ICDS Reporting under Tax Audit

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1 ICDS Reporting under Tax Audit Pune West Study Circle Western India Regional Council - Pune Branch The Institute of Chartered Accountants of India 1 st October, 2017 CA Ganesh Rajgopalan

2 Computation of Income (Post-ICDS) IT Returns Part A-Other Information & Schedule ICDS Net effect on profit because of deviation, if any, as per ICDS Schedule ICDS only in ITR forms -where business income is included ITR 4 (Sugam) For presumptive income from business/profession No disclosure required Computation of income adjustment to be made manually Description Amount Rs. Profit /loss as per profit and loss statement Add/less: Adjustments as per ICDS Adjusted income as per ICDS Add/less: Adjustments as per the Act Total Income 01/10/2017 2

3 Fundamental issues 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 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 case of conflict with the Act, Act prevails In case of conflict with judicial rulings- Rulings which are on the method of accounting Rulings on basic principles underlying the Act e.g., (real) income, accrual 01/10/2017 3

4 Fundamental issues-applicability For MAT under s. 115JB Not applicable [CBDT FAQ No. 6] For AMT under s. 115JC- Computation as per regular provisions of the Act-applicable For presumptive tax schemes Turnover [s. 44AD/44ADA] Amount paid/payable [e.g. s. 44B/44BB/44BBA] Dividend, interest, royalty or FTS flat rate of tax [s. 115A] ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or turnover [CBDT FAQ No. 3] 01/10/2017 4

5 TA Clause 13 - Method of Accounting 13 (a) Method of accounting employed in the previous year (b) Whether there had been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year. (c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss. (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 answer to (d) above is in the affirmative, give details of such adjustments (f) Disclosure as per ICDS 01/10/2017 5

6 ICDS I Accounting Policies Selection of accounting policies Main consideration- true and fair view Fundamental accounting assumptions Going concern, consistency, accrual Accrual Income /expense recognised as they are earned/ incurred [para 2(d)] Accrual interpreted as due Debt arising in favour of the assessee [ED Sasoon & Co Ltd 26 ITR 27 (SC)] Ind AS when event occurs Absent in ICDS Prudence Mark to market losses or expected losses not available [para 4(1)] Materiality significant accounting policies, material change to be disclosed 01/10/2017 6

7 ICDS II - Inventories Duties and taxes To be included under ICDS II To be excluded under AS 2 and Ind AS 2 where subsequently recoverable Adjustment under s. 145A [Separate clause for reporting in Form 3CD] Any tax, duty, cess or fee paid/incurred on inputs to be included in cost of inputs on sale of goods to be included in the sales on the inventory to be included in value of inventories Nil effect under either method [refer ICAI GN, Para 23.15] Work in progress for service providers not covered under ICDS II inventories include the costs of the service for which the entity has not yet recognised the related revenue [AS 2 (revised 2017) & Ind AS 2] Contra adjustment under ICDS III? Assets converted into stock in trade Fair market value and not original cost [s. 2(47)(iv) read with s. 45(2)] Is it cost - Applicability of sec. 45(2) for valuing inventory? 01/10/2017 7

8 ICDS II Inventories Cost includes allocable fixed direct overheads Before or after disallowance? FAQ No. 20 in context of borrowing cost Capitalization of borrowing cost shall apply for that portion of the borrowing cost which is otherwise allowable as deduction under the Act. Disallowance of taxes Sec. 145A prevails On dissolution of partnership or AOP where business is continuing To be valued at NRV (and not at cost or NRV whichever is lower) Sakthi Trading (SC) nullified Deferred payment terms Financing cost to be separated from purchase price and charged to P & L [Ind AS 2]; no such requirement under ICDS 01/10/2017 8

9 ICDS II - Inventories Disclosures accounting policies adopted including the cost formulae used. Where Standard Costing used, details of such inventories and Whether standard cost approximates actual cost; Total carrying amount of inventories and its classification 01/10/2017 9

10 ICDS III - Construction Contracts Contract revenue recognition- When possible to reliably measure outcome of contract [AS 7 & Ind AS 11]; reasonable certainty of ultimate collection [ICDS III, Para 9] That a contract will be completed and that revenue will be realised, the same? Retention monies Contract revenue includes retention (ICDS III) (FAQ 11) to be recognised when there is reasonable certainty of collection (ICDS III, para 9) Accrual of income [Excel Industries (2013) 358 ITR 295 (SC)] income accrued is real; a corresponding liability of the other party to pay; a realistic probability of realisation CIT v Simplex Concrete Piles (India) (P) Ltd [1989] 179 ITR 8 (Cal) assessee had no right to claim any part of the retention money till the verification of satisfactory execution of the contract. 01/10/

11 ICDS III - Construction Contracts Contract revenue Initial amount of revenue agreed as per contract & Variations in contract work, claims and incentive payments Includes retention monies Payable only on satisfaction of conditions Recognise only when reasonable certainty of collection [para 9] Contract revenue not realisable Where revenue considered as income Deduction as bad debt [s. 36(1)(vii)] Where revenue not yet considered as income Deduction as bad debt [s. 36(1)(vii) 2 nd Proviso] Adjustment to contract revenue under AS 7 Contract cost Costs directly relatable to the specific contract Costs that can be allocated to the contract Allocated borrowing costs Reduced by incidental income not being interest, dividend or capital gains [Bokaro Steel 263 ITR 315 (SC) nullified] Costs related to future activity to be excluded and disclosed as WIP 01/10/

12 ICDS III - Construction Contracts Recognition of expected losses not provided in ICDS To be recognised immediately [Para 35 of AS 7 and Para 32 of IndAS] Percentage completion method - options Proportionate costs incurred Survey of work performed Completion of physical proportion of contract work Recognition of revenue on contract-wise Early stages of contract where reliable contract revenue cannot be recognised Cannot extend beyond 25% [ICDS, Para 20] POCM to be applied on cumulative basis yearly; change in estimates Applies to contracts commenced on or after /10/

13 ICDS III - Construction Contracts Contract revenue 1500 Year 1 Year 2 Year 3 (completed) Contract Cost incurred to date Less: Material /WIP to be used in future year(s) 100 Add: Material /WIP of past year(s) brought forward Cost incurred in relation to work performed Estimated Cost to completion Estimated total cost of contract Percentage of work completed till date 30% 59% 100% Contract revenue to be recognised (cumm) Profit/loss (cumm) Profit/loss (for the year) Expected loss (to be recognised in books) Total Profit/ (-) loss in the books Revenue for the year as per ICDS Income for the year as per ICDS Adjustment required Outcome of contract cannot be estimated reliably 2 Beyond early stage of contract (25%), contract revenue cannot be adjusted (para 20, ICDS III) 3 ICDS III does not provide for recognition of expected losses ; to be considered following POCM. 01/10/

14 ICDS III - Construction Contracts Disclosures amount of contract revenue recognised as revenue in the period; methods used to determine the stage of completion of contracts in progress. for contracts in progress at the reporting date amount of costs incurred and recognised profits (less recognised losses) upto the reporting date; the amount of advances received; and amount of retentions. Where adjustments required Retention Early stage of completion Forseeable losses Incidental income other than interest, dividend or capital gains Advancing recognition of income & MAT applicability 01/10/

15 ICDS III & Real Estate Developers Draft ICDS released in May 2017; not yet notified ICAI GN on Real Estate transactions & AS 7 Contract developer to follow POCM where the economic circumstances of the transactions is similar to a construction contracts with significant risks and rewards of ownership of the units transferred to the buyer ICDS IV -not applicable in case of builder developer Sale of immovable property not sale of goods; Developing property on own account not rendering of services 01/10/

16 ICDS IV Revenue recognition Sale of goods - conditions Under ICDS - When property in goods transferred or all significant risks and rewards transferred and seller retains no control of goods associated with ownership Ind AS 18 -requires seller not retaining managerial involvement associated with ownership nor effective control Revenue from sale of goods Sale on approval basis- formal acceptance/time period for rejection elapsed Sale on guaranteed return basis not to defer recognition, make a provision based on past experience Consignment sales when goods are eventually sold to third party COD sales - when cash received Instalment sales - Separate interest component (difference between stated consideration and fair value arrived at by discounting) [paras 9-11 Ind AS 18] Export incentives Recognise income when there is corresponding liability of the other party to pay [Excel Industries Ltd 358 ITR 295 (SC)] ICDS - recognise when there is reasonable certainty of ultimate collection[para 5] 01/10/

17 ICDS IV Revenue recognition Composite transactions (eg warranty, after-sales services) Revenue required to be split up for each identifiable component [Ind AS 18, Para 13] No guidance in ICDS IV; Provn. for expenses on scientific basis [ICDS X,para 5] Rotork Controls [314 ITR 62 (SC)] Revenue from services POCM method under ICDS as well as Ind AS 18 AS 9 permits completed service contract method as well Early stage of contract ICDS specifies 25%, Ind AS 18 does not stipulate any percentage ICDS permits services contracts of duration upto 90 days on completion 01/10/

18 ICDS IV Revenue recognition Interest To be recognised on time basis Reasonable certainty condition absent; write off as bad debt u/s 36(1)(vii) [FAQ 13] Income not accrued where reasonable certainty of recovery lacking [Credit Suisse (2013) 351 ITR 323 (Bom)] Income not accruing, but adjustment to be reported interest received on compensation/enhanced compensation [s. 145A(b)] On receipt basis, ICDS IV not applicable interest on any refund of any tax,duty or cess On receipt basis Adjustment if same recognised in books on accrual Dividend as per Act Royalty as per agreement Taxation on gross basis ICDS for arriving at the amount of tax [FAQ 14] No books of account method of accounting u/s 145 inapplicable 01/10/

19 Revenue Recognitiondeferred payment basis Sale Price of goods Rs (in cash) & Rs. 2000/- five annual instalments Year Principal o/s Principal As per Ind AS 18 Interest Sale of goods Total revenue As per ICDS Revenue Annual instalment Adjustment /10/

20 ICDS IV Revenue recognition Disclosures Revenue recognition not recognised as revenue due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty; amount of revenue from service transactions recognised as revenue during the previous year; method used to determine the stage of completion of service transactions in progress; and for service transactions in progress at the end of previous year: amount of costs incurred and recognised profits (less recognised losses) upto end of previous year; amount of advances received; and amount of retentions 01/10/

21 ICDS V Tangible Fixed Assets Costs of major inspections Capitalised as per Ind AS 16 [Para 14] Provision for dismantling costs Capitalised as per Ind AS 16 to be reduced from Actual cost u/s 43(1) Assets acquired on deferred payment Ind AS 16 requires excess amount to be recognised as interest cost over the period of deferred credit To be added to actual cost in books 01/10/

22 ICDS V Tangible Fixed Assets Disclosures Description of asset or block of assets rate of depreciation actual cost or written down value 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 Central Value Added Tax credit claimed and allowed change in rate of exchange of currency; subsidy or grant or reimbursement depreciation Allowable written down value at the end of year 01/10/

23 ICDS VI Forex Rates Initial recognition At transaction rate Reporting at year-end Monetary items at closing rate Non-monetary items at transaction rate Inventory if determined at NRV, at closing rate Foreign currency liabilities in respect of assets imported S. 43A prevails Long-term FC monetary items not in respect of depreciable asset To be taken to FC Translation Difference A/c and amortised No such provision in ICDS, to be recognised as income/expense every year 01/10/

24 ICDS VI Forex rates which provides for the treatment of inventory carried at net realisable value to be converted at the closing rate [ICDS VI, Para 3(d)] Exchange differences resulting on conversion of non-monetary items at closing rate are not to be recognised as an expense or income of the year [ICDS VI, Para 5(ii)] As per Technical Guide Description Amount in foreign currency Exchange rate for 1 $ INR Raw material purchased in April XX $ 100 INR Net realisable value at March XX $ 80 INR Net effect on income in Books Exchange Gain - adjustment required in tax computation $80 * (65-62) /10/

25 ICDS VI Forex rates Foreign operations To be dealt with as transactions of assessee itself [ICDS VI,Para 7] AS 11 and Ind AS requires all assets and liabilities to be converted at closing rate and taken to Translation Reserve Rule 115 requires profits from business/profession to be converted at closing rate Transitional provisions Balance in FCTL as on to be recognised in AY to the extent not recognised in the income computation in the past [FAQ 16] Forward exchange Contracts Contracts for hedging Premium/discount to be amortised over the life of the contract; no difference in treatment between ICDS and AS 11 For trading or speculation AS 11 requires MTM losses/gains to be recognised while ICDS requires premium/discount to be recognised on settlement No specific disclosures required 01/10/

26 Foreign operations - Transitional provisions Foreign branch AS 11 ICDS Monetary /nonmonetary items USD As at (1$=INR 62) As at (1$=INR 68) Forex diff in FY trf to FCTR As at Gain/-loss Cash & bank Debtors Stock Fixed assets # -240 Creditors * -210 ** # converted at transaction rate (assumed to be 1 $ = 58) being the rate on the date the asset was acquired. *Net gain transferred to Foreign Currency Translation Reserve (FCTR) **Net loss available as deduction from income 01/10/

27 to the extent not recognised in the income computation in the past [FAQ 16] Foreign branch AS 11 AS 11 AS 11 ICDS Monetary Converted As at Forex diff in Transaction /nonmonetary (1$=INR 62) transaction loss As at at As at Gain/- USD FY trf to rate ($ to (1$=INR 68) FCTR INR) items Cash & bank Debtors Stock Fixed assets NA # NA # NA # Creditors * 230 The forex differences arising out of year-end conversions in earlier years were taken to FCTR and not recognised in computation of taxable income # Exchange difference on non-monetary items for non-integral operations is not to be recognised under the transitional provisions *Net gain transferred to Foreign Currency Translation Reserve **Net gain to be included in taxable income 01/10/

28 ICDS VII Government grants Govt grants not to be postponed beyond receipt [ICDS VII, Para 4(2)] If not recognised due to lack of assurance that conditions will be complied AS 12 Grants where no conditions attached credited to capital reserve as per AS 12 Sec 2(24(xviii) Non-monetary assets received as grants On the basis of acquisition cost [ICDS VII, Para 10]; to be measured at fair value [Ind AS 20] 01/10/

29 ICDS VII Government grants Disclosures Nature and extent of 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 Nature and extent of grants recognised as income; Nature and extent of 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 Nature and extent of grants not recognised during the previous year as income and reasons thereof. 01/10/

30 ICDS VIII - Securities Securities converted into stock in trade Cost or market value on the date of conversion [AS 13, para 14] FV [s. 45(2)] Subsequent measurement Determined category-wise [ICDS VIII, Para 10, FAQ 19] Shares, debt securities, convertible securities and any other Security-wise [AS 13] Valuation of listed securities at fair value [Ind AS 109] and at cost or NRV [ICDS VIII, para 9] Derivatives MTM losses to be recognised under AS (prudence) Excluded under ICDS VIII MTM loses not to be recognised (ICDS I) No disclosure requirements 01/10/

31 ICDS VIII - Securities As per AS As per ICDS VIII AS Trading status Cost inventory as on MV on Inventory valued on Share a Regular Share b Regular share c Regular share d Regular DVR Irregular CCD Irregular ICDS VIII Trading status Cost inventory as on MV on Inventory valued on Share a Regular Share b Regular share c Regular share d Regular DVR Irregular CCD Irregular /10/

32 ICDS IX - Borrowing costs Borrowing costs defined AS 16 interest and commitment charges on borrowings; amortisation of discounts or premiums relating to borrowings; amortisation of ancillary costs incurred for arranging of borrowings; finance charges in respect of assets acquired under finance leases or under other similar arrangements; and exchange differences arising from foreign currency borrowings to the extent they are an adjustment to interest costs. Not part of borrowing costs under ICDS IX Qualifying asset Under ICDS, irrespective of time to get ready for intended use; consistent with s. 36(1)(iii) Proviso 01/10/

33 ICDS IX - Borrowing costs Commencement of capitalisation on borrowing (ICDS); (income from temporary investment to be included in total income) on utilisation (borrowing cost less income from temporary investments) [AS 16, Para 10 & Ind AS 23, Para 12] Suspension of capitalisation Cessation of capitalisation Ready for intended use [AS 16/Ind AS 23] vs. put to use [ICDS IX] Construction of qualifying asset completed in part Activities necessary to prepare for intended use completed vs. put to use Consistent with s. 36(1)(iii) Proviso, s. 43(1) expln 8 01/10/

34 ICDS IX - Borrowing costs Temporary use of funds and income derived AS 16 capitalisation net of such income ICDS no such provision- gross interest to be capitalised Specific borrowing To be capitalised from date of borrowing; actual utilisation not required Purpose /Intention important as per ICDS Actual utilisation important [India Cements 60 ITR 52 (SC)] General borrowing A * B / C Calculation asset by asset Figures as per books, before any disallowance Capitalisation from the date of utilisation Disclosure similar to AS 16 and Ind AS 23 accounting policy adopted for borrowing costs amount of borrowing costs capitalised during the previous year Aggregate amount sufficient, details to be maintained 01/10/

35 Specific borrowing-example Date of borrowing Date of utilisation Borrowing cost for the year 12 Asset ready for intended use Asset put to use FD interest 1.5 AS 16 ICDS Cost of asset Period borrowing cost to be capitalised 6 months/ 12 months 12 Borrowing cost for the period 6 12 Income from temporary use 1.5 Net borrowing cost to be capitalised /10/

36 ICDS X Provisions, Contingent Liabilities and assets Provision recognition When probable (AS 29) When reasonably certain (ICDS) Provision for warranty on probability Rotark Controls [314 ITR 62 (SC)] Contingent assets recognition If inflow of economic benefits virtually certain (AS 29) If reasonably certain (ICDS X) Employee benefits under AS 15 ICDS X does not apply 01/10/

37 Thank you! 01/10/

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