so declared under Companies Act, 1956 or Companies Act, 2013.
Application
ICDS applies to all taxpayers (other than Individual or HUF who is not required to get his accounts audited) following accrual system of accounting for the purpose of computation of income under the heads “profits and gains from business/ profession” or “income from other sources”.
“Income Computation and Disclosure Standard VIII (ICDS 8)” relating to Securities is applicable from the Assessment Year (corresponding to AS-13 issued by the ICAI)
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16. ICDS VIII- Securities Part A: Securities held as Stock in trade
Part A of Income Computation and Disclosure Standard -8 on Securities deals with securities held as stock-in-trade and not as Investment.
Part A provides for initial measurement and subsequent measurement of securities elucidated in subsequent slides.
Application
Part A of Income Computation and Disclosure Standard does not deal with:
the framework or policy for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition;
(b) securities held by a person engaged in the business of insurance;
(c) securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013).
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17. ICDS VIII: Securities Part A- Initial Measurement
On acquisition of a security, the same shall be recognized at the actual cost incurred for such acquisition.
The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess.
Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost.
Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost.
Where unpaid interest has accrued before the acquisition of an interest-bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion of the interest is deducted from the actual cost.
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18. ICDS VIII: Securities Part A- Subsequent Measurement
At the end of any previous year, securities held as stock-in-trade shall be valued at actual cost initially recognized or net realizable value at the end of that previous year, whichever is lower.
Such comparison of actual cost initially recognized and net realizable value shall be done category wise and not for each individual security (bucket approach).
For this purpose, securities shall be classified into the following categories, namely:-
(a) shares;
(b) debt securities;
(c) convertible securities; and
(d) any other securities not covered above.
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19. ICDS VIII: Securities Part A- Subsequent Measurement (Contd…)
The value of securities held as stock-in-trade of a business as on the beginning of the previous year shall be:
(a) the cost of securities available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and
(b) the value of the securities of the business as on the close of the immediately preceding previous year, in any other case.
Further, 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.
Where the actual cost initially recognized cannot be ascertained by reference to specific identification, the cost of such security shall be determined on the basis of first-in-first-out method or weighted average cost formula.
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20. ICDS VIII- Securities Part B: Securities held by Scheduled Bank & PFI
Part B 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 Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013).
Classification, Recognition and Measurement of Securities
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 Changes in foreign exchange rates relating to forward exchange contracts would not apply.”
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21. ICDS VIII: Securities CBDT Clarifications
The clarification issued by the CBDT vide Circular No. 10/2017 dated March 23, 2017 with regard to ICDS VIII Part A provides for clarification on subsequent recognition of Securities valued “category wise”.
CBDT clarified that the aggregate cost and net realizable value (NRV) of each category of security is compared and the lower of the two is to be taken as carrying value as per ICDS-VIII.
No clarity provided on how to identify securities, whether held as stock-in-trade or as an investment.
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22. ICDS VIII: Securities CBDT Clarifications (Contd…) : An Illustration
Security
Category
Cost
NRV
Lower of Cost(LOC) or NRV
ICDS Value A
Share
100 75 B
120
150 C
140 D
200
190
Total
560
535
505
535 (LOC or NRV) E
Debt Security
160 F
105 90 G
125
135 H
225
230
220
600
615
585
600 (LOC or NRV)
Securities Total
1160
1150
1090
1135
Subsequent recognition to be category wise and not on basis of individual security.
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23. Comparative analysis ICDS VIII & AS-13, Ind AS-109
The below table describes some of the key differences between ICDS VIII, AS framework and Ind AS framework
Particulars
ICDS VIII
AS Framework
Ind AS Framework
Securities – primary
Literature
Securities
AS 13 – Accounting for Investments
Ind AS 109 Financial Instruments – Recognition, measurement and classification of financial assets
Securities – Scope
This ICDS deals with securities held as stock-in-trade and securities held by banks and FIs
Securities held as stock-in-trade are outside the scope of AS 13. However, provisions of AS 13 relating to current investments are applicable with suitable modifications.
Ind AS 109 includes requirements for recognising and measuring financial assets, financial liabilities and is broader in scope when compared with AS 13 and ICDS VIII.
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24. Draft for discussion purposes only
Comparative analysis ICDS VIII & AS-13, Ind AS-109 (Contd…)
Particulars
ICDS VIII
AS Framework
Ind AS Framework
Securities – general
recognition principle
Not covered by ICDS
No guidance included
An entity should recognise a financial asset or a financial liability in its balance sheet when, and only when, the entity becomes party to the contractual provisions of the instrument.
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
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25. Draft for discussion purposes only
Comparative analysis ICDS VIII & AS-13, Ind AS-109 (Contd…)
Particulars
ICDS VIII
AS Framework
Ind AS Framework
Securities – Part A – Initial Measurement
Acquisition at cost.
Where acquired in exchange of other security or any other asset, to be recognised at fair value of the security so acquired
Investment is acquired by issuing shares or securities or in exchange of any other asset, to be recognised at fair value of the asset given or security issued.
All financial instruments are initially measured at fair value plus or minus transaction cost that are directly attributable to acquisition or issue of financial asset or liability.
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26. Draft for discussion purposes only
Comparative analysis ICDS VIII & AS-13, Ind AS-109 (Contd…)
Particulars
ICDS VIII
AS Framework
Ind AS Framework
Securities – Part A – Subsequent Measurement
Unquoted shares at initial cost.
Other than the above at cost or NRV.
Bucket Approach
Investment either Long Term or Current.
Long-term investments are carried at cost less provision for diminution in value, which is other than temporary.
Current investments are carried at lower of cost and fair value.
Individual Approach
All financial assets are classified as measured at amortized cost or measured
at fair value.
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27. ICDS: Tax Audit Report- Form 3CD
Clause 13(a) of the revised Form 3CD
13. (a) Method of Accounting employed in Previous year
(b) whether there had been any change in the method of accounting employed vis- à-vis the method employed in the immediately preceding previous year;
(c) if answer to (b) is in the affirmative, give details of such change, and the effect thereof on the profit or loss
Serial Number
Particulars
Increase in Profit (Rs.)
Decrease in Profit (Rs.)
(d) Whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)
(e) If the answer to (d) above is in the affirmative, give details of such adjustments.
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28. ICDS: Tax Audit Report- Form 3CD (Contd..)
(d) Whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)
(e) If the answer to (d) above is in the affirmative, give details of such adjustments.
ICDS
NATURE
Increase in profit (Rs.)
Decrease in profit (Rs.)
Net Effect I
Accounting Policies Ii
Valuation of Inventories
III
Construction Contracts IV
Revenue Recognition V
Tangible fixed assets VI
Changes in Foreign Exchange Rates
VII
Government Grants
VIII
Securities IX
Borrowing costs X
Provisions, Contingent Liabilities and Contingent Assets
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29. ICDS: Tax Audit Report- Form 3CD (Contd..)
(f) Disclosure as per ICDS:
I - Accounting Policies
II - Valuation of Inventories
III- Construction Contracts
IV- Revenue Recognition
V - Tangible Fixed Assets
VI- The Effect of Changes in Foreign Exchange Rates
VII- Government Grants
VIII-Securities
IX- Borrowing Cost
X- Provisions, Contingent Liabilities and Contingent Assets
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30. Draft for discussion purposes only
Way forward
The revised ICDS framework is applicable from Assessment Year onwards and the same are mandatory to be followed by all assessees following mercantile system of accounting (except individual and HUF(s) not covered under tax audit provisions)
Non-compliance of the said ICDS may result into best judgement assessment as per provisions of section 144 of the IT Act, 1961.
The amendments in the revised ICDS have settled some of the implementation issues, however, there are still many gaps which needs clarification.
It is evident that the ICDS framework will change the way Income will be computed and would materially impact the Tax computation.
Whether the objective of ‘reduction of litigation’ and ‘certainty to issues’ are achieved and met with.
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31. Joys and Challenges of a Professional
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32. Joys and Challenges of a Professional
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33. NOTE: This presentation is for discussion and general guidance purposes, prepared on the basis of information available. It may not be used for any other purpose, or distributed to any other party, without seeking our prior written consent. No party should rely on this presentation without taking necessary prior professional advice