ICDS is back again# Budget 2018

In 1995, Section 145 of the Income Tax Act, 1961 was amended to give power to the Central Government to notify accounting standards to be followed by specified class of taxpayers with an objective to reduce accounting alternatives provided by ICAI AS. Shortly, thereafter, in January 1996, the Government notified two TAS comparable to ICAI AS-1 and AS-5 viz. TAS-I, Disclosure of Accounting Policies and TAS-II, Disclosure of Prior Period and Extraordinary Items and Changes in Accounting Policies. After a lull of nearly 14 years, ICDS gained momentum in December 2010 with Central Government constituting ICDS Committee to study harmonisation of ICAI AS with the Income Tax Act, 1961 and suggest ICDS and to deal with MAT issues on transition to Ind AS. In October 2002, the Central Government published drafts of 14 standards for public comments. In July 2014, Hon’ble Finance Minister, Sh. Arun Jaitley announced the intent to notify ICDS. In January 2015, the Government released new draft of 12 revised ICDS (including intent of transition in FY 2015-16) out of which 10 ICDS were notified in March 2015 for taxpayers following mercantile method of accounting, effective from FY 2015-16. Later in September 2016, Central Government issued certain amendments to ICDS with effective date of ICDS postponed to AY 2017-18.

Recent Delhi High Court ruling on ICDS (Chamber of Tax Consultant v. UOI & Others [W.P. (C) 5595/2017 & CM APL 23467/2017; order dated 8 November 2017)

The recent Delhi High Court decision on ICDS restricted the power of Central Government to notify ICDS. As per the ruling, ICDS can neither override binding judicial precedents on scope of total income nor those on method of computing income (e.g., completed contract method for contracts, mark-to-market loss on forward contracts held for trading or speculation, etc.)

The ruling had the following implications:

• It is admittedly binding on the Tax Authority in respect of taxpayers within the jurisdiction of Delhi High Court.
• There was no clarity on the course of action which Tax Authority may adopt, i.e., accept the Delhi High Court ruling or file further appeal against the ruling or introduce a Validation Act through Parliament.
• Issue arises whether taxpayers based in other jurisdictions can also rely on Delhi High Court ruling to insist upon tax treatment as per said ruling.

Proposal in Finance Bill, 2018 (effective from 1 April 2017, i.e., applicable in relation to AY 2017-18 and subsequent AYs)

Hon’ble Finance Minister, Sh. Arun Jaitley in his budget speech mentioned that- “In order to provide statutory backing and certainty to Income Computation and Disclosure Standards (ICDS), it is proposed to amend the provisions of Chapter IV-D of the Act relating to computation of business income and Chapter XIV of the Act.” The Finance Bill, 2018 proposed the following changes in the Income-tax Act, 1961:

• Amendment of Sec 36 and Sec 40A
• MTM/ other expected loss as computed in the manner provided in ICDS should be allowed as deduction and no other deduction in respect of MTM/ other expected loss will be allowed.
• Insertion of Sec 43AA
• Subject to the provisions of section 43A, any foreign exchange gain or loss in respect of specified foreign currency transactions should be treated as income or loss and be computed in the manner provided in ICDS.
• Insertion of Sec 43CB
• Profits arising from a construction contract or a contract for providing services should be determined on the basis of percentage of completion method except for certain service contracts.
• Contract revenue should include retention money.
• Contract cost should not be reduced by incidental interest, dividend and capital gains.
• Amendment of Sec 145A
• For the purpose of determining the income chargeable under the head PGBP
• Valuation of inventory should be made at lower of actual cost or net realisable value computed in the manner provided in ICDS.
• Valuation of purchase and sale of goods or services and of inventory should be adjusted to 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, on a recognised stock exchange should be valued at actual cost initially recognised in the manner provided in ICDS.
• Inventory being listed securities should be valued at lower of actual cost or net realisable value in the manner provided in ICDS. For this purpose, the comparison of actual cost and net realisable value should be done category-wise.
• Insertion of Section 145B
• Interest received by an assessee on compensation or on enhanced compensation should be deemed to be the income of the year in which it is received.
• Claim for escalation of price in a contract or export incentives should be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.
• Income referred to in Section 2(24)(xviii) should be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

Concluding remarks

With the budget proposals, ICDS once again became mandatory. The Delhi High Court decision gets taken care by the amendments proposed in the Income-tax Act, 1961 itself and that too with effect from AY 2017-18. This will impact those tax payers who have filed their income-tax returns without considering the provisions under ICDS since they would need to revise their tax returns by virtue of the amendments proposed in the Finance Bill, 2018.