CBDT issued 12 drafts of Income Computation and Disclosure Standards (ICDS) after taking suggestions from stakeholders and the draft ICDS were open for comments and suggestions till 8 February 2015. After taking suggestion 10 ICDS is finalized by CBDT on 31st march 2015. It will applicable from AY 2017-18.
APPLICABILITY RULES OF ICDS:-
- Applicable to ‘All’ assesses who is following mercantile basis of accounting.
- Applicable for computation of income chargeable to income-tax under the head ‘Profits and gains from business or profession’ or ‘Income from other sources’
- Applicable from AY 2017-18 – quarterly tax provision and advance tax as per ICDS to avoid interest.
- Some certain rules lay down to ensure certainty and clarity and eliminate the possibility of misunderstanding and alternatives.
- ICDS is based on Current Accounting Standards. However the objective of ICDS is to provide an independent framework for computation of tax.
- One relief will given that no separate books of accounts are required to maintain.
- Various disclosure requirements is silent about the placement of various disclosures e.g. financial statements (separately), computation of income or return of income etc.
NON APPLICABILITY RULES OF ICDS:-
- The person who are following cash system of accounting.
- Individual and HUFs whose books of account for the year are not required to be audited under section 44AB.
- Individual or HUF who/which falls under and opts to be covered by presumptive tax schemes would fall under the exclusion of ICDS.
- Other than both head ‘Profits and gains from business or profession’ or ‘Income from other sources’ ICDS not apply.
If there is any conflict arise between the income tax act, 1961 and ICDS then provision of act will get preference.
List of 10 ICDS issued by CBDT are as follows:-
- ICDS I relating to accounting policies.
- ICDS II relating to valuation of inventories.
- ICDS III relating to construction contracts.
- ICDS IV relating to revenue recognition.
- ICDS V relating to tangible fixed assets.
- ICDS VI relating to the effects of changes in foreign exchange rates.
- ICDS VII relating to government grants.
- ICDS VIII relating to securities.
- ICDS IX relating to borrowing costs.
- ICDS X relating to provisions, contingent liabilities and contingent assets.
In order to bring certainty on issue of applicability of ICDS following amendments are made:-
- Amendment in section 36 of the Act that market loss or other expected loss which is computed as per ICDS is allowed deduction u/s 145(2).
- Amendment made in section 40A of the Act that no deduction or allowance in respect of market loss or other expected loss shall be allowed except that allow in newly inserted clause (xviii) of sub-section(1) of section 36.
- A new section 43AA is inserted in the income tax Act related to the provisions of section 43A, any gain or loss arising due to effects of changes in foreign exchange rates transactions related to specified foreign currency transactions shall be treated as income or loss, which shall be computed in the manner provided in Income Computation Disclosure Standard notified under sub-section (2) of section 145.
- A new section 43CB is inserted in the Income Tax Act which says that profits arising from a construction contract or a contract for providing services shall be decided on the basis of percentage of completion method except for certain service contracts, and that contract revenue which include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains. Presently no specified method is specified for construction contract except specified in AS 7.
- Amendment in section 145A of the Act that for determining the income chargeable under the head “Profits and gains of business or profession” are as follows:-
- Valuation of inventory is done on actual cost or net realizable value whichever is lower computed on the basis of income computation disclosure standards.
- The valuation of purchase and sale of goods or services include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.
- Inventory being securities not listed or listed but not quoted in a recognised stock exchange should be valued at actual cost which is recognised as the rules given in income computation and disclosure standards notified under subsection (2) of section 145.
- Inventory being listed securities shall be valued at lower of actual cost or net realizable value in the manner provided in income computation and disclosure standards given under subsection (2) of section 145 and for this purpose the comparison of actual cost and net realizable value shall be done category-wise.
- A new section 145B is inserted in the Act which says that interest received by an assessee on compensation or on enhanced compensation should be assumed to be the income of that year in which it is received.
- If in a contract claim of escalation of price and export incentives is received then it should be deemed to be the income of that previous year in which reasonable certainty of its realization is achieved.
- as per section 2(24)(xviii) subsidy shall be deemed to be the income of that previous year in which it is received, if not charged to income tax for any earlier previous year.