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ICDS and it's implications

September 3, 2017

There are 5 heads of income under which the whole income of an assessee have to be reported under the Income Tax Act, 1961. The disclosure and computation of income under various heads of income, and in particular, under the head “Profits and Gains of Business or Profession” was the subject to numerous disputes. Previously computation was based on the accounts maintained by an assessee, and was dependent upon the method of accounting employed by the assessee. This scenario has changed significantly after introduction of Income Computation and Disclosure Standards (“ICDS”). The CBDT had notified following 10 ICDS (I to X) w.e.f  A.Y. 2017-18 :-

ICDS I – Accounting Policies

ICDS II –Valuation of Inventories

ICDS III – Construction Contracts

ICDS IV – Revenue Recognition

ICDS V – Tangible Fixed Assets

ICDS VI – Effects of Changes in Foreign Exchange Rates

ICDS VII – Government Grants

ICDS VIII – Securities

ICDS IX – Borrowing Costs

ICDS X – Provisions, Contingent Liabilities and Contingent Assets

 

ICDS apply only to computation of income under the heads of income “Profits and gains from business or profession” and “Income from Other Sources”. Other than these two heads, ICDS would not apply. ICDS would not apply for the purpose of maintenance of books of account.

 

ICDS is applicable to every assessee who follows mercantile system of accounting without having regard to the amount of Gross Total Income/ Taxable Income. It would not apply to an assessee who follows cash system of accounting. Further, it would not apply to individuals and HUFs not liable for tax audit u/s 44AB of the Income Tax Act, 1961 (the Act).

 

ICDS would apply only if the assessee, being an Individual / HUF is carrying on business or profession. ICDS would not apply if such individual/HUF has no income under the head “Profits and Gains of Business or Profession” but has income under the head “Income from Other Sources” even though he/it follows mercantile system of accounting.

 

ICDS apply to all assesses, irrespective of residence of the person. However, where a non-resident taxpayer falls under a presumptive tax scheme, ICDS would not apply. Further where a nonresident claims the benefit of a double taxation avoidance agreement (DTAA), DTAA would prevail over ICDS.

 

ICDS will also apply to companies preparing their financial statements following either IndAS or Accounting Standard, as they apply to other assessee.

 

Whenever there is conflict between the provisions of Income Tax Act and the ICDS, Act would prevail to that extent.

 

Here we have summarizing the provisions for following two ICDS.

 

ICDS I : ACCOUNTING POLICIES

  • This ICDS is applicable to significant accounting policies applied for computing income under the head income “Profits and gains from business or profession” and “Income from Other Sources”.
  • The ICDS is not a mere disclosure Standard because it requires income computation to factor in the elements of this Standard viz accrual, going concern & consistency.
  • The following are the fundamental accounting assumptions, namely :-
    • Going Concern
    • Consistency
    • Accrual
  • They are usually not specifically stated, because their acceptance and use are assumed. They are stated only when they are not followed.
  •  Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose,

(i) the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and

(ii) marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. (same principal shall apply mutatis mutandis to MTM gains or an expected profit).

  • An accounting policy shall not be changed without reasonable cause. (The ‘reasonable cause’ is not defined. Now what shall constitute ’reasonable cause’? 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.
  • Disclosure Requirements :
    1. All significant accounting policies adopted by a person shall be disclosed.
    2. Any change in an accounting policy which has a material effect. The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time.
  • Transitional Provisions: All contracts or transactions existing on the 1st day of April, 2016 or entered into on or after the 1st day of April, 2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognized in respect of the said contract or transaction for the previous year ending on or before the 31st March, 2016.

 

ICDS IV : Revenue Recognition

  • Scope: This Income Computation and Disclosure Standard deals with the bases for recognition of revenue arising in the course of the ordinary activities of a person from:-
    1. the sale of goods;
    2. the rendering of services;
    3. the use by others of the person’s resources yielding interest, royalties or dividends

(This Income Computation and Disclosure Standard does not deal with the aspects of revenue recognition which are dealt with by other Income Computation and Disclosure Standards)

  • Revenue shall be recognized when there is reasonable certainty of its ultimate collection. (Revenue” is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person’s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.)
  • Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved.”
  • The two cumulative criteria for recognizing revenue from sale of goods are:
    1. The seller has transferred the property in the goods to the buyer for a price or significant risks and rewards associated with the ownership of the goods have been transferred to the buyer and the seller has not retained effective control over the goods transferred.
    2. there is reasonable certainty of ultimate collection of the revenue.
  • Recognition of revenue from sale of services:
    1. Revenue from service transactions shall be recognized by the percentage completion method.
    2. When services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognized on a straight line basis over the specific period.
    3. Revenue from service contracts with duration of not more than ninety days may be recognized when the rendering of services under that contract is completed or substantially completed.
  • Recognition of revenue from the Use of Resources by Others Yielding Interest, Royalties or Dividends :
    1. Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable.
    2. Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in which such interest is received.
    3. Discount or premium on debt securities held is treated as though it were accruing over the period to maturity.
    4. Royalties shall accrue in accordance with the terms of the relevant agreement and shall be recognized on that basis unless, having regard to the substance of the transaction, it is more appropriate to recognize revenue on some other systematic and rational basis.
    5. Dividends are recognized in accordance with the provisions of the Act. Any dividend declared shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. Any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.
  • Disclosure Requirements :
    1. In a transaction involving sale of good, total amount not recognized as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty.
    2. The amount of revenue from service transactions recognized as revenue during the previous year.
    3. The method used to determine the stage of completion of service transactions in progress.
    4. For service transactions in progress at the end of previous year:
      1. amount of costs incurred and recognized profits (less recognized losses) upto end of previous year;
      2. the amount of advances received; and
      3. the amount of retentions.

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