CBDT issued a circular no. 10/2017 dated 23 March 2017 about clarification on income computation and discloure standerd ICDS notified u/s 145(2) of income tax act 1961.
Sub-section (1) of section 145 of the Income-tax Act,
1961(`the Act') provides that the income chargeable under the head -Profits and
gains of business or profession" or "Income from other sources"
shall, subject to the provisions of sub-section (2), be computed in accordance
with either cash or mercantile system of accounting regularly employed by the
assessee. Sub-section (2) of section 145 provides that the Central Government
may notify Income Computation and Disclosure Standards (ICDS) for any class of
assessecs or for any class of income. Accordingly, the Central Government
notified 10 ICDS vide Notification No.S.0.892(E) dated 31st March, 2015 with
effect from assessment year 2016-17.
After notification of ICDS, it has been brought to the
notice of the Central Board of Direct Taxes (`the Board') by the stakeholders
that certain provisions of ICDS may require amendment/clarification for proper
implementation. The matter was referred to an expert committee. The Committee
after duly consulting the stakeholders in this regard has recommended a wo-fold
approach for the smooth implementation of ICLIS i.e. amendment to the
provisions of ICDS in respect of certain issues and issuance of clarifications
by way of FAQs for the rest of issues. Accordingly, vide Notification no 87. Dated
29th September, 2016 Central Government notified amended ICDS with effect from
the assessment year 2017-18.
Further, the issues which require further clarification has
been considered by Board and following clarifications are issued:
Question 1: Preamble of ICDS-I states that this ICDS is
applicable for computation of income chargeable under the head "Profits
and gains of business or profession" or "Income from other
sources" and not for the purposes of maintenance of books of accounts.
However, Para 1 of ICDS I states that it deals with significant accounting
policies. Accounting policies are applied for maintenance of books of accounts
and preparing financial statements. What is the interplay between ICDS-I and
maintenance of books of accounts?
Answer: As stated in the Preamble, ICDS is not meant for
maintenance of books of accounts or preparing financial statements. Persons are
required to maintain books of accounts and prepare financial statements as per
accounting policies applicable to them. For example. Companies are required to maintain books of account and
prepare financial statements as per requirements of Companies Act 2013. The
accounting policies mentioned in ICDS-I being fundamental in nature shall be
applicable for computing income under the heads -Profits and gains of business
or profession" or "Income from other sources".
Question 2: Certain ICDS provisions are inconsistent with
judicial precedents. Whether these judicial precedents would prevail over ICDS?
The ICDS have been notified after due delibration 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.
Question 3: Does ICDS apply to non-corporate taxpayers who
are not required to maintain books of account and/or those who are covered by
presumptive scheme of taxation like sections 44AD, 44AE, 44ADA, 4413, 441313,
4413BA, etc. of the Act?
Answer: ICDS is applicable to specified persons having
income chargeable under the head Profits and gains of business or profession'
or 'Income from other sources'. Therefore, the relevant provisions of ICDS
shall also apply to the persons computing income under the relevant presumptive
taxation scheme. For example, for computing presumptive income of a partnership
firm under section 44AD of the Act, the provisions of ICDS on Construction
Contract or Revenue recognition shall apply for determining the receipts or
turnover, as the case may be. 9
Question 4: If there is conflict between ICDS and other
specific provisions of the Income-tax rules, 1962(`the Rules') governing
taxation of income like rules 9A, 9B etc. of the Rules, which provisions shall
prevail?
Answer: ICDS provides general principles for computation of
income. In case of conflict, if any, between the provisions of Rules and ICDS,
the provisions of Rules, which deal with specific circumstances, shall prevail.
Question 5: ICDS is framed on the basis of accounting
standards notified by Ministry of Corporate Affairs (MCA) vide Notification No.
GSR 739(E) dated 7 December 2006 under section 211(3C) of erstwhile Companies
Act 1956. However, MCA has notified in February 2015 a new set of standards
called 'Indian Accounting Standards' (hid-AS). How will ICDS apply to companies
which adopted Ind-AS?
Answer: ICDS shall apply for computation of taxable income
under the head “Profit and gains of business or profession" or
"Income from other sources" under the Income Tax Act. This is
irrespective of the accounting standards adopted by companies i.e. either
Accounting Standards or Ind-AS.
Question 6: Whether ICUS shall apply to computation of
Minimum Alternate Tax MAT) under section 115.1I3 of the Act or Alternate
Minimum Tax (AMT) under section 115.1C of the Act?
Answer: MAT under section 115JB of the Act is computed on
'book profit' that is net profit as shown in the Profit and Loss Account
prepared under the Companies Act subject to certain specified adjustments.
Since, the provisions of ICDS are applicable for computation of income under
the regular provisions of the Act, the provisions of ICDS shall not apply for
computation of MAT.
AMT under section 115JC of the Act is computed on adjusted
total income which is derived by making specified adjustments to total income
computed as per the regular provisions of the Act. Hence, the provisions of
ICDS shall apply for computation of AMT.
Question 7: Whether the provisions of ICDS shall apply to
Banks, Non-banking financial institutions, Insurance companies, Power sector,
etc.?
Answer: The general provisions of ICDS shall apply to all
persons unless there are sector specific provisions contained in the ICDS or
the Act. For example, ICDS VIII contains specific provisions for banks and
certain financial institutions and Schedule I of the Act contains specific
provisions for Insurance business. •
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CBDT Clarification on Income Computation and Disclosure Standerd ICDS |
Question 8: Para of ICDS-I provides that Market to Market (MTM)
loss or an expected loss shall not be recognized unless the recognition is in
accordance with the provisions of any other ICDS. Whether similar consideration
applies to recognition of MTM gain or expected incomes?
Answer: Same principle as
contained in ICDS-I relating to MTM losses or an expected loss shall apply
mutatis mutandis to MTM gains or an expected profit.
Question 9: ICDS-1 provides that an accounting policy shall
not be changed without `reasonable cause'. The term 'reasonable cause' is not
defined. What shall constitute `reasonable cause'?
Answer: 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.
Question 10: Which ICDS would govern derivative instruments?
Answer: ICDS - VI (subject to Para 3 of ICDS-VIII) provides
guidance on accounting for derivative contracts such as forward contracts and
other similar contracts. For derivatives, not within the scope of ICDS-VI,
provisions of ICDS-I would apply.
Question 11: Whether the recognition of retention money,
receipt of which is contingent on the satisfaction of certain performance
criterion is to be recognized as revenue on billing?
Answer: Retention money, being part of overall contract
revenue, shall be recognised as revenue subject to reasonable certainty of its
ultimate collection condition contained in para 9 of ICDS-III on Construction
contracts.
Question 12: Since there is no specific scope exclusion for
real estate developers and Build -Operate- Transfer (BOT) projects from ICDS IV
on Revenue Recognition, please clarify whether ICDS-III and ICDS-IV should be
applied by real estate developers and BOT operators. Also, whether ICDS is
applicable for leases.
Answer: At present there is no specific ICDS notified for
real estate developers, BOT projects and leases. Therefore, relevant provisions
of the Act and ICDS shall apply to these transactions as may be applicable.
Question 13: The condition of reasonable certainty of
ultimate collection is not laid down for taxation of interest, royalty and
dividend. Whether the taxpayer is obliged to account for such income even when
the collection thereof is uncertain?
Answer: As a principle, interest accrues on time basis and
royalty accrues on the basis of contractual terms. Subsequent non recovery in
either cases can be claimed as deduction in view of amendment to S.36 (I)
(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail over
the provisions of ICDS.
Question 14: Whether ICDS is applicable to revenues which
are liable to tax on gross basis like interest, royalty and fees for technical
services for non-residents u/s. 115A of the Act.
Answer: Yes. The provisions of ICDS than also apply for
computation of these incomes on gross basis for arriving at the amount
chargeable to tax.
Question 15: Para S of ICDS-V states expenditure incurred on
commissioning of project, including expenditure incurred on test runs and
experimental production shall be capitalized. It also states that expenditure
incurred after the plant has begun commercial production i.e., production
intended for sale or captive consumption shall be treated as revenue
expenditure. What shall be the treatment of expense incurred after the conduct
of test runs and experimental production but before commencement of commercial
production?
Answer: As clarified in Para 8 of ICDS-V, the expenditure
incurred till the plant has begun commercial production, that is, production
intended for sale or captive consumption, shall be treated as capital
expenditure.
Question 16: What is the taxability of opening balance as on
1'` day of April 2016 of Foreign Currency Translation Reserve (FCTR) relating
to non-integral foreign operation, if any, recognised as per Accounting
Standards (AS) 11?
Answer: FCTR balance as on 1 April 2016 pertaining to
exchange differences on monetary items for non-integral operations, shall be
recognised in the previous year relevant for assessment year 2017-18 to the
extent not recognised in the income computation in the past.
Question 17: For subsidy received prior to lst day of April
2016 but not recognised in the hooks pending satisfaction of related condition~
arid achieving reasonable certainty of receipt, how shall the same he
recognised under IUDS on or after day of April 2016?
Answer: Para 4 of ICDS-VlI 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.
For example, if out of total subsidy entitlement of 10 Crore
an amount of 6 Crore is recognised in the books of accounts 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 achieved. 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 1 st 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.
Question 18: If
the taxpayer sells a security on the 30th day of April 2017. The interest
payment dates are December and .1iine. The actual date of receipt of interest
is on the 30'1' day of June 2017 but the interest on accrual basis has been
accounted as income on the 31st day of March .2017. Whether the taxpayer shall
he permitted to claim deduction of such interest i.e. offered to tax but not
received while computing the capital gain?
Answer: Yes, the amount already taxed as interest income on
accrual basis shall be taken into account for computation of income arising
from such sale.
Question 19: Para 9 of ICDS-VIII on securities requires
securities held as stuck-in-trade shall be valued at actual cost initially
recognised or net realisable value (NRV) at the end of that previous year,
whichever is tower. Para 10 of Part-A of ICDS-VIII requires the said exercise
to be carried out category wise. How the same shall be computed?
Answer: For subsequent measurement of securities held as
stock-in-trade, the securities are first aggregated category wise. The
aggregate cost and NRV of each category of security are compared and the lower
of the two is to be taken as carrying value as per ICDS-VIII. This is
illustrated below
Security
|
Catagory
|
Cost
|
NRV
|
Lower of Cost or NRV
|
ICDS Value
|
A
|
Share
|
100
|
75
|
75
|
|
B
|
Share
|
120
|
150
|
120
|
|
C
|
Share
|
140
|
120
|
120
|
|
D
|
Share
|
200
|
190
|
190
|
|
|
Total
|
560
|
535
|
505
|
535
|
|
|
|
|
|
|
E
|
Debt Security
|
150
|
160
|
150
|
|
F
|
Debt Security
|
105
|
90
|
90
|
|
G
|
Debt Security
|
125
|
135
|
125
|
|
H
|
Debt Security
|
220
|
230
|
220
|
|
|
Total
|
600
|
615
|
585
|
600
|
Securities total
|
|
1160
|
1150
|
1090
|
1135
|
Question 20: There are specific provisions in the Act read
with Rules under which a portion of borrowing cost may get disallowed under
sections like 14A, 438, 40(a)(i), 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.
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 borrow in 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.
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 1m day of April 2016 in accordance with the provisions
of this standard after taking into account the amount recognised, i any, for
the same for any previous year ending on or before 31 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 -
Provision required as per ICDS on 31 March 2017 for items brought
forward from 31st day of March 2016 ...(A)
|
INR 3 Crore
|
Provisions as per ICDS for FY 2016-17 ...(B)
|
INR 5 Crore
|
Total gross provision ...(C) = (A) + (B)
|
INR 8 Crore
|
Less: Provision already recognised for computation of taxable income
in FY 20 I 6-17or earlier ...(D)
|
INR 2 Crore
|
Net irovisions as per ICDS in FY 2016-17 to be recognised ffls per
transition provision ...(E) = (C) — (D)
|
INR 6 Crore
|
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.
Question 25: ICDS-I requires disclosure of significant
accounting policies and other ICDS requires specific disclosures. Where is the
taxpayer required to make such disclosures specified in ICDS?
Answer: Net effect on the income due to application of ICDS
is to be disclosed in the Return of income. The disclosures required under ICDS
shall be made in the tax audit report in Form 3CD. However there shall not be any separate disclosure requirements for persons who are not laible to tax audit.
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