1. Income Computation & Disclosure Standards
ICAI Calicut

2. Contents Overview of ICDS ICDS 1-10 impact analysis Applicability
ICDS vis-à-vis IT Act, Rules, Case Laws
Impact and disclosure
ICDS 1-10 impact analysis

3. Overview of ICDS

4. ICDS Applicability NOTIFICATION - S.O. 3079 (E) dated 29/9/2016
ICDS applicable from AY
ICDS to be followed by all assessees following mercantile system of accounting except in case of individuals and HUF not liable for tax audit u/s 44AB
ICDS applicable in respect of income under heads
Profits & gains from business or profession
Income from other sources
Non compliance results in best judgment assessment u/s 144
Transitional provisions for treatment of continuing items as on
Important reference materials – ICAI GN on ICDS, CBDT Circular 10/2017

5. Applicability – case studies
Situation
ICDS Applicability
Individual having turnover of Rs 50 lakhs covered by presumptive taxation u/s 44AD X
Firm having turnover of Rs 20 lakhs covered by presumptive taxation u/s 44AD* 
Company/LLP having income from house property of Rs 5 lakhs
Individual having turnover of Rs 30 lakhs and getting accounts audited u/s 44AB due to net loss
Firm having turnover of Rs 10 crores following cash system of accounting
Individual having income from other source of Rs 5 crore
* As per ICAI GN on ICDS, S. 145 would not apply to such entities. CBDT Circular 10/2017 says computation of sales / turnover will be as per ICDS

6. Applicability – case studies
M/s XYZ having turnover of Rs 10 crore follows mercantile system of accounting for business income and cash system of accounting for income from other sources
ICDS would apply only in respect of business income
M/s XYZ having 2 businesses – manufacturing and commission sales. Income recognised on accrual basis for manufacturing business and on cash basis for commission business
ICDS would apply only in respect of manufacturing business income
ICDS cannot dictate timing of TDS by deductor – TDS applicable at the time of payment / credit as earlier

7. Applicability – case studies
Taxpayer following mercantile system of accounting till FY switches to cash system in is it permissible under ICDS?
Taxpayer entitled to change method of accounting provided change is bonafide and it is followed regularly thereafter. As per ICAI GN on ICDS, change in method of accounting does not fall under change in accounting policy and hence requirement of “reasonable cause” does not apply
XYZ Ltd, a foreign company receives royalty from an Indian company. Would ICDS apply to XYZ Ltd
ICDS applicable to all taxpayers including non residents.
Non resident eligible for DTAA benefit may claim such benefit if it is more favourable –for e.g., in case of royalty income DTAA permits taxation on receipt basis
Applicability to charitable trusts
ICDS does not apply to principles of application of income which is based on concept of commercial income
However, trusts having business income would need to apply ICDS

8. ICDS vis-à-vis Act, Rules, Case laws
Conflict between IT Act and ICDS
IT Act would prevail - For e.g., banks can recognise interest income on NPA as per S. 43D on realisation basis whereas ICDS requires accrual basis
Conflict between IT Rules and ICDS
Specific rule governing situation would prevail - For e.g., in case of film producers, income would be computed as per Rule 9A and not as per ICDS
Conflict with circulars / notifications
Circulars binding on tax department unless withdrawn – beneficial circulars can be relied upon
Earlier notifications would be overruled by ICDS
Conflict with judicial precedents
Judgement relying on AS / established accounting convention would be overruled by ICDS – For e.g., allowability of provision for expected losses of contractor
Where courts have interpreted the provisions of IT Act, ICDS cannot overrule such decisions – For e.g., grant in the nature of capital receipt may not be taxable even post ICDS

9. IT Act Amendments – ICDS alignment
Income definition to include ‘assistance’ in any form from government in cash or kind except subsidy considered for reduction from ‘actual cost’ as per Exp. 10 to s.43(1)
Not applicable to LPG subsidy
Deletion of ‘for extension of existing business or profession’ as a condition for disallowance of interest for acquisition of asset
Bad debt deduction for income recognised as per ICDS (without recording in books) in the year in which such debt ‘becomes irrecoverable’

10. ICDS Impact
Business income Income as per IT Act xxx Add: Increase in income as per ICDS xxx Less: Reduction in income as per ICDS xxx Taxable income under business income XXX Income from other sources Income computed as per IT Act xxx Add / Less change in income as per ICDS xxx Taxable income under other sources XXX MAT impact – no direct impact – however, double taxation can happen in some cases AMT impact – direct impact since ICDS impacts computation under IT Act

11. ICDS Disclosure
Return forms amended to disclose impact of ICDS on tax computation
Tax auditor to certify adjustments as per ICDS
Step up from earlier role where tax computation was the responsibility of the assessee and role of tax auditor restricted to certifying true and fair view of accounts and disclosure of particulars given in Form 3CD
Separate column for disclosures as per each ICDS in Form 3CD
Disclosure cannot remedy wrong / inappropriate treatment of any item

12. ICDS 1-10 impact analysis

13. ICDS – 1 Accounting policies
Relates to accounting policies for computation of taxable income
Going concern, consistency and accrual recognised as fundamental accounting assumptions
Choice of accounting policy – depict true and fair view of state of affairs and income
Use substance over form
Prudence and materiality omitted
MTM losses not permitted to be recognised unless covered by other ICDS
Accounting policy cannot be changed without reasonable cause

14. Realised gain less gain of 15-16
ICDS – 1 impact analysis
MTM derivative loss cannot be claimed as a deduction except on settlement except as permitted by other ICDS
MTM gains not considered as income
Expected loss cannot be recognised as an expense except as permitted by other ICDS
Case study:- A Ltd recognises MTM gains and losses in respect of a 3 year forward contract
Particulars
MTM gain / (loss)
Gain
Loss
Pre ICDS
Taxable
Deductible
Post ICDS NA
Non deductible
Realised gain less gain of 15-16

15. ICDS – 2 Inventories Inventory valuation at lower of cost / NRV
Methods permitted - Specific Identification, FIFO / Weighted Average
Cost can be measured using standard costing / retail method
Constant review + confirmation regarding approximation to actual cost
Inclusive method including value of taxes and duties for inventory valuation
Mark down to NRV – item by item basis on cost comparison
In case of raw materials mark down if final product expected to be sold below cost
Opening stock = closing stock of previous year
Stock value on dissolution of firm to be valued at NRV

16. ICDS – 2 impact analysis
Service provider not covered by ICDS – III need to not compute WIP
Service provider reference deleted in ICDS – II
Inventory definition does not include service provider
Stock of partnership firm where business taken over by a partner
Overrules Shakthi Trading (250 ITR 871)
Opening stock = closing stock of previous year
GST transitional credit issue

17. ICDS – 3 Construction Contracts
POCM to be applied for recognition of income / expenses beyond 25% completion
Contract revenue = Revenue as per agreement (including retentions) + price variations (reliably measured and probable)
Stage of completion determined by cost / survey / physical work
Change in estimates – apply prospectively
Income from contracts not completed on can be computed using earlier method
Provision for estimated loss not allowed

18. ICDS – 3 impact analysis
ICDS – 3 not applicable to real estate developers
Draft ICDS issued for real estate developers
Certain related services like project managers & architects covered by ICDS - 3
Judicial precedents have held retention money not income as taxpayer does not have any right to receive the amount
Reversal of income not permitted – can only be claimed as expense
Incidental income cannot be reduced from costs
MAT mismatch on non recognition of estimated loss on contracts
Contract WIP to be recognised even if probability of recovery is low

19. ICDS - 4 Revenue recognition
POCM
Transfer of property or significant risks & rewards of ownership to buyer
As per contractual terms, unless some other systematic / rational basis as per substance of transaction
Ordinarily, POCM
If contract duration < 90 days, permits completed contract method
If services by indeterminate number of acts, permits straight line method
Receipt basis for interest on tax refund
Time basis for other
Revenue recognition criteria as per ICDS 3 & 4
Construction contract (including services directly related to construction like architect)
Sale of goods
Rendering of services
Interest
Royalty
Dividend
As per IT Act

20. ICDS – 4 impact analysis
Interest, royalty income – no requirement for reasonable certainty
NPA interest to be taxed?
As per CBDT Circular 10/2017 non recovery can be claimed as deduction
Recognition of interest income on discounted securities – double taxation when asset sold?
As per CBDT Circular 10/2017 income already recognised can be claimed as a deduction when asset sold
Impact of taxing income as per 26AS

21. ICDS – 5 Fixed assets & analysis
Actual cost of FA = purchase price + import duties + other taxes (excluding those subsequently recoverable) + any directly attributable expenditure on making the asset ready for its intended use - trade discounts and rebates
Exchange of asset – cost = fair value of asset received
Expenditure on start up and commissioning – capitalise
Expenses after commencement of commercial production – charge to expenses
Depreciation, forex fluctuations for imported assets as per IT Act
No need for fixed assets register
Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost

22. ICDS – 6 Forex fluctuations
Monetary items – use closing rates for conversion
Forex gain / loss on monetary items to be considered as profit / loss subject to S. 43A
Non-monetary items conversion – use exchange rate as on date of transaction
Translation of financial statement of foreign operation – use above rule
Forex derivatives – if held for speculation / trading / hedging of firm commitment – gain / loss only on settlement
In other cases gain / loss recognised on yearly basis

23. ICDS – 6 impact analysis
Forex gain / loss on loan taken for purchase of domestic assets using foreign loan
Not covered by S. 43A – as per judicial precedents, exchange fluctuation on capital account and hence not allowable
No distinction between integral and non integral foreign operations as given in AS – 11
Opening balance of FCTR of non integral foreign operations to be recognised as income / expense relating to monetary items
Characterisation issue – firm commitment, speculation, trading contracts
Forex contracts of banks / financial institutions covered by ICDS - 8

24. ICDS – 7 Government grants
Includes all forms of governmental assistance including subsidies, cash incentives, duty drawbacks, concessions, reimbursements, etc; excludes government participation in ownership
Govt assistance which cannot be valued, trading transactions exluded
Grants received from govt agencies and similar bodies also covered
Grant recognition cannot be postponed beyond receipt
Grants relating to fixed assets – reduce from actual cost (S. 43(1))
Grants relating to non depreciable assets – consider as income
Grant given in form of asset at concessional rate – asset accounted at reduced cost
Other grants to be recognised as income to match with corresponding expenditure

25. ICDS – 7 impact analysis Grants without conditions outside ICDS - 7?
Grants considered as capital receipts earlier based on judicial precedents
Definition of income amended to include government grants and align with ICDS
Trusts following cash system – no impact
Trust following mercantile system – no impact as ICDS cannot override computation mechanism is section 11-13
Trusts with business income – ICDS to be considered for business income computation
Grant received in advance subject to satisfaction of conditions

26. ICDS – 8 Securities & impact analysis
Part A deals with taxpayers holding securities as stock-in- trade except specified entities
Refer CBDT Circulars for capital gain vs business income classification
Securities - defined as per SCRA specifically includes shares of closely held companies and excludes derivatives
FV of security acquired in exchange for other securities or assets to be regarded as actual cost of security acquired
Bucket approach for valuation of inventories – category wise at lower of cost / NRV
Categories include: Shares; Debt Securities; Convertible Securities; Any Other Securities
Part B deals with securities held by scheduled banks and PFIs
Treatment as per RBI guidelines

27. ICDS – 9 Borrowing costs
Borrowing cost includes commitment charges, amortisation of discount / premium, finance charges of financial lease
Specific borrowing - Borrowing cost from date of borrowing to date asset put to use / inventory ready for sale to be capitalised
Inventory taking 12 months or more to bring to saleable condition - Conflict with S. 36(1)(iii)?
General borrowing – only if asset takes 12 months for acquisition, construction or production
Based on formula on asset-by-asset basis
Amendment in S. 36(1)(iii) reflects capitalisation principles of ICDS

28. ICDS – 9 impact analysis
Capitalisation and impact on other sections like 40(a), 43B etc
As per CBDT Circular 10/2017 borrowing costs for ICDS excludes interest disallowed under other sections of IT Act
Other charges – bill discounting charges and similar charges
As per CBDT Circular 10/2017 borrowing costs includes such costs also
Condition of extension of business / profession removed from S. 36(1)(iii)
Condition of 12 months for qualifying asset applicable for specific borrowing for inventory and general borrowing
Specific borrowing for fixed assets hit by ICDS - 9

29. ICDS – 10 Provisions, contingencies, contingent assets
Provision can be created if there reasonable certainty of present obligation as a result of past event resulting in outflow + can be reliably measured
Only those obligations arising from past events existing independently of future conduct of its business that are recognised as provisions.
No provision for costs to be incurred for future operations
Contingent liability cannot be recognised
Contingent asset to be recognised only of there is reasonable certainty regarding future inflow
Related income also to be recognised
Provision can only be used for the purpose created

30. ICDS – 10 impact analysis Examples of provisions as per AS – 29
Provision for warranty (affirmed by SC in Rotork Controls 314 ITR 62)
Liability for environmental cleanup where enactment of new law virtually certain) – not permitted by ICDS
Creation of provision – probability vs reasonable certainty
Recognition of contingent asset – virtual certainty vs reasonable certainty
Cases in favour pending before court on appeal – impact of transitional provision
Expenditure on post retirement benefits covered by AS-15 will be dealt with as per provisions of IT Act and not as per ICDS – 10

31. Concluding thoughts
Disclosure requirement for firms / companies not subject to tax audit?
CBDT Circular states ICDS disclosures to be part of Form 3CD
Reliance on established favourable decisions to be reviewed in light of ICDS
Preparation of reconciliations / parallel P&L A/cs
Principles of accrual as per ITA vs ICDS
Arguably, auditor can still rely on substantive audit procedures and materiality concept