Income Computation and Disclosure Standards (ICDSs)

Introduction:

ICDSs were introduced vide notification No. 87/2016 dt. 29.09.2016 applicable from A.Y. 2017-18 onwards [Section 145(2) of the Income Tax Act, 1961]

Applicability of ICDSs:

• Applicable for computation of income under head "Profits and Gains of business/profession" and "Income from Other Sources"

• Applicable to all the assessees (other than individual/HUF not liable to tax audit u/s. 44AB) following mercantile system of accounting

• In case of conflict between the provisions of the Income Tax Act and ICDS, the provisions of the Act shall prevail over ICDS to that extent

Clarifications made vide Circular No. 10/2017:

a. Interplay between ICDS-I and Maintenance of Books of Accounts:

It is clarified that the Accounting Policies mentioned in ICDS-I are required to be followed only for purpose of computation of income and not for maintenance of books of account.

b. Applicability of ICDS in certain cases:

The clarifications have been issued by the CBDT on applicability of ICDS to the persons covered under presumptive taxation scheme, Companies following Ind-AS, Computation under MAT/ AMT, etc. as follows:

i. Persons covered under presumptive taxation scheme (e.g. u/s. 44AD, 44AE, 44ADA, 44B, 44BB, AABBA of the Income Tax Act, 1961): ICDS are applicable for computation of income under head Profits and Gains of business/profession and Income from Other Sources and hence the relevant ICDS shall also apply to persons computing income under the relevant presumptive taxation scheme.

ii. Companies following Ind-AS: ICDS are applicable for computation of income as per Income Tax Act irrespective of the accounting standards adopted by the companies.

iii. Computation under MAT/ AMT: ICDS shall not apply for computation of book profit u/s. 115JB of the Act as it is applicable in case of computation under normal provisions of the Act. However, as AMT is computed on adjusted total income derived by making specified adjustments to total income computed under normal provisions of the Act, the provisions of ICDS shall apply for AMT computation.

iv. Income liable to tax on gross basis: ICDS are applicable for computation of income on gross basis (e.g., interest, royalty, FTS u/s. 115A of the Act) for arriving at the amount chargeable to tax. 

v. Conflict between ICDS & Income Tax Rules, 1962: As ICDS provide for general principles for computation of income, in case of conflict between the provisions of Rules and ICDS, the provisions of rules which deal with specific circumstances shall prevail.

Notified ICDSs AND Corresponding Accounting Standard and IND AS:

Name of ICDS	Corresponding Accounting Standard	Corresponding IND AS
ICDS I Accounting Policy	AS – 1 Disclosure of Accounting Policy	IND AS – 1 Presentation of Financial Statements
ICDS II Valuation of Inventory	AS – 2 Inventory	IND AS – 2 Inventories Accounting
ICDS III Construction Contracts	AS – 7 Construction Contracts	IND AS – 115 AND IND AS 11
ICDS IV Revenue Recognition	AS – 9 Revenue recognition	IND AS 115 AND IND AS 18
ICDS V Tangible Fixed Asset	AS – 10 Property, Plant and Equipment	IND AS 16 Property, Plant and Equipment
ICDS VI Effect of Foreign Exchange Rates	AS – 11 Effect of Foreign Exchange Rate	IND AS 21 – Effect of Foreign Exchange Rate
ICDS VII Government Grants	AS – 12 Government Grants	IND AS 20 – Government Grant and Assistance
ICDS VIII Securities	AS – 13 Accounting for Investment	IND AS – 40, 109, 105
ICDS IX Borrowing Cost	AS – 16 Borrowing Cost	IND AS – 23 Borrowing Cost
ICDS X Provision, Contingent Liability and Contingent Asset	AS – 29 Provision, Contingent Liability and Contingent Asset	IND AS – 37 Provision, Contingent Liability and Contingent Asset

Significant aspects of ICDSs:

ICDS I : Accounting Policies

This ICDS deals with significant Accounting policies for computing Income under the heads “PGBP” & “IFOS”. While it recognizes the fundamental accounting assumption of going concern, consistency and accrual, it specifically de-recognizes the concept of “Prudence and Materiality” in selection of accounting Policy. E.g., Expected losses under construction contract not to be recognized (ICDS-III) means recognize on actual basis.

Accounting policies can be changed if there is “Reasonable cause” for doing so but it is not defined under ICDS. In reference to this the CDBT has clarified that reasonable cause" is an existing concept and has evolved well over a period of time conferring flexibility to the taxpayer in deserving cases.

Under ICDS mark to market Loss or any expected Loss is not allowed unless actually occurred or allowed by other ICDS [36(1)(xviii) r.w.s.40A(13)] – In the books of accounts Prudence concept to be followed i.e. provision to be made for all known liabilities and losses on best estimate basis.

However, it is silent about mark to market gain but the CBDT has clarified that same principle of mark to market loss shall apply mutatis mutandis to mark to market gains or an expected profit, i.e., MTM Gains not to be recognized unless specified in any ICDS).

ICDS II : Valuation of Inventories

This ICDS requires inventory to be valued at cost or NRV, whichever is lower and requires disclosure of the accounting policies adopted in measuring inventories including the cost formulae used and the total carrying amount of inventories and its classification appropriate to a person.

Inventory valuation in case of certain dissolution:

• In case of partnership firm, AOP or BOI inventory on the date of dissolution shall be valued at NRV, whether or not business is discontinued

Pre-ICDS as per the ruling in the case of Shakti Trading Co. vs. CIT (2001) 250 ITR 871 (SC), when dissolution business is not discontinued  inventory to be value at lower of cost or NRV. This treatment now cannot be applied due to specific provisions are given under ICDS to value inventory at NRV and one has to follow the treatment specified under the ICDS.

ICDS III: Construction Contracts

This ICDS is Specifically focused on Percentage of Completion Method for Recognition of Revenue and Cost under Construction Contract. Further, it is to be noted that the penalties arising from the delay of contract completion shall not be reduced from contract revenue.

Other considerations:

• Retention Money:

- Accounting Standards: Silent on treatment of accrual Income

- ICDS: Retention money to be considered as part of contract revenue and revenue to be recognized on POCM basis

Hence as per ICDS retention money would be taxable by considering it as contract revenue.

• Allowability of losses including probable / expected loss:

- Accounting Standard: Losses fully allowable irrespective of commencement, stage of completion and expected profits from other independent contracts

- ICDS: Losses not allowable unless actually incurred and only on POCM basis. ICDS on accounting policies also does not permit recognition of foreseeable loss.

• Contract Work in progress recognition:

- Accounting Standard: Contract cost which relate to future activity shall be recognized as an asset only if recoverability is probable

- ICDS: Contract cost to be recognized as an asset

• Pre-construction incidental income:

- Accounting Standard: Contract cost may be reduced by any incidental income that is not included in contract revenue

- ICDS: Contract cost shall be reduced by any incidental income (except interest, dividend and capital gains) that is not included in contract revenue

 

Hence as per ICDS, Interest, dividend and capital gain to be separately offered as income

ICDS IV: Revenue Recognition

“Revenue “ is the gross cash inflow, receivables or other consideration arising in the course of the ordinary activities of a person from sale of goods, from 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.

• Method of revenue recognition for service contracts:

- Accounting Standard: Proportionate completion method or Completed service contract method

- ICDS: Percentage of Completion Method to be followed. However for Contracts with duration of 90 days or less, follow project completion method Contracts involving indeterminate number of acts over specific period of time, follow straight line method.

• When revenue to be recognized:

-    As per ICDS, revenue to be recognized only if there is reasonable certainty of its ultimate collection from sale of goods and rendering of services.

-    Interest income shall be recognized on the accrual basis determined by the amount outstanding and the rate applicable. Interest on refund, duty or cess shall be taxable on receipt basis.

ICDS V: Tangible Fixed Assets

Cost Component: It has similar definition to AS 10 but words used are ‘actual cost’ as compared to ‘cost’ in AS 10.

Further, as clarified in the Para 8 of ICDS-V, the expenditure incurred till the plant has begun the commercial production, that is, production intended for sale or captive consumption, shall be treated as capital expenditure.

ICDS VI: Effects of changes in foreign exchange rates

• Year-end recognition of monetary items if realizable in Foreign Currency: Converted into reporting currency by applying the closing rate. Exchange difference recognized in P&L a/c subject to Rule 115

• In case of Non-Monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction and Exchange difference arising on conversion shall not be recognized as Income or Expense.

• Year-end recognition of Non-monetary item being Inventory valued in foreign currency: If item is carried at historical cost – Reported at the exchange rate on the date of transaction and If item is carried at NRV – Reported at the exchange rate that existed when the value was determined

ICDS VII: Government grants

This ICDS deals with the treatment of government grants. It recognizes that government grants are sometimes called by other name such as subsidiaries, cash incentives, duty drawbacks, etc. but it does not deal with the government assistance other than in the form of government grants and government participation in the ownership of the enterprise.

ICDS has allowed recognition of Grant on receipt basis if condition fulfilled, unlike in AS which allows recognition of Grant on Mercantile basis where there is certainty that grant will received and condition attached complied.

Grants related to depreciable fixed assets: To be reduced from cost of fixed asset [in line with Explanation 10 to S. 43(1)]

Grants related to non-depreciable fixed assets: To be considered as income on an upfront basis, if there are no conditions attached to grant. To be treated as income over period over which cost of meeting conditions is incurred

Grants other than those covered above: Grant to be treated as income over period over which cost of meeting conditions is incurred

Compensation for expenses / loss incurred or for giving immediate financial support: To be recognized as income in the year in which it is receivable

ICDS VIII: Securities

This ICDS covers only securities held as Stock in Trade, as ICDS apply only for PGBP and IFOS and not for Capital Gain.

Security acquired against non-monetary consideration: actual cost of security acquired shall be recorded at fair value of security acquired

Year-end valuation of securities: Securities should be valued at lower of cost or NRV. Comparison of cost and NRV shall be done category wise, i.e., a) shares; (b) debt; (c) convertible securities; (d) other securities

ICDS IX: Borrowing costs

Scope: Borrowing cost does not include exchange differences arising from foreign currency borrowings

Qualifying Asset: Inventory – 12 months or more. All Specified tangible and intangible assets are qualifying assets (regardless of substantial period condition)

Commencement and cessation of capitalization: Commence from date of borrowing of funds and cessation from the date when asset is put to use (Section 36(1)(iii))

Period of Capitalization: 

• Specific borrowing cost: From the date of borrowing till asset actually put to used
• General borrowing cost: From the date on which funds are used till asset actually put to used

ICDS X: Provisions, Contingent Liabilities and Contingent Assets

Recognition of provision: The criterion for recognition of provision on the basis of the test of “Probable” in AS-29 is replaced with the requirement of “Reasonably certain” under ICDS.

In the absence of definition and scope of reasonably certain, an ambiguity would arise on assessment of that. In the Act, there is no specific provision is there for recognition of provisions. However, provisions are allowed based on accrued liabilities as per ordinary principles of commercial accounting. 

Executory contracts: Executory contracts excluded from the scope of ICDS

Recognition of contingent asset and reimbursement claims: Contingent asset/reimbursement claims are recognized when the realization of related income is “reasonably certain” (as per AS the term used is virtually certain as against reasonably certain)

Provisions for Employee benefits (no specific ICDS has been notified): It is clarified that provisions for employee benefits which are otherwise covered by AS 15 shall continue to be governed by specific provisions of the Act and are not to be dealt with by ICDS X

Disclosure Requirements in Form 3CD:

Clause 13(d): Whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2)

Clause 13(e): If answer to (d) above is in the affirmative, give details of such adjustments

The Income Tax Act has prescribed certain Income Computation and Disclosure Standards (ICDS) ranging from ICDS I to ICDS X. The effect of these ICDS must be taken in the computation of tax to arrive at the net tax liability – The increase in profit, decrease in profit and net effect is mentioned as per each ICDS.

Clause 13(f): Disclosure as per ICDS

The ICDS also contain certain disclosure requirements and this is the clause under which such disclosures are ultimately made.

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