Income Computation and Disclosure Standards … Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting standards” with “income computation and disclosure

Income Computation and Disclosure Standards (ICDS)

Presentation by:

CA SURESH K KABRA एस के काबरा एण्ड कम्पनी CHARTERED ACCOUNTANTS

PROVSIONS IN INCOME TAX : 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 regularly employed by the assessee.

Section 145(2) of the Act states that the Central Government may notify income computation & disclosure standards) to be followed by any class of assesses or in respect of any class of income.

Section 145(3) speaks about rejection of books of accounts if AO is not satisfied about correctness or completeness of the accounts or income has not been computed in accordance with standards notified under sub section 2.

History: 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, (CIR 32/2015) the Central Government has notified 10 out of the 12 draft ICDS which were supposed to be effective from 1st April, 2015.

Subsequently revision of ICDS (CIR 87/2016…29.09.2016) and changes in form 3CD (CIR 88/2016 …. 29.09.2016) was made and it was made effective from AY 2017-18.

General Principles: HEADS COVERED: ICDS are applicable for computation of income

chargeable under the head “profits and gains of business or profession” and “income from other sources”.

ASSESSEES COVERED: Revised ICDS are applicable to all assessees other than Individual and HUF who is not required to get his accounts of the PY audited in accordance with the provisions of section 44AB and who are following MERCANTILE SYSTEM of ACCOUNTING.

CONFLICT BETWEEN LAW & ICDS: In case of conflict between the provisions of the Act and ICDS, the provisions of the Act shall prevail to that extent.

General Principles: ICDS are ‘not applicable’ in following circumstances:

a. Where the assessee follows cash system of accounting b. Where income chargeable to tax comprises of income other than ‘profits and gains

of business or profession’ or ‘income from other sources’. Whether ICDS apply in case of presumptive taxation?

Since in presumptive taxation mode the assessee does not maintain any set of books of account and there is no applicability of mercantile system of account thus ICDS do not apply in case of presumptive taxation. However if one gets his accounts audited because of lower profits, the ICDS will apply

ICDS impact over maintenance of books of accounts? ICDS are not supposed to provide the manner of maintenance of books of accounts they simply provide the income computation and disclosure manner.

General Principles:

Whether ICDS have any impact on Minimum Alternate Taxation?

Since ICDS does not apply to maintenance of books of account and in turn on BOOK PROFIT declared by an COMPANY assessee, accordingly the ICDS does not have any applicability on Income under MAT, though it applies to COMPUTATION of TOTAL INCOME of that Company under regular provisions of the Act. Further as there is no concept of BOOK PROFIT under the provisions u/s 115JC (AMT), it applies to AMT u/s 115JC.

What are the consequences of ICDS non-compliance?

ICDS non-compliance, as per the provisions of section 145(3) shall enable the Assessing Officer to make an assessment in the manner provided under section 144 of the Income Tax Act 1961 . However there is no specific penal provision inserted in the law regarding non-compliance of ICDS.

General Principles: What is Reasonable Cause for changes in accounting policy?

Reasonable Cause is as existing concept and has evolved well over a period of time conferring desired flexibility to the tax payer in deserving cases. (Circular No 10/2017 dated 23/03/2017)

Where provisions of ICDS are inconsistent with judicial rulings, Whether these judicial ruling shall prevail ?

ICDS have been notified after due deliberation and examination of judicial views for bringing certainty on the issue covered by it accordingly provisions of ICDS shall prevail over judicial rulings.

General Principles:

How disclosures under ICDS are to be made or where to be made: All ICDS notified provide for the disclosure requirement and such disclosure is required to be made in amended Form No 3CD, Clause 13(d) to Clause 13(f).

Whether ICDS will impact Tax Audit?

YES, ICDS are certainly going to impact tax audit, for example, the valuation of closing stock as per ICDS II shall have an impact on 3CD filling. Similarly deviation in value of stock will also form part of 3CD reporting. Like wise Valuation of securities, Borrowing cost , Revenue recognition will also have major impact in 3CD reporting.

General Principles: Penal Consequences of ICDS non-compliance:

There are no specific provisions inserted in the income tax law particularly in Chapter – XXI : “Penalties Imposable” to levy penal consequences for non-compliance of ICDS. However any non compliance will result into addition to the TOTAL additions in income due to applicability of ICDS may attract concealment penalty consequences etc.

List of ICDS 1) ICDS I: Accounting Policies (AS-1) 2) ICDS II: Valuation of Inventories (AS-2) 3) ICDS III: Construction Contracts (AS-7) 4) ICDS IV: Revenue Recognition (AS-9) 5) ICDS V: Tangible Fixed Assets (AS-10) 6) ICDS VI: The Effects of Changes in Foreign Exchange Rates (AS-11) 7) ICDS VII: Government Grants (AS-12) 8) ICDS VIII: Securities (AS-13) 9) ICDS IX: Borrowing Costs (A-16) 10) ICDS X: Provisions, Contingent Liabilities and Contingent Assets (AS-29)

PREAMBLE to all ICDSs

• 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 the 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.

DISCLOSURE….ICDS…I • Disclosure of Accounting Policies

• 6. All significant accounting policies adopted by a person shall be disclosed.

• 7. Any change in an accounting policy which has a material effect shall be disclosed. 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.

• 8. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item.

• 9. If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed.

ICDS……I ICDS I-Accounting Policies

1) The assessee maintains his accounts on mercantile basis and are consistent and in consonance in accordance with generally accepted accounting principles. For details please refer to Notes to Accounts.

ICDS I-Accounting Policies

2) Any change in accounting policy which has a material effect- No Change


3) The amount by which any item is affected by such change- Not App


4) where such amount is not ascertainable, wholly or in part- Not App


5) 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-Not Applicable

SCOPE…..ICDS..II • Scope

• 1. This Income Computation and Disclosure Standard shall be applied for valuation of inventories, except:

• (a) Work-in-progress arising under 'construction contract' including directly related service contract which is

dealt with by the Income Computation and Disclosure Standard on construction contracts; • (b) Work-in-progress which is dealt with by other Income Computation and Disclosure Standard; • (c) Shares, debentures and other financial instruments held as stock-in-trade which are dealt with by the

Income Computation and Disclosure Standard on securities; • (d) Producers' inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the

extent that they are measured at net realisable value; • (e) Machinery spares, which can be used only in connection with a tangible fixed asset and their use is

expected to be irregular, shall be dealt with in accordance with the Income Computation and Disclosure Standard on tangible fixed assets.

DISCLOSURE…..ICDS…II

• 26. The following aspects shall be disclosed, namely:—

• (a) the accounting policies adopted in measuring inventories including the cost formulae used. Where Standard Costing has been used as a measurement of cost, details of such inventories and a confirmation of the fact that standard cost approximates the actual cost; and

• (b) the total carrying amount of inventories and its classification appropriate to a person.

ICDS……II

ICDS II-Valuation of Inventories 1. The raw materials are valued at cost, finished stock is valued at cost or NRV which is lower

ICDS II-Valuation of Inventories 2. Where the standard costing has been used as a measurement of cost, details of such inventories- Not Applied

ICDS II-Valuation of Inventories 3. The total carrying amount of inventories and its classification appropriate to a person - As per Annexure - to Balance sheet

SCOPE…….ICDS…..III

•Scope

• 1. This Income Computation and Disclosure Standard should be applied in determination of income for a construction contract of a contractor.

DISCLOSURE…..ICDS….III

• 23. A person shall disclose: • (a) the amount of contract revenue recognised as revenue in the period; and • (b) the methods used to determine the stage of completion of contracts in progress.

• 24. A person shall disclose the following for contracts in progress at the reporting date,

namely:— • (a) amount of costs incurred and recognised profits (less recognised losses) upto the

reporting date; • (b) the amount of advances received; and • (c) the amount of retentions.

ICDS……III ICDS III-Construction Contracts

1. Disclose the amount of contract revenue recognised as revenue in the period- Not Applicable

ICDS III-Construction Contracts

2. Disclose the methods used to determine the stage of completion of contracts in progress - Not Applicable


3.For contracts in progress, amount of costs incurred and recognised profits (less recognised losses) upto the reporting date. -Not Applicable


4. For contracts in progress, the amount of advances received. -Not applicable


5. For contracts in progress, the amount of retentions.- Not applicable

SCOPE…..ICDS…IV • 1(1) 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

• (i) the sale of goods; • (ii) the rendering of services; • (iii) the use by others of the person's resources yielding interest, royalties or

dividends. • (2) 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.

DISCLOSURE……ICDS….IV • 13. Following disclosures shall be made in respect of revenue recognition, namely:—

• (a) in a transaction involving sale of good, total amount not recognised as revenue during the

previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty;

• (b) the amount of revenue from service transactions recognised as revenue during the previous year; • (c) the method used to determine the stage of completion of service transactions in progress; and • (d) for service transactions in progress at the end of previous year:

• (i) amount of costs incurred and recognised profits (less recognised losses) upto end of previous

year; • (ii) the amount of advances received; and • (iii) the amount of retentions.

ICDS…….IV ICDS IV-Revenue Recognition

1. In a transaction involving sale of good, total amount not recognised as revenue during the year- NIL

ICDS IV-Revenue Recognition

2.The amount of revenue from service transactions recognised as revenue during the previous year - NIL/ As per Annexure ….


3. The method used to determine the stage of completion of service transactions in progress - The duration of service completion is not more than 90 days hence recognised on completion of service.


4. For service transaction in progress, disclose amount of costs incurred and recognised profits (less recognised losses) upto end of previous year - For services cost incurred is shown as WIP in the financial statement and recognised profit is NIL


5. For services transactions in progress, disclose the amount of advances received.-NIL


6. For service transactions in progress, disclose the amount of retentions. - NIL

SCOPE……ICDS….V

•1. This Income Computation and Disclosure Standard deals with the treatment of tangible fixed assets.

DISCLOSURES……ICDS….V • 19. Following disclosure shall be made in respect of tangible fixed assets, namely:—

• (a) description of asset or block of assets; • (b) rate of depreciation; • (c) actual cost or written down value, as the case may be; • (d) additions or deductions during the year with dates; in the case of any addition of an asset, date put to

use; including adjustments on account of— • (i) Central Value Added Tax credit claimed and allowed under the CENVAT Credit Rules, 2004; • (ii) change in rate of exchange of currency; • (iii) subsidy or grant or reimbursement, by whatever name called; • (e) depreciation Allowable; and • (f) written down value at the end of year.

SCOPE……ICDS….VI • This Income Computation and Disclosure Standard deals with:

• (a) treatment of transactions in foreign currencies;

• (b) translating the financial statements of foreign operations;

• (c) treatment of foreign currency transactions in the nature of forward exchange contracts.

DISCLOSURES……ICDS….VI

•NO DISCLOSURES PROVIDED

SCOPE….ICDS…VII

• 1. This Income Computation and Disclosure Standard deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.

• 2. This Income Computation and Disclosure Standard does not deal with:—

• (a) Government assistance other than in the form of Government grants; and

• (b) Government participation in the ownership of the enterprise.

DISCLOSURES…..ICDS….VII • 14. Following disclosure shall be made in respect of Government grants, namely:—

• (a) nature and extent of Government grants recognised during the previous year

by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year;

• (b) nature and extent of Government grants recognised during the previous year as income;

• (c) nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons thereof; and

• (d) nature and extent of Government grants not recognised during the previous year as income and reasons thereof.

ICDS…..V/VII ICDS V-Tangible Fixed Assets

Refer Schedule 18 of form 3CD

ICDS VII-Governments Grants

1. Nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the assets or from the written down value or assets or from the written down value of block of assets and reasons.


2. Nature and extent of Government grants recognised during the previous year as income


3. Nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons


4. Nature and extent of Government grants not recognised during the previous year as income and reasons thereof. - NIL

SCOPE……ICDS…VIII….PART A • 1. This part of Income Computation and Disclosure Standard deals with securities

held as stock-in-trade.

• 2. This part of Income Computation and Disclosure Standard does not deal with:

• (a) the bases for recognition of interest and dividends on securities which are covered by the Income Computation and Disclosure Standard on revenue recognition;

• (b) securities held by a person engaged in the business of insurance;

• (c) securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013).

SCOPE….ICDS…VIII….PART B • This part of Income Computation and

Disclosure Standard deals with securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 (1 of 1956) or the Companies Act, 2013 (18 of 2013).

DISCLOSURES ….ICDS…VIII

•NO DISCLOSURES PROVIDED

SCOPE….ICDS…..IX

• 1. (1) This Income Computation and Disclosure Standard deals with treatment of borrowing costs.

• (2) This Income Computation and Disclosure Standard does not deal with the actual or imputed cost of owners' equity and preference share capital.

DISCLOSURE……ICDS….IX • 11. The following disclosure shall be made in

respect of borrowing costs, namely:—

• (a)the accounting policy adopted for borrowing costs; and

• (b)the amount of borrowing costs capitalised during the previous year.

SCOPE……ICDS….X • 1. This Income Computation and Disclosure Standard deals with provisions, contingent

liabilities and contingent assets, except those:

• (a) resulting from financial instruments;

• (b) resulting from executory contracts;

• (c) arising in insurance business from contracts with policyholders; and

• (d) covered by another Income Computation and Disclosure Standard.

• 2. This Income Computation and Disclosure Standard does not deal with the recognition of revenue which is dealt with by Income Computation and Disclosure Standard - Revenue Recognition.

• 3. The term 'provision' is also used in the context of items such as depreciation, impairment of assets and doubtful debts which are adjustments to the carrying amounts of assets and are not addressed in this Income Computation and Disclosure Standard.

DISCLOSURES……ICDS…X • 21(1) Following disclosure shall be made in respect of each class of provision, namely:—

• (a) a brief description of the nature of the obligation;

• (b) the carrying amount at the beginning and end of the previous year;

• (c) additional provisions made during the previous year, including increases to existing provisions;

• (d) amounts used, that is incurred and charged against the provision, during the previous year;

• (e) unused amounts reversed during the previous year; and

• (f) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.

• (2) Following disclosure shall be made in respect of each class of asset and related income recognised as provided in para 11, namely:—

• (a) a brief description of the nature of the asset and related income;

• (b) the carrying amount of asset at the beginning and end of the previous year;

• (c) additional amount of asset and related income recognised during the year, including increases to assets and related income already recognised; and

• (d) amount of asset and related income reversed during the previous year.

ICDS….IX / X ICDS IX Borrowing Costs

1. The accounting policy adopted for borrowing cost.- The borrowing cost of qualifying assets are capitalised in accounts. 2. The amount of borrowing cost capitalised during the previous year. – NIL

ICDS X-Provisions, Contingent Liabilities and Contingent Assets

1. A brief description of the nature of the obligation - A provision shall be recognised when the assessee has a present obligation as a result of a past event, it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

2. The carrying amount at the beginning and end of the previous year. – NIL 3. Additional provisions made during the previous year, including increases to existing provisions –NIL

4. Amount used, that is incurred and charged against the provision, during the previous year. NIL

5. Unused amounts reversed during the previous year – NIL 6. The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement –NIL

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Income Computation and Disclosure Standards … Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting standards” with “income computation and disclosure

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