Income Computation and Disclosure Standards and Tax Audit

Transcription

1 Income Computation and Disclosure Standards and Tax Audit CA N.C. Hegde J B Nagar CPE Study Circle 15 th October 2017

2 An Overview

3 Background: History:- Enabling Provisions:- section 145(1): Profits & 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 section 145(2): The Central Government may notify ICDS for any class of assessees or for any class of income January 1996: CBDT notified AS I & II July 2014: section 145 was amended to substitute ICDS for AS March 2015: 10 ICDS were notified September 2016: Revised ICDS were issued & Form 3CD was amended to capture compliance March 2017: CBDT issued Circular No.10/2017 dated 23 March 2017 providing clarifications on specific issues (FAQ) 3

4 Revised ICDS applicable from AY : ICDS Corresponding AS Corresponding Ind-AS I - Accounting Policies AS-1 Ind AS-8 II - Valuation of Inventories AS 2 Ind AS-2 III - Construction Contracts AS 7 Ind AS-115 IV - Revenue Recognition AS 9 Ind AS-115 V - Tangible Fixed Assets AS-10 Ind AS-16 VI - Effects of Changes in Foreign Exchange Rates AS 11 Ind AS-21 VII - Government Grants AS 12 Ind AS-20 VIII Securities AS 13/AS 30 Ind AS-109 IX - Borrowing Costs AS 16 Ind AS-23 X - Provisions, Contingent Liabilities & Contingent Assets AS 29 Ind AS-37 Draft ICDS on Real Estate Transactions (CBDT press release dt. 11 May 2017) 4

5 Applicability: Applies to all assessees following the mercantile system of accounting, except for individuals, HUF who are not covered under the tax audit provisions Circular No. 10/2017 dated 23 March 2017 clarifies that ICDS will apply to:- Assessees under presumptive tax schemes FAQ 3 Companies adopting Ind-AS FAQ 5 AMT computation, but will not apply to MAT computation FAQ 6 Assessees in Finance, Insurance & Power sectors FAQ 7 Real estate developers, Build-Operate-Transfer projects, Leases FAQ 12 5

6 General principles: ICDS apply only to computation of: Profits and gains of business or profession Income from other sources ICDS do not apply to maintenance of books of account FAQ 1 In case of conflict, the provisions of the Act shall prevail - Preamble Specific provisions of the Rules shall prevail over ICDS FAQ 14 W.e.f. AY , ICDS shall prevail over judicial precedents FAQ 2 Disclosures required under ICDS are to be made in the ITR Form and Form 3CD FAQ 25 Default in compliance with ICDS may lead to best judgment assessment section 145(3) 6

7 Disclosures - Form 3CD (1/2): Clause 13(d) under Part-B: (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: ICDS I ICDS II ICDS III ICDS IV ICDS V ICDS VI ICDS VII ICDS VIII ICDS IX ICDS X Accounting Policies Valuation of Inventories Construction Contracts Revenue Recognition Tangible Fixed Assets Changes in Foreign Exchange rates Government Grants Securities Borrowing Costs Provisions, Contingent Liabilities and Contingent Assets Total Increase in profit (Rs.) Decrease in profit (Rs.) Net effect (Rs.) 7

8 Disclosures - Form 3CD (2/2): Clause 13(d) under Part-B (Contd..): (f) Disclosure as per ICDS: (i) ICDS I - (ii)icds II - (iii)icds III - (iv)icds IV - (v)icds V - (vi)icds VII - (vii)icds IX - (viii)icds X - Accounting Policies Valuation of Inventories Construction Contracts Revenue Recognition Tangible Fixed Assets Government Grants Borrowing Costs Provisions, Contingent Liabilities and Contingent Assets 8

9 Disclosures - Forms ITR 3, ITR 5, ITR 6 (1/2): Schedule ICDS: 9

10 Disclosures - Forms ITR 3, ITR 5, ITR 6 (2/2): Part A - OI: 10

11 Some Issues & Observations: ICDS are contrary to the law settled by judicial precedents eg: recognition of retention money Though the ICDS do not apply to maintenance of books, the differences in treatment in books & as prescribed under ICDS, may necessitate maintenance of records & workings to prove adjustments eg: difference in the provision amount as per books and as claimed for tax purpose due to different recognition criteria under Ind-AS 37 and ICDS X Potential double taxation due to accelerated income recognition under ICDS i.e. normal tax in the year of income recognition as per ICDS and MAT in the year of accounting in books. 11

12 ICDS I Accounting Policies

13 Highlights: The ICDS is based on the fundamental accounting assumptions of Going Concern, Consistency & Accrual Accounting policies shall represent a true and fair view of the state of affairs and income of the business, profession: Treatment & presentation of transactions to be governed by substance & not merely the legal form MTM loss or an expected loss shall not be recognized unless permitted by any other ICDS (eg: inventory valuation loss, forex loss on monetary item) MTM gain or expected profit shall not be recognized unless permitted by any other ICDS FAQ 8 of Circular No. 10/2017 An accounting policy shall not be changed without reasonable cause 13

14 Disclosures: All significant accounting policies adopted by the tax payer Any change in an accounting policy which has a material effect along with the amount by which any item is affected. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated Any change in accounting policy which has no material effect for the current year but is reasonably expected to have a material effect in later years, the fact of such change shall be appropriately disclosed in the year of change and also in the year in which the change has material effect for the first time If any fundamental accounting assumption is not followed, the fact shall be disclosed 14

15 Reasonable cause for change in accounting policy: : 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 - FAQ 9 of Circular No. 10/2017 Reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances without negligence, inaction or want of bonafide Azadi Bachao Andolan[2001]](252 ITR 471)(Del) Assessee can change accounting policy if the same is bona fide and is followed in subsequent years as well - Atul Products Ltd. [2002](255 ITR 85)(Guj), Mopeds (India)[1988](173 ITR 347) Earlier, under AS, a change in accounting policy was permitted only if required by statute; or for compliance with AS; or if considered as resulting in more appropriate presentation 15

16 ICDS II Valuation of Inventories

17 Highlights: Inventories shall be valued at cost or net realizable value, whichever is lower Identified valuation methods First-in First-out, Weighted average cost, Retail method, Standard costing Specific identification of cost is required for goods that are not ordinarily interchangeable and produced & segregated for specific projects Valuation method once adopted not to be changed without a reasonable cause Inventory shall be valued at NRV on the date of dissolution of partnership firm / AOP/ BOI, whether business is discontinued or not Value of opening inventory to be the same as the closing inventory in the preceding year regardless of change in valuation method of closing inventory Disclosures: The accounting policies adopted in measuring inventories including the cost formulae; a confirmation that standard cost approximates the actual cost The total carrying amount of inventories and its classification appropriate to a person 17

18 Valuation on dissolution of firm, AOP, BOI: On dissolution of firm, AOP or BOI, inventory to be valued at NRV regardless of whether business is discontinued: Negates the ruling in Sakthi Trading Co [2001](250 ITR 871)(SC) wherein SC upheld lower of cost or NRV considering that business was continued post dissolution In A.L.A Firm[1991](189 ITR 285)(SC), SC upheld valuation at NRV since business was discontinued on dissolution 18

19 ICDS III Construction Contracts

20 Highlights: Recognition of revenue (including retentions) & costs (direct costs, allocated costs, borrowing costs & other costs specifically chargeable to customer) shall be based on the percentage of completion method (POCM) Contract revenue shall be recognized when there is reasonable certainty of its ultimate collection Contract costs to be reduced by incidental income if not in the nature of interest, dividends or capital gains During the early stage (not extending beyond 25% of the completion stage), contract revenue must be recognized only to the extent of costs incurred Disclosures: The amount of contract revenue recognized as revenue in the period The methods used to determine the completion stage of contracts in progress For contracts in progress at the reporting date, following to be disclosed:- amount of costs incurred and recognized profits (less recognized losses) the amount of advances received the amount of retentions 20

21 Recognition of retention money: Various Courts have held as under: The assessee does not have the right to receive the entire amount including the retention amount, on the date of submission of bills Simplex Concrete Piles India (P) Ltd [1989](179 ITR 8)(Cal), East Coast Constructions & Ind Ltd [2007](283 ITR 297)(Mad) The retention amount will accrue upon completion of work Ballast Nedam International [2013](215 Taxman 254), Ignifluid Boilers (India)Ltd [2006](283 ITR 295)(Mad), Associated Cables Ltd [2006](286 ITR 596)(Bom) The right to receive retention amount does not accrue till the performance warranty period is over Amarshiv Construction (P) Ltd [2014](367 ITR 659)(Guj) It can hence be argued that the retention amount does not accrue until the work is completed or the terms and conditions under the contract are satisfied The ICDS however accelerates recognition of retention money as contract revenue subject to reasonable certainty of its ultimate collection Can the ICDS override the accrual principle under section 5 r.w.s 9, given that in case of conflict, the provisions of the Act shall prevail? 21

22 ICDS IV Revenue recognition

23 Highlights - Recognition of revenue: Sale of goods Upon transfer of significant risks & rewards of ownership to buyer Recognition only if there is reasonable certainty of ultimate collection Claims for price escalation & export incentives can be postponed to the extent of uncertainty of collection Rendering of services Service contracts with duration < 90 days: When the rendering of services is completed or substantially completed Services involving an indeterminate number of acts over a specific period: On a straight line basis over such period Other service transactions: By the POCM - requirements of ICDS III shall mutatis mutandis apply Interest, Royalties, Dividends Interest: On time basis Interest on refund of any tax, duty or cess: On receipt basis Discount or premium on debt securities held: Over the period to maturity Royalty: As per terms of the relevant agreement, unless based on substance, some other systematic and rational basis is more appropriate Dividends: In accordance with the Act 23

24 Disclosures: For sale of goods: Amount of unrecognized revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty For service transactions: Amount recognized as revenue during the previous year The method used to determine the stage of completion of service transactions in progress For service transactions in progress at the end of previous year: (i) amount of costs incurred and recognized profits (less recognized losses) upto end of previous year; (ii)the amount of advances received; and (iii). the amount of retentions 24

25 Specific clarifications - Circular No. 10/2017 dt. 23 March 2017: Issue FAQ 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? FAQ 14 - Whether ICDS is applicable to revenues which are liable to tax on gross basis like interest, royalty and FTS for non-residents u/s 115A of the Act? Clarification 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 section 36(1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS The provisions of ICDS shall also apply for computation of these incomes on gross basis for arriving at the amount chargeable to tax 25

26 ICDS V Tangible Fixed Assets

27 Highlights: Tangible fixed asset shall be recorded at actual cost including purchase price, taxes (excluding those that are recoverable) and other expenditure for bringing the asset to workable condition Administration & general overheads to be excluded if not relating to asset Expenditure on start-up and commissioning of a project shall be capitalized; expenditure post commencement of commercial production shall be expensed Expenditure incurred after trial run but before commencement of commercial production shall be capitalized - FAQ 15 of Circular No. 10/2017 Fair value to be recorded if asset is acquired for non-monetary consideration. Consolidated price for acquiring group of assets to be apportioned on fair basis Depreciation and income on transfer of asset will be as per the Act 27

28 Disclosures: 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 asset, date put to use; including adjustments on account of Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004 Change in rate of exchange of currency Subsidy or grant or reimbursement, by whatever name called Depreciation allowable Written down value at the end of year 28

29 ICDS VI Effects of Changes in Foreign Exchange Rates

30 Highlights (1/2): Foreign currency transactions shall be recorded initially at exchange rate as on the date of transaction or at a weekly / monthly average rate (if such rate does not fluctuate significantly from the actual rate) Rates to be applied for year-end conversion:- Monetary items closing rate unless it does not reflect the amount likely to be realized or required for disbursal Non-monetary items - exchange rate at the date of the transaction Inventory carried at NRV exchange rate when NRV was determined Exchange difference on monetary items (and not non-monetary items) at each year-end shall be recognized as income / expense The above is made subject to section 43A and rule 115 of the Act Financial statements of a foreign operation shall be translated as above 30

31 Highlights (2/2): Premium / discount on certain forward exchange contracts shall be amortized over the life of the contract and exchange differences / differences on renewal or cancellation will be recognized as income / expense Premium / discount / exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction should be recognized at the time of settlement ICDS-I would apply to derivative instruments not within the scope of ICDS VI - FAQ 10 of Circular No. 10/2017 eg: cross currency swaps, futures, interest rate swaps, etc. 31

32 ICDS VII Government Grants

33 Highlights: Government grants shall be recognized when there is reasonable assurance that related conditions will be complied with & ultimate collection will be made - recognition cannot be postponed beyond the date of actual receipt Grants relating to depreciable asset must be reduced from actual cost or written down value. Grants received for a group of assets will be apportioned Grants for compensation of expense / loss or for giving immediate financial support with no further related costs will be recognized as income in the year in which it is receivable Grants relating to non-depreciable assets and other grants will be recognized as income over the period over which related cost is charged to income Grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost Refund of grants shall be applied first against any unamortized deferred credit, charged to P&L or added to the cost/wdv of the depreciable asset 33

34 Disclosures: Nature & extent of Grants recognized during the year by way of deduction from the actual cost of assets or from the WDV of block of assets Nature & extent of Grants recognized during the year as income Nature & extent of Grants not recognized during the year by way of deduction from the actual cost of assets or from the WDV of block of assets & the reasons thereof Nature & extent of Grants not recognized during the year as income & the reasons thereof 34

35 Grants no longer a capital receipt? Subsidy/ Grants held as non-taxable:- Subsidy granted for setting up new unit/expansion of existing business is a capital receipt Ponni Sugars & Chemicals Ltd.[2008](306 ITR 392)(SC) Subsidy to setup a new unit in a backward area- Reliance Industries Ltd.[2011](339 ITR 632)(Bom) Incentive of additional quota for free sale of sugar for setting up a new sugar factory/expansion Kisan Sahkari Chini Mills Ltd.[2010](2 taxmann.com 274)(All) Grant for R&D in the field of telecommunications, which would benefit the Nation & public at large - India Telephone Industries Ltd [2013](215 Taxman 82)(Kar) Amendment to section 2(24) by the Finance Act, 2015 read with the Finance Act, 2016: (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee [other than, (a)the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or (b)the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be];] Carbon credit, Prepayment of sales tax deferral loan Not covered by the ICDS/ above amendment? 35

36 ICDS VIII Securities

37 Scope: Deals with: Part A Securities held as stock-in-trade Part B - Securities held by scheduled banks or public financial institutions Part A: securities" mean securities as per section 2(h) of the Securities Contracts (Regulation) Act, 1956 (excluding derivatives referred to in sub-clause (ia) of that definition) and include share of a company in which public are not substantially interested Part B: securities" mean securities as per section 2(h) of the Securities Contracts (Regulation) Act, 1956 and include share of a company in which public are not substantially interested As per Section 2(h) of the Securities Contracts (Regulation) Act, 1956, securities include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id)units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia)such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities; Similar definition under both Parts, except that only derivatives held by scheduled banks & public financial institutions are covered 37

38 Highlights: Part A securities: An acquired security shall be recognized at actual cost Actual cost means: Purchase price + Acquisition charges (brokerage, fees, tax, duty, cess) Fair value of the acquired security, where the security is acquired in exchange for other securities or another asset Pre-acquisition period interest included in the purchase price, shall be reduced from the actual cost on subsequent receipt Closing year-end value = Lower of actual cost initially recognized or NRV Comparison shall be done category wise and not for each individual security. Securities shall be classified into Shares, Debt securities, Convertible securities, Any other securities In the case of unlisted securities or thinly-traded securities, the initially recognized actual cost shall be the Closing value if actual cost cannot be ascertained by specific identification, the same shall be determined as per FIFO method or weighted average cost formula Part B securities: The extant RBI guidelines in this regard shall apply and any claim for deduction in excess of the said guidelines shall not be taken into account 38

39 Specific clarifications - Circular No. 10/2017 dt. 23 March 2017: Issue FAQ 18 - A taxpayer sells a security on 30 April The interest payment dates are December and June. The actual date of receipt of interest is 30 June 2017 but the interest on accrual basis has been accounted as income on 31 March Whether the taxpayer shall be permitted to claim deduction of such interest i.e. offered to tax but not received while computing the capital gain? Clarification Yes, the amount already taxed as interest income on accrual basis shall be taken into account for computation of income arising from such sale The clarification provides relief in a scenario where the security is sold after interest recognition on time basis as per ICDS IV, but before interest receipt 39

40 Specific clarifications - Circular No. 10/2017 dt. 23 March 2017: Issue FAQ 19 - Para 9 of ICDS-VIII requires securities held as stock-in-trade to be valued at actual cost initially recognized or net realizable value (NRV) at the end of that previous year, whichever is lower. Para 10 of Part-A of ICDS-VIII requires the said exercise to be carried out category wise. How the same shall be computed? Clarification 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. Refer Illustration (on subsequent slide) 40

41 FAQ 19 Category-wise valuation - Illustration: Security Category Cost NRV Lower of cost or NRV A Share ICDS value B Share C Share D Share Total E Debt Security F Debt Security G Debt Security H Debt Security Total Securities Total

42 When do securities constitute Stock-in-trade? Part-A of the ICDS deals with securities held as stock-in-trade. However, the ICDS does not guide on when securities can be considered as stock-in-trade Litigation around the same continues and reliance would have to be placed on judicial precedents & CBDT Circulars Category-wise valuation of securities: As may be noted from the illustration provided in the FAQ, the ICDS value based on category-wise valuation is INR 1135 as against INR 1090 which is the lower of the cost/ NRV of the individual securities Thus under category-wise valuation, anticipated profits are indirectly recognized and brought to tax, since appreciation in the value of certain securities is off set against the diminution in the value of other securities Potential double taxation i.e. normal tax in a year based on ICDS value and MAT in another year based on book value 42

43 ICDS IX Borrowing Costs

44 Highlights: Borrowing costs (including interest, commitment charges, premium, etc.) that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of the asset Qualifying asset means: 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 Borrowing costs to be considered for capitalization shall exclude costs which are disallowed under specific provisions of the Act - FAQ 20 of Circular No. 10/2017 Bill discounting charges and other similar charges are covered as borrowing cost - FAQ 21 of Circular No. 10/

45 Capitalization of borrowing costs: Amount to be capitalized Commencement of capitalization Cessation of capitalization Specific Borrowing Actual From the date on which funds are borrowed General Borrowing To be computed as per specified formula (the qualifying asset shall be such asset that necessarily requires a period of 12 months or more for its acquisition, construction or production) From the date on which funds are utilized When the asset is first put to use (In case of inventory when substantially all the activities necessary to prepare it for its intended sale are complete) The ICDS aligns with the amended section 36(1)(iii) of the Act 45

46 Formula for capitalization of General Borrowing cost: "6. Subject to Para 8, in respect of borrowing other than those referred to in Para 5, if any, the amount of borrowing costs to be capitalised shall be computed in accordance with the following formula namely : A x B/C A = borrowing costs incurred during the previous year except on borrowings referred to in Para 5 above; 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; Explanation For the purpose of this paragraph, a qualifying asset shall be such asset that necessarily require a period of twelve months or more for its acquisition, construction or production. 46

47 Disclosures: The accounting policy adopted for borrowing costs The amount of borrowing costs capitalised during the year 47

48 ICDS X Provisions, Contingent Liabilities and Contingent Assets

49 Highlights: Deals with provisions, contingent liabilities and contingent assets, except those resulting from financial instruments, executory contracts, arising in insurance business or covered by other ICDS ICDS does not address provisions for depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets Recognition: Provisions To be recognized when there is reasonably certainty that an outflow of resources embodying economic benefits will be required to settle a present obligation arising out of a past event Costs relating to future obligations or future operations are not to be recognized Obligation under a proposed new law arises only when such law is enacted Contingent Liabilities Contingent Assets Shall not be recognized To be recognized as income if inflow of economic benefit or reimbursement is reasonably certain 49

50 Highlights: The amount recognized shall not be discounted to its present value The amount recognized shall be reviewed at each year-end and adjusted to reflect the current best estimate. The amount shall be reversed if it no longer meets the recognition criteria Disclosures: For each class of provision For each class of asset & related income A brief description of the nature of the obligation The carrying amount at the beginning & end of the year Additional provisions made during the year, including increases to existing provisions Amounts used, that is incurred and charged against the provision, during the year Unused amounts reversed during the year The amount of any expected reimbursement, stating the amount of any asset that has been recognized for that expected reimbursement A brief description of the nature of the asset and related income The carrying amount of asset at the beginning and end of the year Additional amount of asset and related income recognized during the year, including increases to assets and related income already recognized Amount of asset and related income reversed during the year 50

51 Loss on onerous executory contracts: Unlike AS 29, all executory contracts including outside the scope of ICDS X onerous contracts, are Based on commercial accounting principle, it may be argued that provision for loss on onerous contracts is deductible Recognition of Contingent Asset: As against the reasonable certainty recognition criteria under ICDS X, AS 29 prescribes recognition based on virtual certainty of inflow of economic benefits Tax authorities may argue that reasonably certain is a lower threshold than virtually certain 51

52 Potential double taxation in some scenarios: : In contrast to the reasonable certainty recognition requirement of ICDS X, AS 29 prescribes recognition of provision based on probability of outflow of resources Consider the following scenario: Year 1 Book Profit Revenue 100 Less: Provision (based on Probability) (40) Net Profit 60 Year 1 Taxable Income as per ICDS Revenue 100 Less: Provision (based on Reasonable Certainty) NIL Net Profit 100 Year 2 Book Profit Revenue 200 Less: Cost incurred & adjusted against provision NIL Net Profit 200 Year 2 Taxable Income as per ICDS Revenue 200 Less: Cost incurred & adjusted against provision (40) Net Profit 160 Year 1 - Tax is payable on the income of Rs.100 as per ICDS Year 2 - MAT is payable on the Book Profit of Rs.200 The Provision of Rs.40 is hence doubly taxed 52

53 Recent Development

54 Writ Petition challenging the constitutional validity of ICDS: Key Grounds: The ICDS are contrary to settled law as laid in various judicial precedents The Central Government (through CBDT), who notified ICDS, in exercise of delegated legislation, cannot have such uncontrolled, unfettered or absolute powers while prescribing ICDS, so as to nullify the effect of various Supreme Court / High Court judgments The Central Government s further sub-delegating its authority to notify the ICDS to CBDT, is erroneous as this is against the principle of delegatapotestas non potestdelegari, meaning no delegated powers can be further delegated There is violation of Articles 14, 19(1)(g), 141, 144 & 265 of the Constitution Compliance with ICDS is an arbitrary, unnecessary & unreasonable additional requirement, which will increase the compliance burden & cost in the hands of the taxpayers and would thus defeat the purpose of the ICDS in terms of simplification of processes Assessees across the country will have to spend considerable amount of time, energy & man hours in preparing & reconciling income as per ICDS and as per books of accounts maintained as per applicable AS Listed for hearing in October

55 Abbreviations: AMT Alternate Minimum Tax AOP Association of Persons AS Accounting Standards AY Assessment Year BOI Body of Individuals CBDT Central Board of Direct Taxes CG Central Government DTAA Double Taxation Avoidance Agreement FAQ Frequently Asked Question FMV Fair Market Value FTS Fees for technical services FY Financial Year HUF Hindu Undivided Family ICAI The Institute of Chartered Accountants of India ICDS Income Computation and Disclosure Standard Ind-AS Indian Accounting Standards INR Indian Rupees ITA/ the Act Income-tax Act, 1961 ITR/ the Rules Income-tax Rules, 1962 ITR Income-tax Return Form MAT Minimum Alternate Tax MCA Ministry of Corporate Affairs MTM Market to Market P&L Profit & Loss Account RBI Reserve Bank of India TDS Tax Deducted at Source r.w.s. Read with section u/s Under section w.e.f. With effect from 55

56 Thank You