Income Computation and Disclosure Standards (as notified under Section 145(2) of The Income Tax Act, 1961) ICDS VII to X, and Litigation around ICDS CA. Rahul Chawla
Common Disclaimer This Income Computation and Disclosure Standard 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 purpose of maintenance of books of account. In case of conflict between the provisions of the Income Tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent
ICDS VII Government Grants
ICDS VII Government Grants Scope: Government grants; alias subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. Not in case of Government ownership Grants Includes: assistance by Government in cash or kind to a person for past or future compliance with certain conditions. Excludes: Assistance which cannot have a value placed upon them, and Transactions with Government which cannot be distinguished from the normal trading transactions of the person
ICDS VII Government Grants Only Income Approach for accounting No Capital approach as prescribed under AS-12
ICDS VII Government Grants Recognition criteria AS-12 To be recognised on achieving reasonable certainty of satisfaction of related conditions & of receipt ICDS - Only upon reasonable assurance that: Person shall comply with conditions attached to them; & Grants shall be received Not to be postponed beyond actual date of receipt. Possible double taxation (MAT) & Ultra-vires the other provisions of the Act
ICDS VII Government Grants Grant for depreciable Fixed Assets AS12 Reduce from gross block or charge to P&L ICDS Reduce from gross block No outright charge to P&L Grants for non-depreciable Fixed Assets AS12 Credit to Capital Reserve Account ICDS Charge to income over the same period over which the cost of meeting the relevant obligations is charged to income
ICDS VII Government Grants Grants not directly relatable to any specific Fixed Asset Total grant has to be apportioned over the various assets to reduce their cost proportionately In accordance with section 2(24)(xviii) such grants for non-depreciable assets should be concluded as an income and therefore be offered to tax Applicability of this provision of ICDS VII is thus restricted to Depreciable assets only
ICDS VII Government Grants Grant for meeting expenses/ losses Recognise as income upon receipt Other grants Recognise as income based upon matching principle Grants in form of non-monetary assets; Given at a concessional rate Accounted at acquisition cost (not FMV or NRV)
ICDS VII Government Grants Refund of Grant Non depreciable asset Charge to unamortised deferred credit Subsequently, add to Income Refund of Grant - Depreciable asset increasing the actual cost or written down value of block of assets by the amount refundable
ICDS VII Government Grants Disclosures Nature and extent of Government grants recognised during the year: By way of deduction from actual cost of the assets or from the WDV of block of assets during the previous year; As income; By way of deduction from actual cost of assets or from WDV of block of assets and reasons thereof; Not recognised as income and reasons thereof.
ICDS VIII Securities
ICDS VIII Securities Scope PART A: Securities held as Stock in Trade ONLY (not on Investments) Not for derivatives Not for insurance business, mutual funds, VC funds, banks or public financial institutions ICDS on Revenue recognition deals with interest and dividends recognition
ICDS VIII Securities Initial Recognition At actual cost, STT? Including brokerage, fees, tax, duty or cess If exchanged for another security/ asset fair value of the security so acquired shall be its actual cost Unpaid Interest? Pre acquisition & Post acquisition
ICDS VIII Securities Year end measures Revalue at cost or NRV whichever is lower, Bucket approach & not item-by-item: Shares, Debt securities Convertible securities, and Others Securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised. FIFO / Weighted Average method
ICDS VIII Securities Bucket approach - Example Security Cost NRV Lower of NRV or Cost Share 1 100 75 75 Share 2 120 150 120 Share 3 140 120 120 Total 360 345 315 345 ICDS Value Part B: For Scheduled Banks and Public Financial Institutions RBI guidelines to be followed
ICDS VIII Securities Disclosures? None prescribed!
ICDS IX Borrowing Cost
ICDS IX Borrowing Cost Scope Treatment of Borrowing cost Does not deal with cost of Equity or preference share capital Borrowing cost includes Commitment charges Amortized discounts or premiums Ancillary cost for borrowing Finance charge for assets acquired under finance lease
ICDS IX Borrowing Cost Qualifying Assets ICDS AS 16 Tangible/ Intangible Assets Inventory 12 months or more for saleable condition Assets taking 12 months or more for ready to sale
ICDS IX Borrowing Cost Capitalization as per this ICDS Revenue expenditure as per provisions of the Act Funds are borrowed specifically for the purposes of acquisition, General construction assets but or Considering takes more than 12 production of the a assets qualifying are asset Capitalize months for acquisition, purchased in construction or General borrowing mid-year not for any particular asset production Capitalize the total expense in year based upon the average general qualifying assets acquired
ICDS IX Borrowing Cost Capitalization commences: Specific borrowing date of borrowing General borrowing date on which funds are utilised Contradicts the formula in preceding paragraph
ICDS IX Borrowing Cost Capitalization ceases: Qualifying asset other than Inventory date of put to use (not ready for use as in AS 23) Inventory when substantially all the activities necessary to prepare such inventory for its intended sale are complete When construction is completed in Parts?
ICDS IX Borrowing Cost Disclosures Accounting policy adopted Amount of borrowing costs capitalised during the previous year Important: Alternate investment of Borrowed funds for time being! (Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315) Borrowing cost for the period between ready to use and put to use! (Proviso to Section 36(i)(iii))
ICDS X Provisions, contingent liabilities and contingent assets
ICDS X Provisions and contingencies Scope does not cover resulting from financial instruments; resulting from executory contracts; arising in insurance business from contracts with policyholders; covered by another ICDS; Revenue recognition; Items such as Depreciation, doubtful debts, impairment of assets, etc.
ICDS X Provisions and contingencies Provision to be recognized when it is reasonably certain (~AS 23; when it is probable) that an outflow of resources embodying economic benefits will be required to settle the obligation. Present obligation for past events Reliable estimate can be made
ICDS X Provisions and contingencies No provision shall be recognised for costs that need to be incurred to operate in the future Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is enacted (unlike AS 29 virtually certain to be enacted) Contingent Assets & Liabilities Not to be recognized
ICDS X Provisions and contingencies Contingent Assets to be monitored and recognized upon reasonable certainty Measurement of provision Best estimate No discounting for present value Review & Use of Provision Regularly and only for the intended purpose
ICDS X Provisions and contingencies Disclosures Brief description of the nature of the asset and related income; Carrying amount of asset at the beginning and end of the year; Additional amount of asset and related income recognised during the year, including increases to assets and related income already recognised; Amount of asset and related income reversed during the year; and the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement
Legal principle THE HIGH COURT OF DELHI W.P.(C) 5595/2017 & CM APL 23467/2017 Date of decision: November 08, 2017 THE CHAMBER OF TAX CONSULTANTS & ANR versus UNION OF INDIA & ORS Coram: JUSTICE S.MURALIDHAR JUSTICE PRATHIBA M. SINGH
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