Income Tax


Sunday 10 March 2019

Income Computation and Disclosure Standards (ICDS)

Introduction of the Topic : 

Income Computation & Disclosure Standard was formulated from January-1995. Finance Act, 1995 empowered the Central Government to notify Tax Accounting Standards vide section 145(2) of the Income-tax Act, 1961. CG Constituted a committee (2002 Committee) for formulation of Tax Accounting Standards in 2002. In December-2010, Central Government constituted Committee to study harmonization of ICAI’s Accounting Standards with the Income-tax Act & suggest Tax standards. Based on final report submitted by Committee, CG published drafts of 14 standards for public comments in October-2012. And finally in July-2016 CBDT defers the applicability of ICDS to FY 2016-17 vide its press release dated July 06, 2016 considering the recommendations by expert committee.

First time, ICDS were notified by Central Govt. by issuing notification no. 32/2015 dated 31/03/2015 (applicable for FY 2015-16 and onwards). ICDS to be applicable only for computation of ‘Profits and Gains from Business & Profession’ (‘PGBP’) and ‘Income from other sources’ in case of taxpayers following mercantile system of accounting. No separate books of account to be maintained for application of ICDS. ICDS shall apply irrespective of accounting standards adopted by the companies i.e. AS or Ind-AS, and it shall not apply for computation of MAT but shall apply for computation of AMT. ICDS shall apply to all persons (including Banks, NBFCs, Insurance Co., Power Sector) unless there are sector specific provisions in ICDS or the Act. Words and expressions used and not defined in the ICDS but defined in the Act shall have the meaning assigned to them in the Act. Items not specifically covered by any ICDS (e.g.: leases, intangible assets, etc.) will continue to be governed by relevant AS/Ind-AS and existing provisions of the Act.And finally the important point to be remembered is Non-compliance with ICDS will give power to tax officer for Best Judgment Assessment. All ICDSs are basically based Accounting Standards. 

Now coming to first ICDS i.e.Accounting Policies which is as similar to Accounting Standard 1.  
Fundamental accounting assumptions under ICDS are 1st is Going Concern It refers to the assumption that the person intends to continue his business, profession or vocation for the foreseeable future. 2nd assumption refers to the assumption that accounting policies are consistent from one period to another. And 3rd refers to the assumption that revenues and costs are recognized as they are earned or incurred and recorded in the previous year to which they relate.  ICDS 1 Does not consider the concept of ‘materiality’ & “Prudence”. This ICDS prohibits recognition of expected loss or profit unless permitted by any other ICDS. As per ICDS 1, accounting policy can be changed for any “reasonable cause”, As per clarifications reasonable cause is an existing concept and has evolved well over a period of time conferring desired flexibility to the taxpayer in deserving cases. 
Disclosure required under this ICDS is. 
1) All significant accounting policies adopted by a person shall be disclosed. 
2) Any change in the accounting policy having material effect shall be disclosed. The amount by which any item is affected shall also be disclosed to the extent ascertainable. 
3) If a change is made in the accounting policies having no material effect for the current year then the disclosure is required both in the year of adoption as well as in the first year in which it has material effect. 

Now moving to 2nd ICDS i.e. Valuation of Inventories 
This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except: Shares, debentures and other financial instruments held as stock‐in‐trade which are dealt with by the Income Computation and Disclosure Standard on securities; 
In case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realizable value.  
Now Cost of Inventories under this ICDS: 
Cost Comprises of all cost of purchase, cost of service, cost of conversion and other costs incurred in bringing inventories to their present location and condition.  
• Cost of Purchase: Consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebate and other similar items be deducted in determining the cost. While as per AS-2 cost of purchase are shown at net. i.e. exclusive method  
• Cost of Services: Consist of labour and other costs of personnel directly engaged in providing service including supervisory personnel and attributable overheads. While AS 2 does not deal with costs of services. 
Disclosure under this ICDS: 
Accounting policies adopted in measuring should be disclosed & Total carrying amount of inventories.

Now ICDS 3 i.e. Construction Contracts 
This Income Computation and Disclosure Standard shall be applied for: 
 Determination of income from construction contract 
  Also applies to contract for destruction or restoration of an asset and construction of surrender of services related to construction of an asset 
The Combining and Segmenting Construction Contracts under this ICDS is similar with AS-7  
Contract Revenue under ICDS 3 will be ….. 
Contract revenue and contract costs associated with the construction contract, which commenced on or after April 01, 2016 shall be recognized in accordance with the provisions of this standard. 
• Contract revenue and contract costs associated with the construction contract, which commenced on or before the 31st March , 2016 but not completed by the said date, shall be recognized on the method regularly followed by the person prior to the previous year beginning on the 1st day of April, 2016.  
Disclosure Requirements under this ICDS  
• The amount of contract revenue recognized as revenue in the period 
• The methods used to determine the stage of completion of contracts in progress 
• Amount of costs incurred and recognized profits (less recognized losses) up to the reporting date (for contracts in progress) 
• The amount of advances received (for contracts in progress) 
• The amount of retention (for contracts in progress)  

ICDS 4 i.e. Revenue Recognition deals with the basis for recognition of revenue arising in the course of ordinary activities from: 
- Sale of goods; 
- Rendering of Services; and 
- The use by others of the person’s resources yielding interest, royalties or dividends. 
• It excludes from its application revenue recognition of items that are dealt by other ICDS . 
However, it excludes the following income: 
- Construction contracts 
- Government Grants 
- Hire Purchase / Lease arrangements 
- Revenue earned by insurance companies 
- Disclosure under this ICDS is: 
In case of Sale of Goods: Revenue not recognized due to uncertainty in collection along with the nature of uncertainty to be disclosed; 
In case of Services: Method to compute the stage of completion, Amount of revenue recognized; 
Disclosures with respect to service transactions in progress at the end of the year; 
Amount of costs incurred and recognized profits (less recognized losses) up to the reporting date; 
Amount of advances received; and Amount of retentions.

ICDS 5 deals with the treatment of Tangible Fixed Assets. 
Concept of Materiality to treat an item as expense is recognized by AS, is not allowed under ICDS. 
Stand-by equipment and servicing equipment are to be capitalized under this ICDS. 
ICDS specifically excludes Other Taxes which are subsequently recoverable from the cost of an acquired tangible fixed asset. 
An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. 
Disclosure required under this ICDS is: 
Description of assets or block of assets with its rate of depreciation 
Actual Cost or Written down Value of depreciable asset should also be disclosed with any additions & deductions during the year 
Date of Put to Use, Change in rate of currency, Subsidy or grant or reimbursement received also be disclosed.

Now coming to ICDS 6 that is Effects of Changes In Foreign Exchange Rates 
The standard deals with: 
 Treatment of transactions in foreign currencies; 
 Translating the financial statements of foreign operations; 
 Treatment of foreign currency transactions in the nature of forward exchange contracts 
 Initial Recognition of foreign currency transaction shall be as per the exchange rate on the date of transaction 
 If the exchange rate does not fluctuate significantly, average rate for week or month can be considered for conversion 
 However, if rate fluctuates significantly, rate on the date of transaction to be considered 
The forward contract is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction. 
 Premium or discount on arising at the inception of forward contract shall be amortized as expense or income over the life of contract. 
 Exchange difference on contract shall be recognized in previous year in which the exchange rates change. 
Disclosure required to be given is Premium or Discount to be amortized over the period of contract. Exchange difference to recognized on the last day of previous year. 

Now ICDS 7 which Deals with the treatment of Government Grants – 
 But does not cover government assistance; 
 Conditions for recognition of Government Grants 
 Government grants not to be recognized until there is a reasonable assurance that the person shall comply with the related conditions attached; and the grants shall be received.  
Following disclosure shall be made in respect of Government grants, namely: 
 Nature and extent of Government grants recognized during the previous year; 
 Nature and extent of Government grants recognized during the previous year as income; 
 Nature and extent of Government grants not recognized during the previous year by way of deduction from the actual cost of the asset; and  Nature and extent of Government grants not recognized during the previous year as income and reasons thereof.

Income Computation and Disclosure Standard No. 8 deals with the Securities.  
 This ICDS is applicable to Stock Brokers, Traders & Non-Banking Financial Institutions. 
 It excludes Recognition of interest and dividend on securities, Securities in the business of insurance, Securities of Mutual fund, Venture capital funds, Banks and Public financial institutions. 
 This ICDS deals with securities held as stock-in-trade and not for securities held as investment. Where a security is acquired in exchange for another security, cost shall be fair value of the security acquired. Securities listed on a recognized stock exchange shall be valued at actual cost as initially recognized or net realizable value, whichever is lower. Securities not listed on a recognized stock exchange shall be valued at actual cost as initially recognized. Part-B of ICDS-VIII contains special requirements regarding securities held by schedule banks and Public Financial Institution  
The disclosure requirements under this ICDS will be   
 There are no disclosure requirements as per ICDS-VIII 

The 9th standard deals with treatment of Borrowing Cost. 
Borrowing Costs shall include 
 Commitment charges on Borrowings  Amortized amount of premium and Discounts  Finance charges in respect of assets under finance lease  Ancillary costs in connection with arrangements of borrowings. 
The standard does not deal with actual or imputed cost of owner’s equity and preference share capital. 
 Borrowing costs eligible for capitalization shall be determined in accordance with ICDS & other borrowing cost shall be dealt in accordance with provisions of The Act. 
Disclosure required under this ICDS: 
 Accounting policy adopted for borrowing costs. Amount of borrowing costs capitalized during the year. 

The last but not the least i.e. 10th ICDS deals with Provisions, Contingent Liabilities and Contingent Assets Except 
 Resulting from financial instruments  Resulting from executory contracts  Arising in insurance business from contracts with policyholders and Covered by another ICDS 
Whereas, Provision is a liability which can be measured only by using a substantial degree of estimation. 
Liability is a present obligation of the person arising from past events, the settlement of which is expected to result in an outflow from the person of resources embodying economic benefits. 
Contingent liability is A possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events. 
Contingent assets are recognized when there is a reasonable change and certainty that inflow of economic benefit will arise.

Disclosure of contingent liability  
 A brief description of the nature of the obligation; 
 The carrying amount at the beginning and end of the previous year; 
 Additional provisions made during the previous year, including increases to existing provisions;  
Disclosure of contingent ASSET 
 A brief description of the nature of the asset and related income; 
 The carrying amount of asset at the beginning and end of the previous year; 

This is the step to harmonize the accounting & tax. After showing the balance of profit & loss account show the adjustment of ICDS & then adjust the adjustments following under Income Tax Act.  
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, etc. Such benefits are covered by AS-15for which no parallel ICDS has been notified. 

Click here to Download PPT On ICDS

Thank you….
-  Tushar Gopal Agrawal 


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