2. Contents
1) Background
2) General principles
3) ICDS I: Accounting Policies
4) ICDS II: Valuation of Inventories
5) ICDS III: Construction Contracts
6) ICDS IV: Revenue Recognition
7) ICDS V: Tangible Fixed Assets
8) ICDS VI: The effects of changes in foreign exchange rates
9) ICDS VII: Government Grants
10) ICDS VIII: Securities
11) ICDS IX: Borrowing Costs
12) ICDS X: Provisions, Contingent liabilities and Contingent assets
3. Background
Section 145(1) of the Income-tax Act, 1961 (Act) stipulates that the method of
accounting for computation of income under the heads “Profits and gains of business or
profession” and “Income from other sources” can either be cash or mercantile system of
accounting.
Section 145(2) of the Act states that the Central Government may notify the accounting
standards to be followed by any class of assesses or in respect of any class of income.
Accordingly, two tax accounting standards had been notified until now:
1. Disclosure of accounting policies
2. Disclosure of prior period and extraordinary items and changes in accounting policies
4. Background
Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting
standards” with “income computation and disclosure standards” (ICDS).
The CBDT constituted the Accounting Standards Committee which had earlier issued
draft 14 Tax Accounting Standards in 2012. On the basis of the suggestions and
comments received from the stakeholders, CBDT had revised and issued 12 draft
ICDS for public comments.
On 31st March, 2015, the Central Government has notified 10 out of the 12 draft
ICDS which shall be effective from 1st April, 2015.
The introduction of ICDS may significantly alter the way companies compute their
taxable income.
5. General principles
ICDS are applicable for computation of income chargeable under the head “profits and gains
of business or profession” and “income from other sources” and not for maintaining books of
accounts.
ICDS applies to all taxpayers
In case of conflict between the provisions of the Act and ICDS, the provisions of the Act
shall prevail to that extent.
o What if in case of conflict between HC / SC rulings and ICDS?
o The risk of best judgment assessment u/s 144 if positions adopted as per ICDS is contrary
to rulings.
ICDS applies only to taxpayers following mercantile system of accounting.
7. Materiality
• No concept of materiality in ICDS unlike, AS-1.
• No likely significant tax impact
• In the absence of materiality concept, considerable time and cost will be
involved making trivial adjustments in net profit as per books of account
to arrive at PGBP since authorities may insist on strict application of ICDS
even on small value items.
8. Prudence
• Based on the concept of ‘prudence’, AS-1 precludes recognition of
anticipated profits and requires recognition of expected losses.
• However, ICDS provides that expected losses or mark to market losses
shall not be recognized unless permitted by any other ICDS to avoid
differential treatment for recognition of income and losses.
• However, ICDS is silent on MTM gain.
9. Prudence
• In the absence of prudence as a fundamental assumption, there could be
several situations which could result in earlier recognition of income or
gains or later recognition of expenses as compared to that under AS. E.g.
provision for warranty expenses on sales made.
• An ambiguity would arise on deductibility of losses which are not covered
in any specific ICDS. E.g. Currently no specific proposed ICDS dealing with
MTM loss on derivatives.
10. Example:
Deferred Tax Asset (DTA) / Deferred Tax Liability (DTL) as the case may be as per AS 22 would arise.
Year Loss Anticipated
Income
Computation Remarks
Income
Tax
Books of
Accounts
1 Expected
loss =
(5000)
Anticipated
Income =
1,000
1,000 (5,000) Foreseeable loss is not allowed as
deduction in Year 1 as per ICDS but
anticipated profit is taxed and thus tax is
required to be paid as per Normal
Provisions on 1,000.
2 Actual loss
= (5,000)
Actual
Income =
1,000
(5,000) 1,000 As per ICDS, the actual loss will now be
allowed in year 2 and actual gain will be
regarded as income in accounts. However,
MAT will apply and tax is required to be
paid as per the provisions of MAT.
12. Value of opening inventory
• Value of opening inventory should be same as preceding year’s closing inventory.
• In case of a newly commenced business, the value of the opening inventory shall be the
cost of the inventory.
• Cases of conversion of capital asset into stock-in-trade with intent to commence
business may remain unaffected due to overriding provisions of Section 45(2) of the
Act.
• If business is commenced with acquisition of running business on slump sale, price paid
will be ‘cost’ of opening inventory.
• If partner takes over running business of firm/LLP, value agreed with other partners for
inter-se settlement shall be ‘cost’ for the partner.
13. Method of Valuation
• ICDS does not permit standard cost method for the purpose of inventory valuation.
• It may not have any impact on assessee not following standard cost method.
• The same will have an impact on taxpayers following standard cost method for valuation
of inventory for accounting purpose, who will need to adopt FIFO or weighted average
cost formula for tax purposes.
• However, Companies Act, 2013 permits Standard cost method under Cost Records rules.
• Further, as per ICDS, method of valuation once adopted shall not be changed without
reasonable cause. It would not have a significant impact since bonafide change may
constitute reasonable cause
14. Valuation of inventories in case of service
providers
AS- 2 ICDS
• AS-2 does not include work in progress
(WIP) arising in the ordinary course of
business of service providers.
• Specifies that it does not apply to WIP
which is dealt with by other ICDS.
• Valuation of service inventory to be the lower of cost or NRV.
• Cost to include labor and other costs of personnel directly engaged in providing services
including supervisory personnel and attributable overheads.
• Difficulty would arise in case of services whose chargeability depends on the success of
the service.
15. Valuation of Inventories in case of
Firm/AOP/BOI Dissolution
• According to ICDS, 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.
• This is unfair particularly as there is no specific provision for allowing such
NRV as the cost to the successor of the business.
• Also this is contrary to law settled by Apex court in the case of Sakthi
Trading Co. v. CIT
16. Case laws discussed
• A.L.A. Firm v. CIT [1991] 55 Taxman 497 (SC) / 189 ITR 285
In cases of dissolution of firm, the stock-in-trade will have to be valued at
the prevailing market price while preparing the accounts if the business of
the firm is discontinued.
• Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) / 250 ITR 871
If on dissolution of the firm the business is not discontinued, then, the
ordinary principle of commercial accounting permitting valuation of stock-
in-trade at Cost or Net Realizable value whichever is lower will apply.
18. Construction Contracts
AS - 7 ICDS III
Real Estate Developers
It does not deal with recognition of revenue by
Real Estate Developers and there is separate
Guidance Note on the same issued by the ICAI.
ICDS is silent whether the same is applicable to
Real Estate Developers or not.
Contract Cost
Contract Cost includes:
- Direct cost
- Cost allocated to the contract
- Cost specially charged to the customer
under the terms of the contract
The scope of the Contract Cost has been
widened to include “Allocated Borrowing Cost”
in accordance with ICDS on Borrowing Cost.
19. Construction Contracts
AS - 7 ICDS III
Recognition of Contract Revenue
Contract revenue to be recognized if it is
possible to reliably estimate the
outcome of a contract.
The criteria “if it is possible to reliably measure the
outcome of a contract” has been omitted.
Contract revenue to be recognized when there is
reasonable certainty of its ultimate collection.
Impact: The recognition of contract revenue may be preponed under ICDS.
It lays down the conditions to
estimate the outcome of
construction contract in case of :-
- Fixed Price Contract
- Cost plus Contract
ICDS is silent on the same
20. Construction Contract
AS-7 ICDS III
Situation when outcome of contract cannot be reliably estimated
Contract revenue and contract costs to be recognized
as revenue or expenses by reference to the POCM if
the outcome of the contract can be estimated reliably;
else, revenue should be recognized only to the extent
of contract costs incurred.
No quantitative threshold laid down for determining
the stage of completion, until when, the outcome of a
contract cannot be reliably measured.
ICDS provides that early stage of a
contract shall not exceed 25% of the stage
of completion.
In other words, upto 25% of the stage of
completion, if the outcome of
construction contract cannot be reliably
measured, contract revenue is recognized
only to the extent of cost incurred.
Impact: Under ICDS, profit recognition has to start compulsorily once 25% stage is completed but
the same is not the case currently under AS – 7.
21. Construction Contract
AS-7 ICDS III
Retention Money
Contract revenue shall comprise:
The initial amount of revenue agreed in the contract
Contract revenue shall comprise:
The initial amount of revenue agreed in the contract,
including retentions.
Impact Analysis: There are various judicial precedents like Angelique International Ltd. vs Department of
Income Tax [ITA No.4085/DEL/2011] which do not recognize retention money as income for tax purpose if
there is no enforceable debt. ICDS leads to deviation from the settled judicial position.
Incidental Income
Any incidental income, not included in the contract
revenue, shall be deducted while computing
construction cost.
Contract cost shall be reduced by any incidental
income, not being in the nature of interest, dividends
or capital gains, that is not included in the contract
revenue. Therefore, interest income, dividend
income and capital gains shall be taxed as income in
accordance with the applicable provisions of the Act.
22. Construction Contract
AS-7 ICDS III
Recognition of foreseeable losses
It permits to recognise immediately the
foreseeable losses on a contract regardless of
commencement or stage of completion of
contract.
ICDS does not permit recognition of the
foreseeable/expected losses on a contract.
ICDS on accounting policies also does not
permit recognition of foreseeable loss.
Impact: ICDS deviates from the present legal settled position in the case of CIT V/s. Triveni
Engineering & Industries Ltd (49 DTR 253) (Del) & CIT v. Advance Construction Co. (P) Ltd (275 ITR
30) (Guj)) in which foreseeable losses on construction contracts were allowed as a deduction for
tax purpose.
23. Example:
Year Loss Unrelated
Income
Computation Remarks
Income
Tax
Books of
Accounts
1 Expected
loss = 5,000
4,000 4,000 (1,000) Foreseeable loss of contract is not
allowed as deduction in Year 1 as
per ICDS and thus tax is required to
be paid as per Normal Provisions.
2 Contract
concludes
on loss
4,000 (1,000) 4,000 The foreseeable loss is recorded in
year 1 as per AS 7 and as per ICDS
the same will now be allowed in
year 2. However, MAT will apply and
tax is required to be paid as per the
provisions of MAT.
24. Construction Contract
AS-7 ICDS III
Recognition of incentive payments
Incentive payment to be recognised only when (i)
probability exists that specified performance
standards would be met or exceeded (Guidance para
in ICAI AS, links probability to contract progress upto
sufficiently advanced stage); (ii) incentive is reliably
measurable.
Requires recognition under POCM if incentive reliably
measurable and it is probable that it will result in
revenue. In absence of further guidance, ambiguity
may arise if the requirement of “sufficiently advanced
stage of contract” is deleted/diluted.
Recognition of claims
Claims against customers to be recognised when (i)
probability exists that the customer will accept the
claim (Guidance para in ICAI AS, links probability to
negotiation progress upto advanced stage); (ii)
amount is reliably measurable.
Requires recognition under POCM if claims are
reliably measurable and it is probable that it will
result in revenue. In absence of further guidance,
ambiguity may arise if the requirement of “advanced
stage of negotiation” is deleted/diluted.
26. AS - 9 ICDS
It does not apply to companies
engaged in insurance business.
ICDS is silent on same.
Revenue from service transactions
are recognised as percentage
completion method or by the
completed service contract
method.
ICDS provides only for percentage
completion method for recognition
of service transactions.
Impact: May have minimal impact since service sector largely follows
POCM or Cost plus method.
27. ICDS requires application of ICDS on construction contracts for recognition
of revenue on mutatis mutandis basis.
• Threshold of 25% stage of completion for recognition of income
• No recognition of the foreseeable losses on a contract. However, AS-7
permits immediate recognition of the foreseeable losses on a contract
regardless of commencement or stage of completion of contract.
• Stage of completion can be determined with reference to (a) total
estimated costs v/s. cost incurred till balance sheet date; or (b) survey
of work performed; or (c) completion of physical proportion of work
29. AS- 10 ICDS
It applies to tangible fixed assets as well as
goodwill
It applies to only tangible fixed assets.
Cost of fixed asset comprises its purchase
price, non refundable taxes and any directly
attributable cost of bringing the asset to its
working condition for its intended use.
It has similar definition to AS 10 but the
words used are actual cost as compared to
cost in AS -10.
Impact:
The Act provides for the definition of the term ‘actual cost’ and it is again repeated in the
ICDS but it does not modify the concept of actual cost. However when there is conflict in
interpreting the abovementioned term under ICDS and Act, the Act will prevail over ICDS.
Such a narrow definition in ICDS might encourage the taxpayer to contend that expenditure
on acquisition which is not part of actual cost should be deductible as revenue instead of
capitalising.
30. AS- 10 ICDS
AS 10 read with guidance note on
Machinery for Spares provides for
charge to P/L, however spares to
specific asset should be capitalised and
shall form part of that Asset .
It provides that machinery spares which
can be used only in connection with an
item of tangible fixed asset and their
use is expected to be irregular, shall be
capitalized.
Impact:
ICDS specifies that machinery spares dedicated to a tangible fixed asset should be
capitalized, it does not provide any further guidance on subsequent treatment that
whether it will form part of the block of the asset. However, in absence of such
clarification spares would form part of the block and once the principal asset is put to
use, the spares shall qualify for the depreciation at the same rate.
31. Assets acquired against non-monetary consideration
AS- 10 ICDS
When a fixed asset is acquired in exchange or
in part exchange for another asset, the cost of
acquired asset should be recorded either at
FMV or NBV of asset given up, adjusted for
any balancing payment or receipt of cash or
other consideration.
When a tangible fixed asset is acquired
in exchange for other asset, the fair
value of the tangible fixed asset so
acquired shall be its actual cost
Fixed asset acquired in exchange for shares or
other securities in the enterprise should be
recorded at its FMV, or the FMV of the
securities issued, whichever is more clearly
evident.
When a tangible fixed asset is acquired
in exchange for shares or other
securities, the fair value of the tangible
fixed asset so acquired shall be its
actual cost.
Usual Practice: Concept of cost should normally relate to what is given up.
32. Assets acquired for a consolidated price
AS- 10 ICDS
Para 15.3 says that when several assets are
purchased for consolidated price, the
consideration is apportioned on fair basis as
determined by competent valuers.
When several assets are purchased for
a consolidated price, the consideration
shall be apportioned to the various
assets on a fair basis.
Impact: In absence of determination by registered valuers in ICDS words “fair basis”
becomes subjective and might be prone to litigation.
33. Misc.
Depreciation on a tangible fixed asset and income arising on transfer of a tangible fixed
asset shall be computed in accordance with the provisions of the Act.
The requirement of maintenance of ICDS specific tangible fixed asset register as proposed
earlier has been done away with.
35. Revenue monetary items (like trade receivables, payables,
bank balance, etc.)
AS- 11 ICDS
Reported using the closing rate
Exchange difference recognised in P&L A/c
Allowed under the Act also.
Converted into reporting currency by
applying the closing rate
Recognised as income or expense
subject to provisions of Rule 115
Impact: No change in tax position
36. Revenue non-monetary items (like inventory)
AS- 11 ICDS Impact
Which are carried in terms of
historical cost denominated in
a FC - Reported using the
exchange rate at the date of
the transaction
Converted into
reporting currency
using the exchange
rate at the date of
the transaction.
No exchange difference would arise
under both
No change in the position
Which are carried at fair value
or other similar valuation
denominated in a FC -
Reported using the exchange
rates that existed when the
values were determined i.e.
closing rate.
Converted into
reporting currency
using the exchange
rate at the date of
the transaction.
No exchange difference would arise
as per ICDS. Hence, the FE
gain/loss as per the books of
accounts will have to be reduced/
added back respectively while
computing the taxable income.
37. Revenue non-monetary items (like inventory)
The impact of this deviation by ICDS from the provisions of AS may be understood with the
help of following illustration:
Particulars Amount in Forex Exchange Rate Value
Cost $100 55 as on date of
acquisition
Rs.5,500
NRV $50 60 closing rate i.e. at
B/S date
Rs.3,000
Valuation at lower of cost or NRV ($100 or $50) i.e. $50
As per AS 11 Rs.3,000 (50*60)
As per ICDS Rs.2,750 (50*55)
38. Applicability of AS 22
This will result into creation of DTL as per AS 22 “Accounting for Taxes on Income”
DTL will be created on difference of valuation of Inventory as per Taxation and as
per Books of accounts
= Rs. 3000 – Rs. 2750 = Rs. 250 * Applicable Tax Rate
When stock will be sold, in that year it will result into reversal of DTL.
39. Applicability of Ind AS 12 and Ind AS 21
• Those companies which are voluntarily complying with the Ind AS for accounting periods
beginning on or after 1st April, 2015 for them its applicability is explained. Even otherwise for the
purpose of providing comparatives statement companies need to comply with Ind AS from
financial year 2015-16.
• In Ind AS 12 “Income Taxes” Balance Sheet approach is followed which focuses on “Temporary
Difference” whereas in AS 22 Profit & Loss Statement approach is followed which focuses on
“Timing Difference”.
• According to Ind AS 21 “The effect of changes in foreign exchange rates” Non-monetary items
carried at fair value, Rate as of date of fair value determination will be considered
• Temporary differences are differences between the carrying amount of an asset or liability in the
balance sheet and its tax base. So effect will remain same under Ind AS 12 also and DTL
(According to Ind AS parlance “Taxable temporary differences”) will be created.
40. Capital monetary items – Relating to Imported assets
AS- 11 ICDS
Requires recognition in P&L A/c.
Option of capitalization u/s 211(3C) of companies Act,
1956 as per which (Para 46 & 46A) exchange differences
arising in case of long-term foreign currency monetary
items shall be either adjusted to capital asset or
accumulated in FCMITDA.
Requires recognition in
P&L A/c subject to
provisions of Section 43A.
No Para 46 & 46A exists.
Impact:
Presently, Section 43A permits capitalization on payment basis of exchange differences
relating to asset acquired from a country outside India.
Hence, there would be no change in the tax position.
41. Capital monetary items – Not relating to Imported assets
AS- 11 ICDS
Requires recognition in P&L A/c.
Option of capitalization u/s 211(3C) of companies Act,
1956 as per which (Para 46 & 46A) exchange differences
arising in case of long-term foreign currency monetary
items shall be either adjusted to capital asset or
accumulated in FCMITDA.
Requires recognition in
P&L A/c subject to
provisions of Section 43A.
No Para 46 & 46A exists.
Impact:
Section 43A does not apply since it applies only if it relates to the imported assets.
Presently, such FE differences are not recognized for tax purposes i.e. gain is not taxable,
loss is not deductible/ allowable.
42. Capital monetary items – Not relating to Imported assets
Judicial precedents
Section 43A of the Act was introduced by the Finance (No. 2) Act, 1967 with
effect from 1st April, 1967.
In the case Tata Iron & Steel [TISCO - (1998) 231 ITR 285 (SC)] for the case
relating to AY 1960-61 and AY 1961-62 (When Section 43A was not introduced),
Supreme Court had held that cost of an asset and cost of raising money for
purchase of asset are two different and independent transactions and events
subsequent to acquisition of assets cannot change price paid for it. Therefore,
fluctuations in foreign exchange rate while repaying instalments of foreign loan
raised to acquire asset cannot alter actual cost of assets for computing
depreciation.
43. Capital monetary items – Not relating to Imported assets
Hence, given that the provisions of Section 43A requiring foreign
exchange gain/loss to be adjusted with the cost of the assets, apply only
with respect to imported assets, the case of indigenous assets will
continue to be governed by the ratio of the Tata Iron & Steel’s decision.
Gains arising on deposits (in foreign currency) are capital receipt as the
deposits were in essence loan/capital and not a trading receipt - Shell Company
of China Ltd. [22 ITR 1 (CA)]
If the foreign currency is held as a capital asset or as fixed capital, profit or loss
to an assessee on account of appreciation or depreciation in the value of
foreign currency held by it, on conversion into another currency, would be of
capital nature. - Sutlej Cotton Mills Ltd., [(1979) 116 ITR 1 (SC)]
44. Capital monetary items – Not relating to Imported assets
Conclusion
Since ICDS requires recognition in P&L A/c subject to provisions of Section 43A
and Section 43A applies only if it relates to imported assets, a controversy may
arise, whether such exchange fluctuation gain or loss on capital monetary items
(not relating to imported assets) would be allowable as an income or expense
as per ICDS or not.
May be considered as non-cognizable for tax purposes based on its Capital
nature.
It is also arguable that judicial settled position would remain unchanged as the
Act shall prevail in case of conflicts with ICDS.
45. Foreign operations
AS - 11 ICDS
Foreign Operation is a subsidiary,
associate, joint venture or branch of the
reporting enterprise, the activities of
which are based or conducted in a
country other than the country of the
reporting enterprise.
“Foreign operations of a person” is a
branch, by whatever name called, of that
person, the activities of which are based
or conducted in a country other than
India.
Impact: The definition of foreign operations given under ICDS does not include a
subsidiary, associate or joint venture of the reporting enterprise. Hence, the tax positions
will remain the same in the case of foreign operations being a subsidiary, associate or
joint venture of the person
Integral operations – No change in tax positions
46. Non-integral foreign operations
AS - 11 ICDS
Exchange Differences arising on translating
monetary items of non-integral foreign
operations shall be transferred to “Foreign
Currency Translation Reserve”(FCTR).
Exchange Differences arising on translating
of assets and liabilities both monetary
and non monetary of non integral foreign
operations shall be recognised as “income
or expense” in that previous year.
Impact:
FE differences arising from the translation of the financials on MTM basis will have to be
considered in Computation of Income Statement.
Capital and revenue items are not distinguished in ICDS. MTM to be recognised even on
tangible fixed assets.
Recognition of the amount lying in the FCTR on 31st March, 2015.
In case of change of foreign operations from integral to non-integral and vice-versa, no
adjustment is required for the foreign exchange difference, since unlike AS, no FCTR is
maintained under ICDS.
47. AS 22 Applicability
DTL or DTA will be created as the case may be due to the above difference.
E.g. Suppose Exchange Differences arising on translating financial statements of non-
integral foreign operations results into FE income.
This will result into creation of DTA subject to condition of AS 22 i.e. consideration
of prudence and virtual certainty as to sufficiency of future taxable income in case of
unabsorbed depreciation or carry forward of losses under tax laws.
On disposal of Net Investment in Non Integral Operation, according to AS 11 the
balance in FCTR will be recognized as income which will result into reversal of DTA.
AS 11 ICDS
Foreign Currency Translation Reserve (FCTR) Treated as income for tax purpose
48. Applicability of Ind AS 12 and Ind AS 21
As per Ind AS 21, the exchange difference shall be recognized in “Other
Comprehensive Income (OCI)”. It is a form of reserve forming part of equity.
So effect under Ind AS will also be same and results into creation of DTA (According
to Ind AS parlance deductible temporary differences)
49. Forex derivatives – Forward exchange contracts
Purpose AS - 11 ICDS Impact
Hedging –
Capital
account
Premium/discount is
amortized over the life of
contract.
Restated on MTM basis at
year end and difference is
recognized in P&L.
Profit/loss on cancellation
or renewal is also
recognized in P&L.
Same as
AS – 11
Impact:
As per the Act, FE difference is capitalized to
imported asset on actual settlement, if it is
related to imported asset. If not related to
imported assets, exchange difference may give
rise to capital gains but only on actual
settlement and not on MTM basis. However,
ICDS requires FE differences to be
recognized as revenue income/ expense
which is contrary to the judicial settled
position under the Act.
Hedging –
Revenue
account
Same as above Same as
above
No change in tax position in relation to
contracts on revenue account
50. Impact of Hedging – Capital account Explained with the help of Following
Illustration
On 01-01-16, XYZ Ltd. borrowed loan from USA to purchase asset from India,
payment to be made $ 100,000 on 30-06-16. On 01-01-16 itself it entered into a
forward exchange contract to mitigate the risks associated with changes in exchange
rates. The company follows Para 46A for the accounting purpose. The exchange rates
(Rs. per US $) are as below:
Period 01-01-16 31-03-16 30-06-16
Spot Rate 60 63 65
Forward rate (for six months) 62
Forward rate (for three months) 64
51. Rs. in Lakhs Cont.
Particulars
F.Y. 2015-16 FY. 2016-17
Accounting Purpose
Income-tax purpose
Accounting Purpose
Income-tax purpose
Pre-ICDS Post-ICDS Pre-ICDS Post-ICDS
Premium 1
[62-60]/2
(capitalized as per Para
46A over period of
contract)
Nil
(Non-cognizable
for the tax
purpose)
*(1)
[62-60]/2
(deducted from Net
Profit as per books to
arrive at PGBP)
1
[62-60]/2
(capitalized as per Para
46A over period of
contract)
Nil
(Non-
cognizable for
the tax
purpose)
*(1)
[62-60]/2
(deducted from Net
Profit as per books to
arrive at PGBP)
Forward
Exchange
Gain
(3)
[63-60]
(reduced from value
of asset as per Para
46A)
Nil
(Non-cognizable
for the tax
purpose)
*3
[63-60]
(Added to Net Profit
as per books to arrive
at PGBP)
(2)
[65-63]
(reduced from value of
asset as per Para 46A)
Nil
(Non-
cognizable for
the tax
purpose)
*2
[65-63]
(Added to Net Profit
as per books to arrive
at PGBP)
Loss due to
increase in
Liability
3
[63-60]
(capitalized as per Para
46A)
Nil
(Non-cognizable
for the tax
purpose)
*(3)
[63-60]
(deducted from Net
Profit as per books to
arrive at PGBP)
2
[65-63]
(capitalized as per Para
46A)
Nil
(Non-
cognizable for
the tax
purpose)
*(2)
[65-63]
(deducted from Net
Profit as per books to
arrive at PGBP)
* To the extent, ICDS suggests revenue treatment of exchange fluctuations on capital account, it is in conflict with the
provisions of the Act and settled position by the Supreme Court in the case of TISCO-(1998) 231 ITR 285 (SC). However, on
a practical plank, the Tax Department may not challenge treatment as per ICDS.
52. Depreciated Value/ Written Down Value (WDV) of Asset Cont.
This would result into difference of amount of depreciation as per accounts and tax and thus creation
of DTA/DTL as the case may be as per AS 22 “Accounting for Taxes on Income”
F.Y.
Accounting Purpose
Income-tax purpose
Pre-ICDS Post-ICDS
2015-16 Rs. 60,00,000
Add: Rs. 3,00,000
Less: (Rs. 3,00,000)
Add: Rs. 1,00,000
Balance: Rs. 61,00,000
Rs. 60,00,000
Balance: Rs. 60,00,000
Rs. 60,00,000
Balance: Rs. 60,00,000
2016-17 Add: Rs. 2,00,000
Less: (Rs. 2,00,000)
Add: Rs. 1,00,000
Balance: Rs. 62,00,000 Balance: Rs. 60,00,000 Balance: Rs. 60,00,000
53. Forex derivatives – Forward exchange contracts
Purpose AS - 11 ICDS
Others (i.e.
trading,
speculation,
firm
commitment,
highly probable
forecast)
Marked to market at each balance
sheet date and the gain or loss be
recognised in the P&L a/c.
No amortization of premium/
discount.
Premium, discount or exchange
difference on contracts be recognised
at the time of settlement only.
Impact:
SB ruling in Bank of Bahrain & Kuwait (41 SOT 290) which relied on SC ruling in
Woodward Governor’s case supports MTM recognition. Contradiction would arise between
the ICDS and settled position under the Act.
54. Forex derivatives – Other
Other forex derivatives like, futures, interest rate swaps, etc. are not covered by ICDS VI.
ICDS I on accounting policies provides that marked to market loss or an expected loss
shall not be recognized unless the recognition of such loss is in accordance with the
provisions of any other Income Computation and Disclosure Standard. .
Hence, in case of forex derivatives not covered by ICDS VI, ICDS I would apply.
Forward exchange contract includes foreign currency option contract also.
56. Government Grants
AS- 12 ICDS VII
Recognition of grant
• On reasonable assurance of compliance of
attached conditions and reasonable certainty
of ultimate collection
• Mere receipt is not sufficient
• On reasonable assurance of compliance of
attached conditions and reasonable certainty
of ultimate collection
or
• On actual receipt basis
Impact:
If the grant is recognized on receipt basis as income even if conditions are not met, it would create
DTA and MAT mismatch. Further, an issue may arise whether grants received in earlier years but
not recognized pending fulfillment of conditions will require recognition on receipt basis as per
ICDS in year of transition.
Grants other than those covered by specific provisions
• Revenue grant to be credited as income or
reduced from related expense.
• Same as AS-12 but no clarification that it is
restricted only to revenue grants.
57. Government Grants
AS- 12 ICDS VII
Relatable to depreciable fixed assets
• Requires reduction from the cost of fixed
asset or recognition as deferred revenue by
systematic credit to P&L A/c.
• Consistent with Explanation 10 to Section
43(1), requires reduction from the cost of
fixed asset.
Relatable to non depreciable fixed assets
• To be credited as capital reserve, if no
conditions attached to the grant.
• To be credited to P&L A/c over period of
incurring cost of meeting conditions of grant.
To be treated as income –
• on an upfront basis, if there are no conditions
attached to grant.
• over the period over which cost of meeting
conditions is incurred.
58. Government Grants
AS- 12 ICDS VII
Grant in the nature of promoter’s contribution
• To be credited to capital reserve and to be
treated as shareholders funds.
• No such clarity for grants in the nature of
promoter’s contribution. Therefore, by
implication, requires recognition as income.
Compensation for expenses / loss incurred or for giving immediate financial support
• To be recognised in P&L A/c in the year in
which it is receivable
• Same as AS-12
Disclosure requirement
• No disclosure of unrecognized grants • Disclosure of unrecognized grants
59. Government Grants
• Based on the purpose and object for which the subsidy has been given, various judgments
have been pronounced.
• ICDS does not seek to recognize the need for assessing characterization of subsidy into a
revenue or a capital grant on the basis of motive test.
• To the extent ICDS requires recognition of any subsidy as income (for example, subsidy of a
capital nature relatable to non depreciable fixed asset) will have conflict with the Act.
• To circumvent the same, the definition of 'Income' under Section 2(24) has been amended by
inserting a new sub-clause (xviii) to provide that assistance in the form of a subsidy or grant or
cash incentive or duty drawback or waiver or concession or reimbursement by the CG or a SG
or any authority or body or agency in cash or kind to the assesse [other than one considered
under Explanation10 to Section 43(1)] shall be the income of an assessee. Subsidy which is
reduced from the actual cost of the asset as per Explanation 10 to Section 43(1) shall be not
taxable as revenue receipt.
• The said amendment is in line with the ICDS.
61. Securities
AS- 13 ICDS VIII
Applicability
This Standard deals with accounting for
investments in the financial statements of
enterprises.
Assets held as stock-in-trade are not
‘investments’*
This ICDS deals with securities held as stock-in-
trade.
*However, as per AS 13, the manner in which they are accounted for and disclosed in the financial
statements is quite similar to that applicable in respect of current investments. Accordingly, the
provision of AS 13 in respect of current investments are applicable to securities held as stock-in-
trade.
62. Securities
AS- 13 ICDS VIII
Carrying amount
Current investments
are valued at lower of
cost and fair value.
Securities held as Stock-in-trade shall be valued at actual cost or NRV,
whichever is lower. (where the actual cost cannot be ascertained by
reference to specific identification, the cost shall be determined on the
basis of FIFO.)
Individual Scrip wise
Valuation
Category wise Valuation -
Classification into four categories namely, (a) shares; (b) debt securities;
(c) convertible securities; and (d) any other securities not covered above.
Valuation of unlisted/ thinly traded securities at cost - At the end of any
previous year, securities not listed on a recognized stock exchange; or
listed but not quoted on a recognized stock exchange with regularity from
time to time, shall be valued at actual cost initially recognized.
63. Example
Shares Cost NRV
Valuation as per AS 13 Valuation as per ICDS
Lower of cost or NRV
- Individual scrip wise
Lower of cost or NRV
- Category wise
ABC Ltd. 100 40 40
XYZ Ltd. 200 140 140
PQR Ltd. 300 150 150
EFG Ltd. 400 250 250
LMN Ltd. 100 500 100
Total 1100 1080 680 1080
Impact: Category wise valuation results into accelerated taxation since appreciation in the
value of certain securities will be set off against diminution in the value of other securities.
64. Securities
AS- 13 ICDS VIII
Pre-acquisition Interest
• AS 13 and ICDS on securities both require the pre-acquisition interest to be deducted from the
actual cost.
• SC in Vijaya Bank’s case (187 ITR 541) had ruled that pre-acquisition interest paid is part of
purchase cost of security.
• But as per the case of American Express International Banking Corpn. v. CIT [2002] 125 Taxman
488 (Bom.), if income from securities is taxed under PGBP, department ought to have taxed
interest received from broken period and allow deduction of interest paid for broken period.
• Also the above case is followed as a prevalent practice.
65. Example
Interest Bearing Security acquired on 1st February, 2016
Interest rate 12%
Interest Payable Half Yearly (31st Dec & 30th June)
Cost of Interest Bearing Security 1,010 (Rs. 1,000 - Face Value & Cost at which security
acquired plus Rs. 10 – Pre-acquisition interest for 1 month)
AS 13 & ICDS Prevalent Practice
Cost of Security as on 31-03-2015* 1,010 1,000
Adjustment to P&L for 2015-16 NIL 10 debited as int. exp.
On 30th June, 2016 when int. received
Adjustment to P&L for 2016-17 50 credited as income 60 credited as income
Adjustment in Cost 10 reduced from cost NIL
*NRV is assumed to be higher than cost
66. Securities
AS- 13 ICDS VIII
If an investment is acquired by the issue of shares or
assets, the acquisition cost should be the fair value of
the securities issued/fair value of the asset given
up. Alternatively, the acquisition cost of the investment
may be determined with reference to the fair value of
the investment acquired if it is more clearly evident.
Where a security is acquired in
exchange for other securities or
asset, the fair value of the
security so acquired shall be its
actual cost.
Usual Practice: Concept of cost should normally relate to what is given up.
67. Treatment of receipt of bonus shares
• The cost of bonus shares is taken as NIL for capital gain purpose.
• However, for a trader the cost of bonus shares is computed on average principle basis in terms
of the SC ruling in the case of CIT v. Dalmia Investment Co. Ltd. [52 ITR 567 (1964)]
• ICDS does not provide any specific treatment for bonus shares. Hence, there could be two views
on treatment of its cost.
View 1 : Since ICDS is silent, matter will be governed by the SC ruling upholding the averaging
principle.
View 2 : Since ICDS requires security to be recognised at actual cost and as purchase prise is NIL,
bonus shares to be valued at NIL.
68. Treatment of convertible debentures
• Convertible securities is a separate category under ICDS
• So long as convertible debentures are not converted into shares, valuation will be
under separate category of convertible securities
• When convertible debentures are converted into shares, the valuation of shares will
move into separate category i.e. of shares
• Issue will arise on how conversion should be treated for tax purposes and how cost
should be computed for shares acquired on conversion of debentures
69. Cont.
• In case of capital gains, in view of specific provisions u/s 47(x) and 49(2A), the
conversion is exempt from capital gains and cost of debentures is substituted as cost of
shares
• In case of business income two views are possible:
View 1 : The conversion may be regarded as ‘exchange’ and the fair value of shares acquired
may be regarded as cost.
View 2 : Conversion is not equivalent to ‘exchange’ since there is an extinguishment of
debentures. Since ICDS is silent, it may be treated as tax neutral event and actual cost of
debentures may be substituted as actual cost of shares.
71. Borrowing Costs
AS - 16 ICDS
• Qualifying Asset is an asset
that takes substantial period
of time to get ready for its
intended use or sale.
• Qualifying Assets mean:
o Tangible Assets – land, plant, etc.
o Intangible Assets – patents, licenses, etc.
o Inventories – that require 12 months or more to bring
them to saleable condition.
Impact:
• Specified tangible & intangible assets are qualifying assets regardless of substantial period
condition.
• ICDS includes ‘land’ also in the definition of qualifying assets, unlike AS-16. As per ICDS, the
borrowing cost in respect of land shall be capitalized. The depreciation shall not be allowed on
the same since the land is a non-depreciable asset. However, the capitalized cost shall form
part of a cost of asset while calculating Income from Capital Gain in respect of that land.
72. Borrowing Costs
AS - 16 ICDS
• Commencement of Capitalisation:
The date of fulfilment of three
conditions viz. incurrence of capex,
incurrence of borrowing costs and
preparatory activities are in progress.
a)Specific borrowings – Date on
which funds were borrowed
b)General borrowings – Date on
which funds were utilised.
Impact: The capitalisation period starts early under the ICDS as compared to
AS-16.
73. Borrowing Costs
AS - 16 ICDS
• Method of Capitalisation:
Specific Borrowings:
Actual borrowing costs incurred on the
borrowing during the period less any income
from temporary investment of those borrowings.
Specific Borrowings:
Actual borrowing costs
incurred during the period
on the funds borrowed.
Impact: AS-16 requires income from temporary deployment of unutilised funds to be
reduced from borrowing cost. However, ICDS does not provide for the same. The income
from temporary deployment of unutilised funds from specific loans shall be taxable as
Income from other sources under the ICDS.
SC ruling in Tuticorin Alkali Chemicals (227 ITR 172) requires that interest income earned
from temporary deployments of funds has to be offered to tax immediately as IFOS. Hence
above deviation has no tax impact.
74. Borrowing Costs
AS - 16 ICDS
General Borrowings:
Costs determined by applying capitalisation
rate to the expenditure incurred on the asset.
The rate is weighted average of borrowing
costs applicable to the borrowings during the
period other than specific borrowings.
General Borrowings:
Costs determined by
following formula;
A * B
C
75. Borrowing Costs
In the formula given in ICDS for capitalisation of general borrowing costs A, B and C stands
for:
A = Borrowing costs incurred during previous year except on specific borrowings
B =a)Average cost of QA appearing in balance sheet on first and last day of the previous
year
b)Half of the cost of QA, if it does not appear in balance sheet on the first day or both
first and last day of the previous year
c)Average cost of QA as on first day of previous year and date of completion, if it does
not appear in balance sheet on the last day of the previous year
C = Average of total assets, other than those funded by specific borrowings, as appearing
in balance sheet as on first and last day of previous year
* QA = Qualifying Assets other than those funded by specific borrowings.
76. Borrowing Costs
AS - 16 ICDS
• Suspension of Capitalisation:
During extended periods in which active
development of the asset is interrupted.
No provision regarding suspension of capitalisation
of borrowing cost.
Impact: Borrowing cost incurred during the periods in which active development of the asset is
interrupted can also be capitalised under the ICDS.
• Cessation of Capitalisation:
When substantially all activities necessary
to prepare the qualifying asset for its
intended use or sale are complete.
a) Qualifying Asset – when such asset is first put to use.
b) Inventory – when substantially all activities necessary
to prepare it for its intended sale are complete.
Impact: Income-tax Act allows capitalisation of the borrowing cost till the asset is put to use (Section
43(1) r.w. Expl. 8). ICDS also allows the capitalisation till the date of put to use. Hence, there is no
impact.
79. Recognition of provisions
AS - 29 ICDS
Provisions shall be recognised if it is
probable that outflow of economic
resources will be required.
Provision is not discounted to NPV
Provisions shall be recognised if it is
reasonably certain that outflow of
economic resources will be required.
Provision is not discounted to NPV
Impact:
The criteria for recognition of provisions on the basis of the test of ‘probable’ (i.e.
more likely than not criteria) replaced with the requirement of ‘reasonably certain’.
In the absence of definition and scope of ‘reasonably certain’ criteria, an ambiguity
would arise on assessment of ‘reasonably certain’ criteria.
In the Act, there is no specific provision for recognition of provisions. However,
provisions are allowed based on accrued liabilities as per ordinary principles of
commercial accounting.
80. Recognition of provisions
Impact:
Provision for Warranty is allowed as an expenditure upholding the test of
‘probable’ warranty obligation in the following judgments.
o Rotork Controls India P. Ltd. (2009) 314 ITR 62 (SC) (extract on next
slide)
o Himalaya Machinery (P) Limited v DCIT 334 ITR 64
o CIT vs. Luk India P. Ltd. 52 DTR 117.
o Siemens Public communication Networks Limited v CIT
o CIT v Indian Transformer Limited. 270 ITR 259
81. Recognition of provisions
Rotork Controls India (P.) Ltd. v. CIT [2009] 180 TAXMAN 422 (SC)
A provision to qualify for recognition, there must be a present obligation arising
from past events, settlement of which is expected to result in an outflow of
resources and in respect of which a reliable estimate of amount of obligation is
possible.
If historical trend indicates that in past large number of sophisticated goods were
being manufactured and defects existed in some of items manufactured and
sold, then provision made for warranty in respect of army of such sophisticated
goods would be entitled to deduction from gross receipts under section 37(1),
provided data is systematically maintained by assessee.
82. Meaning of obligation
AS 29 ICDS
Clarifies that obligations may be legally enforceable and
may also arise from normal business practice, custom
and a desire to maintain good business relations or act in
an equitable manner.
No specific
guidance on
meaning of
‘obligation’
Impact:
Provisions made on obligations recognized out of customary business practices or
voluntary obligations may not be allowed. (e.g. informal refunds policy to
dissatisfied customers, employee welfare, etc.)
83. Onerous executory contracts
AS - 29 ICDS
AS-29 is not applicable to “executory
contracts” except where contract is
onerous.
Since “onerous contracts” are
excluded from executory contracts,
AS is applicable to onerous contracts.
Requires upfront recognition of
liabilities under onerous contracts
It is not applicable to “executory
contracts”.
However, here “onerous contracts” are
not specifically excluded from
executory contracts.
Impact:
Deduction for the accrued liabilities on onerous contracts in books will be allowed in
a year in which liability to pay arises.
84. Contingent assets & reimbursement claims
AS - 29 ICDS
Contingent assets/ reimbursement
claims are recognized if inflow of
economic benefits/
reimbursement is “virtually
certain”.
Contingent assets/ reimbursement
claims to be recognized if inflow of
economic benefits/
reimbursements is “reasonably
certain”.
Impact:
Revenue authorities may contend that ‘reasonably certain’ is a lower
threshold than ‘virtually certain’.
It is not made clear whether transitional provision requires recognition of
all past accumulated contingent assets in F.Y. 2015-16.
85. Conclusion
All the ICDS, except ICDS on Securities, have incorporated transitional provisions
according to which the provisions of ICDS may apply retrospectively in certain cases
and prospectively in some other cases.
The ICDS should also entail appropriate modifications in the return of income and
Form No. 3CD.
The ICDS seem to be based on the current AS issued by ICAI. However, listed
companies are required to adopt IND AS from 1st April, 2016. Thus, the accounting
policies for these companies under IND AS could be significantly different from
ICDS.
Thus, providing clarity on the tax position in ICDS in alignment with the IND AS is
also essential.
