CHAMBER OF TAX CONSULTANTS STUDY CIRCLE MEETING ICDS 5 & th September, Adv. Dharan V. Gandhi

Transcription

1 CHAMBER OF TAX CONSULTANTS STUDY CIRCLE MEETING ICDS 5 & 9 04 th September, 2017 Adv. Dharan V. Gandhi 9/6/2017 ICDS 1

2 History Finance Act section 145 amended to give power to the Central Government to notify accounting standards Notification No. SO 69(E) dated Government introduced two accounting standards to be followed all the assessee s followi g e a tile s ste of a ou ti g f o AY (now superseded by the ICDS) Two accounting standards notified were: AS I Disclosure of significant accounting policies AS II Disclosure of prior period and extraordinary item and changes in accounting policies. In December 2010 CBDT constituted committee for Tax Accounting Standards In August 2012 Formulation of 14 Tax Accounting Standards 9/6/2017 ICDS 2

3 History (contd.) In July 2014 Nomenclature changed from TAS to ICDS In January 2015 released 12 draft ICDS Notification No. 32/2015 dated , the Central Government notified 10 ICDS and the ICDS were made applicable w.e.f. AY Implementation of ICDS postponed by one year due to practical difficulty Notification No. 86/2016 dated Vide Notification No. 87/2016 dated , new ICDS notified and made applicable w.e.f. AY Circular No. 10/2017 dated issued giving certain clarifications in respect of ICDS. 9/6/2017 ICDS 3

4 Background Parent Section - Section 145 (Method of accounting) 145(1) - 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. 145(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. 9/6/2017 ICDS 4

5 Background Points to be noted: Section 145 only deals with method of accounting to be followed Section 145(2) empowers the Government to notify ICDS. Purpose of ICDS is to assist the assessee in following proper method of accounting It can never deal with the allowabilty or non-allowability of any expenses or It can never deal with taxability or non-taxability of any income. However, in following the method of accounting and ICDS, the aspect of allowability of expenses or taxability of income is indirectly touched upon. Can therefore, by way of notification, Government control the computation of income? 9/6/2017 ICDS 5

6 Important Issues Delegated Legislation ICDS notified by the Central Government is a piece of delegated legislation. Such delegated legislation cannot override the provision of the Act Assam Co. Ltd. & Anr. Vs. State Of Assam & Ors ITR 567(SC) A delegate cannot override the Act either by exceeding the authority or by making provision which is inconsistent with the Act. Any rule made in exercise of such delegated power has to be in consonance with the provisions of the Act, and if the rule goes beyond what the Act contemplates, the rule becomes in excess of the power delegated under the Act, and if it does any of the above, the rule becomes ultra vires of the Act Notification that goes beyond the statute curtailing the scope of deduction (CIT vs. Sirpur Paper Mills Etc. 237 ITR 41(SC)] or imposing a tax without the authority of law cannot be held to be valid [District Council Of Jowai Autonomous Distt & Ors. Vs. Dwet Singh Rymbai & Ors 169 ITR 468(SC)] Can such delegated legislation override the judgment given by the Supreme Court or the Jurisdictional High Court?? See Q. 2 of Circular 10 9/6/2017 ICDS 6

7 Introduction to ICDS List of ICDS notified ICDS No. Name Equivalent AS Equivalent IND AS ICDS I Accounting Policies AS-1 IND AS-1 and 8 ICDS II Valuation of Inventories AS-2 IND AS-2 ICDS III Construction contracts AS-7 IND AS-115 ICDS IV Revenue Recognition AS-9 IND AS-115 ICDS V Tangible Fixed Assets AS-10 IND AS-16 ICDS VI Effects of Changes in Foreign Exchange Rates AS-11 IND AS-21 ICDS VII Government Grants AS-12 IND AS-20 ICDS VIII Securities AS-13 IND AS-32 ICDS IX Borrowing Costs AS-16 IND AS-23 ICDS X Provisions, Contingent Liabilities and Contingent Assets AS-29 IND AS-37 9/6/2017 ICDS 7

8 Introduction to ICDS Essential features: Applicable to all assessees Following mercantile system of accounting (Cash system not governed by ICDS) except individual or a Hindu undivided family who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the said Act (Only if Tax audit applicable in a previous year, then ICDS applicable). Fo o puti g i o e u de the head PGBP a d IFOS Effective from AY Not for the purpose of maintenance of books but only for computation of income (Q. 1 of circular No. 10) In case of conflict between the provisions of Act/ Rules and the ICDS, the ACT/ Rules shall prevail. Not applicable for computation of book profit u/s 115JB (Q. 6 of Circular No. 10) 9/6/2017 ICDS 8

9 What if not followed? Section 145(3) if income has not been computed in accordance with the ICDS, then the Assessing Officer may make an assessment in the manner provided in section 144 i.e. Best judgment assessment. Maximum he should do is to compute income after considering the effect of ICDS. 9/6/2017 ICDS 9

10 Computation of income under ICDS regime Particulars Amt Amt Profits and Gains from Business or Profession XXX Add/ Less: Adjustments as per ICDS xxx Add/ Less: Adjustments as per the provisions of the Act xxx Net PGBP XXX Income from Other Sources Add/ Less: Adjustments as per ICDS Add/ Less: Adjustments as per the provisions of the Act Net IFOS XXX xxx xxx XXX Total XXX 9/6/2017 ICDS 10

11 ICDS 9 Borrowing cost 9/6/2017 ICDS 11

12 ICDS 9 Scope This ICDS deals with treatment of borrowing cost This ICDS does ot deal with the a tual o i puted ost of ow e s e uit a d p efe e e sha e capital. Definition Bo owi g osts a e i te est a d othe osts i u ed a pe so i o e tio with the borrowing of funds and include: commitment charges on borrowings; amortised amount of discounts or premiums relating to borrowings; amortised amount of ancillary costs incurred in connection with the arrangement of borrowings; finance charges in respect of assets acquired under finance leases or under other similar arrangements. Note: Bill discounting charges and other similar charges are included (see Q. 21) 9/6/2017 ICDS 12

13 ICDS 9 Definition Qualif i g asset ea s: land, building, machinery, plant or furniture, being tangible assets; know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets; inventories that require a period of twelve months or more to bring them to a saleable condition. Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. 9/6/2017 ICDS 13

14 ICDS 9 Recognition Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. apitalisatio i the o te t of inventory means addition of borrowing cost to the cost of inventor 9/6/2017 ICDS 14

15 ICDS 9 Borrowing Costs Eligible for Capitalisation Specific borrowing - the extent to which funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed. General borrowing in respect of borrowing other than those referred to above the amount of borrowing costs to be capitalised shall be computed in accordance with the following formula namely(qua each asset) : A XB/ C Where A = borrowing costs incurred during the previous year except on specific borrowings B =(i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year; (ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day, half of the cost of qualifying asset; or (iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of the previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be, excluding the extent to which the qualifying assets are directly funded out of specific borrowings; C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than assets to the extent they are directly funded out of specific borrowings; Note: In case of general borrowings - qualifying asset shall be such asset that necessarily require a period of twelve months or more for its acquisition, construction or production 9/6/2017 ICDS 15

16 ICDS 9 Commencement of capitalisation In case of specific borrowings - from the date on which funds were borrowed; In case of general borrowings - from the date on which funds were utilised Cessation of Capitalisation In case of inventories - when substantially all the activities necessary to prepare such inventory for its intended sale are complete. In case of other qualifying assets - when such asset is first put to use Construction of qualifying asset completed in parts which is capable of being used while the remaining construction goes on In case of inventories - when substantially all the activities necessary to prepare such inventory for its intended sale are complete. In case of other qualifying assets - when such asset is first put to use 9/6/2017 ICDS 16

17 ICDS 9 Transitional provisions All the borrowing costs incurred on or after 1st day of April, 2016 shall be capitalised for the previous year commencing on or after 1st day of April, 2016 in accordance with the provisions of this standard after taking into account the amount of borrowing costs capitalised, if any, for the same borrowing for any previous year ending on or before 31st day of March,2016. Disclosure The following disclosure shall be made in respect of borrowing costs, namely: (a) the accounting policy adopted for borrowing costs; and (b) the amount of borrowing costs capitalised during the previous year. 9/6/2017 ICDS 17

18 ICDS 9 Issues Law is quite settled in so far as interest cost is concerned, was there any need for this ICDS? An extension of section 36(1)(iii) but no power to the Govt. to prescribe any method under the said section Whether apportionment method deals with accounting? No period specified for fixed asset fixed asset even if requires less than 12 months to get ready for use, then also capitalisation is required. Inventories that require 12 months or more to put them to saleable condition [All inventories including real estate covered] - No such condition in 36(1)(iii)? Conflicting with the Act? Lokhandwala Construction Inds. Ltd. 260 ITR 579 (Bombay HC) CIT vs. Cellice Developers (P.) Ltd. (231 TM 255)(Cal) DCIT vs. Core Health Care Ltd ITR 194(SC) Bo owed fu ds te po a il pa ked i FD s corresponding interest income should be taxed as income or should it be deducted from the interest cost? CIT Vs. Maharashtra Electromelt Ltd ITR 489(Bom) (2012) 210 TAXMAN 358 (Delhi) NTPC SAIL POWER COMPANY PVT. LTD vs. CIT 9/6/2017 ICDS 18

19 ICDS 9 Specific borrowings - funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset - If the purpose for which the funds are borrowed is not acquisition or construction or production of a qualifying asset, however, the funds are specifically used for the said purposes, then whether the said specific funds would fall in specific borrowing criteria? When funds are borrowed for specified purposes, however, same are not utilised for the same purposes, whether the said funds would fall within the realm of specific borrowing criteria? General borrowings Formula given for computation of interest No other formula in case of general borrowings can be used? Compare with S.14A and R. 8D, where only if not satisfied one can travel to Rule 8D. GODREJ & BOYCE MFG. CO. LTD. vs. DCIT ITR 0081 (Bom) Arguments of own funds valid? CIT vs. Reliance Utilities & Power Ltd ITR 340(Bom) CIT vs. Gujarat Reclaim & Rubber Products Ltd. (ITA No of 2013)(Bom) General borrowings para applies to all the borrowings other than the specific borrowings. Therefore, even a borrowing which is specifically for a purpose not being the specified purpose and has been utilised for the said purpose, still the interest amount would be liable to the included in the formula given? Practical difficulty for big companies with multiple borrowings and different blocks? 9/6/2017 ICDS 19

20 ICDS 9 Cessation of capitalisation Other assets - Put to use vs. ready to put to use? Whittle Anderson Ltd. vs CIT 79 ITR 613(Bom) NTPC vs. CIT 357 ITR 253(Del) Q. 20 of the Circular No There arc specific provisions in the Act read with Rules under which a portion of borrowing cost may get disallowed under sections like 14A, 43B, 40(a)(1), 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? Reply - 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 See (2013) 0358 ITR 0043 (P&H) CIT vs. MARK AUTO INDUSTRIES LTD. And (2013) 23 ITR 447 / 59 SOT 4(URO) (Mum.)(Trib.) Sonic Biochem Extractions P. Ltd. v. ITO 9/6/2017 ICDS 20

21 ICDS 9 Illustrations M/s A Ltd. took a loan for the purpose of erection of a factory building of Rs. 5 12%. As soon as the loan was disbursed, a part of the loan amount was utilised for make payment of administrative expenses of Rs. 1 crore. Balance of Rs. 4 crore was utilised for the purpose of erection of the factory building. Further, it also made payment of Rs. 1.5 crores from its OD account for the construction work (Rate of interest being 13%). The OD was only utilised for the said purpose in the year under consideration. 9/6/2017 ICDS 21

22 ICDS 5- Tangible Fixed Assets 9/6/2017 ICDS 22

23 ICDS 5 Definition Ta gi le Fixed Assets is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Fai Value of an asset is the amount for which that asset could be exchanged between k owledgea le, willi g pa ties i a a s le gth transaction Other terms not defined in the ICDS but defined in the Act will take its meaning as assigned in the Act. Eg: Plant defined in section 43(3) 9/6/2017 ICDS 23

24 ICDS 5 Identification of Ta gi le Fi ed Assets It must be an asset being land, building, machinery, plant or furniture It must be held with the intention of being used for the purpose of producing or providing goods or services and It must not be held for sale in the normal course of business. Other items: Sta d-by equipment and servicing equipment are to be capitalised Machinery spares shall be charged to the revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised. 9/6/2017 ICDS 24

25 ICDS 5 Components of actual cost Initial Components of actual cost: purchase price, import duties and other taxes, excluding those subsequently recoverable, and any directly attributable expenditure on making the asset ready for its intended use. any trade discounts and rebates shall be deducted in arriving at the actual cost. Also see section 43(1) Subsequent changes price adjustment, changes in duties or similar factors; or exchange fluctuation as specified in ICDS VI (See section 43A) 9/6/2017 ICDS 25

26 ICDS 5 Components of actual cost General expenses: Administration and other general overhead expenses are to be excluded if they do not relate to a specific tangible fixed asset. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset. (Also see Q 15 of the Circular) Test run and start-up expenditure The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, that is, production intended for sale or captive consumption, shall be treated as revenue expenditure. 9/6/2017 ICDS 26

27 ICDS 5 Components of actual cost Self constructed fixed assets : Cost of construction that relate directly to the specific tangible fixed asset Costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs. Non- monetary Consideration: When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost. When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost 9/6/2017 ICDS 27

28 ICDS 5 Improvements and Repairs: An expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. The cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is to be added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used after the existing tangible fixed asset is disposed of, shall be treated as separate asset. 9/6/2017 ICDS 28

29 ICDS 5 Valuation in Special Cases: Where a person owns tangible fixed assets jointly with others, the proportion in the actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets. Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis. 9/6/2017 ICDS 29

30 ICDS 5 Transitional Provisions: The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st day of March, 2016 but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st day of April, 2015 shall be taken into account for recognising actual cost of the said assets for the previous year commencing on the 1st day of April, 2016 and subsequent previous years. 9/6/2017 ICDS 30

31 ICDS 5 Depreciation shall be in accordance with the provisions of the Act. Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act. 9/6/2017 ICDS 31

32 ICDS 5 Disclosure: Following disclosure shall be made in respect of tangible fixed assets, namely: description of asset or block of assets; rate of depreciation; actual cost or written down value, as the case may be; 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 (i) CENVAT credit claimed and allowed under the CENVAT Credit Rules, 2004; (ii) change in rate of exchange of currency; (iii) subsidy or grant or reimbursement, by whatever name called; depreciation allowable; and written down value at the end of year. 9/6/2017 ICDS 32

33 ICDS 5 Issues in ICDS 5 Expenditure (other than interest) on start- up or commissioning of the project/ on trial run and experimental production treatment? Capitalised or revenue? CIT Vs. Dhampur Sugar Mills Ltd ITR 82(All) (Favourable) CIT Vs. Saurashtra Cement & Chemical Industries Ltd ITR 47(Guj) (Against) CIT vs. G.T. Industries ITR 538(Bom) (Against) Trial run conducted depreciation allowable? ACIT vs. Ashima Syntex Ltd. 251 ITR 103 (Guj) CIT vs. Vindhyachal Distilleries (P) Ltd ITR 0583 (MP) Commencement of business vs. Set up of business? Depreciation and other expenses allowable? Business set up held expenses and depreciation allowable no need for commencement CIT vs. Shri Rama Multi Tech Ltd. 393 ITR 371(SC) Western India Vegetable Products Ltd. vs CIT 26 ITR 151(Bom) CIT vs. ESPN Software ITR 368(Del) 9/6/2017 ICDS 33

34 ICDS 5 Issues in ICDS 5 Ready to use or put to use? (See Q 15) NATIONAL THERMAL POWER CORPN LTD. vs. CIT ITR 253(Del) CAPITAL BUS SERVICE (P) LTD vs. CIT ITR 0404 (Del) Trial run income to be reduced? Incidental income? CIT vs. Bokaro Steel Ltd 236 ITR 315(SC) favourable CIT vs. KARNAL CO-OPERATIVE SUGAR MILLS LTD ITR 2(SC) - favourable 247 ITR 268(SC) CIT vs. KARNATAKA POWER CORPORATION 247 ITR 268(SC) - favourable Test of enduring benefits done away with? Empire Jute Co. Ltd. Vs. CIT -124 ITR 1(SC) - still alive 9/6/2017 ICDS 34

35 ICDS 5 Can the cost of a tangible fixed asset undergo change subsequent to its acquisition or construction? Banco Products (India ) Ltd. vs. DCIT 379 ITR 1(Guj) 341 ITR 467(Del) CIT vs. OSWAL AGRO MILLS LTD (asset lose their identity) Materiality dead or alive? Significant accounting policies. Government had vide earlier notification bearing number no [F. NO. 132/7/95-TPL], dated ] had notified 2 accounting standard u/s 145(2) wherein they had accepted the concept of materiality Transitional provision whether treatment accorded to any cost in earlier year to be disturbed? 9/6/2017 ICDS 35

36 Disclosure in ROI for AY Disclosure Relevant change in ITR Part A-OI Effect on the profit because of deviation as per ICDS Separate sheet on ICDS Effect of ICDS on profit (one item for each ICDS) However, no effect of such figure in Schedule of BP and OS? How to make the adjustment to the total i o e? I othe adjust e t ow Consolidated figure is required One should prepare a statement of ICDS disclosure in accordance with the disclosure requirements of each ICDS, which cannot be submitted with the ROI, but should be kept ready or should be made an annexure to the Form 3CD. See Q. 25 of the Circular No /6/2017 ICDS 36

37 Disclosure in ROI for AY /6/2017 ICDS 37

38 Disclosure in ROI for AY /6/2017 ICDS 38

39 Disclosure in 3CD for AY Disclosure Notification No. 88/2016 Income-tax (23 rd Amendment) Rules, 2016 W.e.f In Form 3CD, in part B, in clause 13, for sub-clause (d), the following clause shall be substituted. 9/6/2017 ICDS 39

40 Disclosure in 3CD for AY /6/2017 ICDS 40

41 Disclosure in 3CD for AY /6/2017 ICDS 41

42 Concluding remarks Practical difficulty apply AS/IND AS/ ICDS - How many more to come? Accounting standard issuance should be left to the expert body i.e. ICAI Validity itself is doubtful excessive delegation Litigation will increase instead of reduction Should it be implemented w.e.f when the whole country is busy finding solutions for demonetisation and GST? 9/6/2017 ICDS 42

43 QUESTIONS, IF ANY? THANK YOU Dharan V. Gandhi, (B.Com, CA, LL.B.) Advocate, Bombay High Court, Tel: /6/2017 ICDS 43