bombay chartered accountant society list of notified icds icds income computation and disclosure...

Bombay Chartered Accountant Society

September 4, 2015

Income Computation and Disclosure Standards - („ICDS‟)

Presentation by :

Yogesh Thar

Chartered Accountant

2

What is ICDS?

Section 145(1) – Income chargeable under the heads “Profits and Gains from Business or

Profession” or “Income from other Sources” – subject to 145(2)- as per method of accounting

regularly followed

Section 145(2) – the Central Government has power to notify “ICDS”

CBDT vide notification dated 31 March 2015 introduced 10 ICDS to be effective from 1 April

2015 and shall be accordingly apply for AY 2016-17 onwards

BCAS - September 4, 2015

3

History of ICDS

1995 - substitution of old section 145 – power no notify accounting standards

January 1996 – Central Government notified A.S. I & II

December 2010 – CBDT constituted committee for Tax Accounting Standards

October 2012 – Formulation of 14 Tax Accounting Standards

July 2014 – Nomenclature changed from TAS to ICDS

January 2015 – released 12 draft ICDS

March 2015 – 10 ICDS notified


4

Applicability of ICDS

ICDS will apply to:

An assessee

Following mercantile system of accounting

Computing taxable income under the following heads of income:

• Profit and gains of business or profession

• Income from other sources

No Net worth or Turnover Criteria prescribed for applicability

Not for the purpose of maintenance of books of account

In case of conflict between ICDS and Act, the Act shall prevail


5

What if ICDS is not complied?

Section 145(3)-AO has the power to make best judgement assessment u/s. 144 if he is not

satisfied about the :-

o correctness or completeness of the accounts of the assessee ; or

o method of accounting is not regularly followed ;or

o Income not computed as per ICDS

Hence ICDS has to be mandatorily followed or else best judgement assessment can be done by

Assessing Officer.


6

List of Notified ICDS

ICDS Income Computation and Disclosure

Standards

Equivalent

AS

Equivalent

IND AS

ICDS I Accounting Policies AS-1 IND AS-1 and 8

ICDS II Valuation of Inventories AS-2 IND AS-2

ICDS III Construction contracts AS-7 IND AS-115

ICDS IV Revenue Recognition AS-9 IND AS-115

ICDS V Tangible Fixed Assets AS-10 IND AS-16

ICDS VI Effects of Changes in Foreign Exchange Rates AS-11 IND AS-21

ICDS VII Government Grants AS-12 IND AS-20

ICDS VIII Securities AS-13 IND AS-32

ICDS IX Borrowing Costs AS-16 IND AS-23

ICDS X Provisions, Contingent Liabilities and Contingent

Assets

AS-29 IND AS-37


7

Commercial Accounting principles- Basis for

Taxable Profits Prior to introduction of ICDS , the taxable profits were computed based on the commercial

accounting principles subject to express provision of the Act. :-

• Miss Dhun Dadabhai Kapadia v. CIT [(1967) 63 ITR 651(SC)]

• CIT v. U.P. State Industrial Development Corporation [(1997) 225 ITR 703 (SC)] it was held that :-

“for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be

applied, so long as they do not conflict with any express provision of the relevant statute”

Going Forward –for taxation purposes- profits to be computed as per commercial accounting

principles as modified by provisions of ICDS


8

Specimen for computing Taxable Income under

ICDS framework

Particulars Amt Amt

Profits and Gains from Business or Profession XXX

Income from Other Sources XXX

Total XXX

Add/ Less: Adjustments as per ICDS xxx

Adjusted Income as per ICDS XXX

Add/ Less: Adjustments as per the provisions of the Act xxx

Total Income XXX


Can ICDS modify the basis of taxation hitherto upheld by the

Apex Court?

9

Delegated Legislation cannot override the Statute

Settled law that a notification cannot override the statute. This view is supported based on

following decisions :

o CIT v. Sirpur Paper Mills [(1999) 237 ITR 41 (SC)]

o CIT v. Taj Mahal Hotels [(1971) 82 ITR 44 (SC)]

Preamble to every ICDS clearly states that in case of conflict between the provisions of the Act and

the ICDS - the provisions of the Act shall prevail

Can ICDS bring to charge any item which is not “income” ?


10

Constitutional Validity of ICDS

Indian system of governance is broadly divided in three wings –

Legislative wing,

Judicial wing

Executive wing.

Legislation power – delegated to executive – “Delegated Legislation”


What are the limitations of delegated legislation?

11

Limitation of legislature to delegate

A seven-judge bench of the Supreme Court in case of Harishankar Bagla [AIR 1954 SC 465]

wherein it was held that:

“while delegating powers of legislation to executive, the legislature must declare the policy of the

law and the legal principles which are to control the given legislation and must provide a

standard to guide the officials or body in power to execute the law.”

Further in case of Vasanlal Maganbhai Sanjanwala [AIR 1961 SC 4] Supreme Court held that:

“The Legislature has to lay down the policy and principle to afford guidance for carrying

out the said policy before it delegates its subsidiary powers in that behalf.”


12

Limitation of legislature to delegate

In the case of Avinder Singh [AIR 1979 SC 321] the Supreme Court held that what constitutes an

essential feature cannot be delineated. The Supreme Court laid down the following tests for valid

delegation of legislative power:

(i) the Legislature cannot efface itself

(ii) it cannot delegate the plenary or the essential legislative function

(iii) even if there be delegation, Parliamentary control over delegated legislation should be a living continuity

as a constitutional necessity.

AS – 22 notified under the Companies Act, 1956 has been upheld based of the forgoing principles

in case of J. K. Industries Ltd. vs. UOI [297 ITR 176]. It was held that the concept of “true and

fair” accounting was the controlling consideration.

What is the controlling consideration/ legislative policy and guidelines

in section 145(2)?


13

Basic Issues

Will ICDS be applicable for computing the Minimum Alternate Tax liability?

Preamble of each ICDS clearly states that ICDS is not for the purpose of maintenance of books of accounts.

Whether ICDS would have any impact on the financial statements of the assessee?

Preamble of each ICDS states that ICDS is not for the purpose of maintenance of books of accounts.

However, deferred tax asset or liability under Accounting Standard 22 would be affected due to the timing differences between the income or expense is recognised in the books and when they are considered while computing total income.

Will ICDS impact tax audit?

Though presently no notification has been issued, it is likely that the format of the tax audit report would be modified to adhere to the requirements of ICDS.

Whether ICDS will apply in case of presumptive taxation?

ICDS are applicable for computation of „income‟ not „gross turnover‟


14

ICDS I - Accounting Policies – Analysis

Whether prudence is no more relevant?

Accounting Standard –

• Recognizes the concept of prudence hence, expected losses are provided and expected gains are ignored.

Committee Report –

• To avoid differential treatment of recognition of loss and income, concept of prudence has been

removed.

Judicial view –

• The issue has always been governed by commercial accounting principle (Woodward Governor India (P.) Ltd.

(312 ITR 254)(SC)) (Foreign exchange gain loss)

ICDS –

• Mark to market and expected loss should not be recognized unless permitted by other ICDS.


15


Note to mitigate the impact –

• Difference between loss and expenditure would become relevant as explained in case of Allen v. Farquharson

Brothers and Co. [1932] 17 Tax Cas. 59

Expense – volition

Loss – no volition


16


Concept of materiality has been done away by ICDS?


• Recognizes the concept of materiality.


• As the concept of materiality not recognised by Income Tax Act.

ICDS –

• No specific provision on materiality.

A possible view –

• ICDS deals with „significant‟ accounting policy. (Para 1)

• Selection of accounting policy should be such that discloses „true and fair view‟ not „true and correct‟ (Para 4)

• Change in accounting policy having material effect are to be disclosed (Para 7)

• Hence, even though the concept of materiality has not been expressly stated, it is impliedly still relevant.


17


What is reasonable cause for change in accounting policy?


• Accounting policy can be changed for

1. Required by statute

2. Compliance with an accounting standard

3. More appropriate presentation

ICDS –

• An accounting policy shall not be changed without reasonable cause.

A possible view –

• The accounting standard has restricted change in accounting policy to the three instances.

• ICDS has kept it open for any reason which is not covered by Accounting Standard

• However frequent change in accounting policy without bonafide reason may not be permitted.


18


Whether ICDS – I is a legislative misfire?

Preamble of ICDS and committee report clearly states that ICDS are not for the purpose for maintenance of

books of accounts.

Explanatory Memorandum to Finance Act (No. 2) 2014, also states that ICDS not meant for the purpose of

maintenance of books of accounts.

However contents of ICDS :

• Para 2 – Fundamental accounting assumptions

• Para 3 – Accounting Policies

• Para 4 – Considerations in the selection and change of accounting policies


19

ICDS II - Valuation of Inventories – Analysis

Whether ICDS requires differential treatment for distribution cost for example transportation cost

of branch transfer?


• „Selling and distribution‟ expense to be excluded from the cost of inventory.

ICDS –

• „Selling‟ expense should be excluded from the cost of inventory.

Cost Accounting Standard – 1

• „Distribution Costs‟ are the cost incurred in handling a product from the time it is completed in the works until

it reaches the ultimate consumer. E.g. Transportation cost, warehousing, delivering the products to customers,

secondary packaging.

• „Selling costs‟ are indirect costs related to selling of products or services and include all indirect cost in sales

management for the organization. E.g. commission, advertisement, market research, royalty on sale.


20


Whether ICDS requires differential treatment for distribution cost for example transportation cost

of branch transfer? (Cont. …)

EAC Opinion (Volume XXIII page 162) –

All cost incurred to bring the inventory to the present location and condition.

Transportation cost incurred on branch transfer are not covered by the term „selling and distribution cost‟

Transportation cost should be added to the cost of inventory.

Hence, no adjustment may required in valuation of inventory as per ICDS.


21


Whether ICDS – II will be applicable to service providers?


• WIP of service provider has been excluded from the scope.

Committee Report -

• The method of valuation of inventories of a service provider based on the international best practices to be incorporated.

As per para 2(1) of ICDS – II Inventories are assets:

(i) held for sale in the ordinary course of business;

(ii) in the process of production for such sale;

(iii) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

A possible view –

• The definition of inventories has not been modified to cover WIP of service providers. However service provider need to follow percentage completion method, hence there may not be a case of WIP.


22


Whether inventory has to be valued at NRV in case of dissolution of a firm even though the

business is continued, as required by ICDS?

Accounting standard – silent on the issue

Committee Report – To give certainty to the tax treatment.

Judicial Pronouncement - Sakthi Trading (250 ITR 871) (SC) – Regular method of accounting to be

followed, hence inventory to be valued at cost or NRV which ever is lower.

A possible view –

• Prima facie, Sakthi trading is overruled, but whether ICDS can bring to tax something which is not income,

just based on valuation is an arguable proposition.

• Cost of acquisition to acquirer – not clear ?


23

ICDS VIII – Securities – Analysis

What would be the major impact of ICDS on securities, due transitional provision?

Comparison of cost or NRV has to be done category wise not individual asset wise.

Individual Security Cost NRV Valuation

Company P 150 20 20

Company Q 150 45 45

Company R 150 15 15

Company S 150 300 150

600 380 230

Valuation (A.S.) 230

Valuation (under ICDS) 380


24

ICDS II and VIII – Section 145A

Whether ICDS on inventories/ securities has any relevance?

Section 145A of the Act –

“Notwithstanding anything to the contrary contained in section 145,—

(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the

income chargeable under the head "Profits and gains of business or profession" shall be—

(i) in accordance with the method of accounting regularly employed by the assessee; and

. . .”

Following points may be noted:

• Section 145A starts with a non- obstante clause.

• Requires inventory of goods to be valued in accordance with the method of accounting regularly employed by

the assessee.

• Even the preamble if ICDS states that in case of conflict between the Act and ICDS, Act will prevail.


25


Whether ICDS on inventory has any relevance? (Cont. …)

A possible view –

• ICDS on Inventories has no relevance for goods.


26

ICDS III - Construction Contracts – Analysis

Whether ICDS – III will apply to Real Estate Developers?

Accounting standard – 1985 – Scope :-

“This Statement deals with accounting for construction contracts in the financial statements of enterprises

undertaking such contracts (hereafter referred to as 'contractors'). The Statement also applies to enterprises

undertaking construction activities of the type dealt with in this Statement not as contractors but on their own

account as a venture of a commercial nature where the enterprise has entered into agreements for sale.”

Accounting standard – 2002 – Scope :-

“This Standard should be applied in accounting for construction contracts in the financial statements of

contractors.”

ICDS – Scope :-

“This Income Computation and Disclosure Standard should be applied in determination of income for a

construction contract of a contractor.”


27



“the Committee recommends that TAS covering the following areas may also be considered for notification under the Act:

. . .

(iii) Revenue recognition by real estate developers”

Supreme Court in case of M/s. Larsen & Toubro Limited (2014 (1) SCC 708) has held a real estate transaction when flat are sold under construction as works contract for MVAT.

After considering the aforesaid decision Gujarat High Court in case of Mangala Properties (57 taxmann.com 35) allowed deduction u/s 80-IB to developer, who had entered in a JDA will land owner and specifically stated :-

“While construing the provisions of the Income Tax Act, the ordinary meaning of the expression "works contract" is required to be taken into and resort cannot be had to the meaning of the said expression as envisaged under the relevant Sales Tax Act which are enacted in the context of the provisions of article 366(29A)(b) of the Constitution.”


28


Whether retention money would be taxable on stage of completion basis?


• Silent on treatment of retention money

Judicial View –

• More than 6 High Courts have held that retention money doesn‟t accrue during the performance of contract.


• To overcome unintended meaning given by judicial pronouncements.

ICDS –

• Revenue to be recognised on percentage completion basis including retention money.

A possible view –

• ICDS cannot override the concept of accrual u/s 5, as explained by the courts.


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In absence of specific provision in ICDS, whether expected loss on construction contract can still be claimed ?

Accounting standard –

• Expected loss is allowed – prudence


• To remove differential treatment between income and losses

Judicial Pronouncements –

• Considering commercially accepted accounting principles, courts have allowed expected losses on construction contract. Triveni Engineering (336 ITR 374) (Delhi HC), Advance Construction (275 ITR 30) (Gujarat HC)

A possible view –

• Prima facie, such loss won‟t be allowed. However if it is concluded that ICDS – I is a legislative misfire, than relying on commercial accounting principle the loss should be allowed.

• Whether, provision for expense can be made or not under ICDS X has to be analysed on case to case basis.


30


Implication of non – allowance of expected loss.

Example :-

Expected loss in the year 1st year of a 3 year contract was Rs . 300.

Actual Loss on completion of the contract in the third year was Rs. 240.

It can be observed that, without any actual income there would be taxable income u/s 115JB in the 3rd year.

Year Book Profit Profit as per Income Tax

I (300) (100)

II - (100)

III 60 (40)


31

ICDS IV - Revenue Recognition – Analysis

Whether ICDS – IV would impact treatment of finance lease?


• Specific AS 19 deals with leases


• Had recommended ICDS on leases, which has not been notified.

ICDS –

• Excludes revenue recognition of items specifically dealt by other ICDS.

A possible view –

• Scope of ICDS – IV is limited to sales of goods, rendering of services and Use of Resources by others

Yielding Interest, Royalties or Dividends.

• Hence, lease rentals are outside the purview of ICDS – IV.


32


Whether ICDS will have any impact on revenue recognition of export incentive?


• Export incentive cannot be construed to be received from sale of goods or rendering of services and hence AS-

9 is not applicable. (EAC Opinion)

ICDS –

• Para 5 – To recognize export incentive when claim is raised unless there is no reasonable certainty.

Judicial Pronouncement –

• Income to be recognised when there is corresponding third party liability to pay. CIT v. Excel Industries Ltd.

(SC) (358 ITR 295)

A possible view –

• ICDS cannot override the concept of accrual as explained by the courts.


33

ICDS IV – Revenue Recognition – Analysis

Implication of following project completion method for books of accounts?

e.g. service contract will take 3 years for execution and expected profit is Rs. 300.

Year Income Tax Books of

Accounts

Tax @ 30% MAT @ 18.5%

1 100 - 30 0

II 100 - 30 0

III 100 300 30 55.5


34


Interest income to accrue on time basis and discount and premium over period of debt instrument ?

ICDS –

• Interest, discount and premium to be recognized on time basis.


• Due to specific provision of bad debt in the Act, revenue recognition should not be postponed.


• Interest income to accrue on coupon date - DIT v. Credit Suisse First Boston (Cyprus) Ltd 351 ITR 323 (Bom.

A possible view –



35


Interest income from NPA has to be recognised on time basis?


• Income not to be recognized if there is uncertainty.


• Due to specific provision of bad debt in the Act, revenue recognition should not be postponed.


• Real Income theory - E.D. Sassoon & Co. Ltd. (SC) (26 ITR 27), Godhra Electricity (SC) (225 ITR 746)

A possible view –



36

ICDS V – Tangible Fixed Assets – Analysis

What are the major difference between AS and ICDS?

A.S. provides that in case there is significant delay between the period when the plant is ready for

commercial production and the actual commencement of commercial production, the expenditure during

such period can also be treated as revenue in nature. However, in absence of such specific clause, under the

ICDS even such expenditure would need to be capitalized.

Existing AS permits capitalization of foreign exchange difference along with underlying asset under certain

circumstances. ICDS reiterates the fact that capitalization of exchange difference relating to fixed asset

shall be in accordance with Section 43A and other provisions of the Act.

As per ICDS, in case of acquisition of an asset in exchange for another asset,, fair value of tangible fixed

asset acquired shall be recorded as actual cost of the asset. AS-10 provides for an option to record the cost

at either the fair market value of the asset given or fair market value of asset acquired, whichever is more

clearly evident.

Income arising on transfer of a tangible fixed asset and depreciation shall be computed in accordance with

the provisions of the Act.

As revaluation of fixed assets is not recognized under the Act, provisions relating to the same are not dealt

with in the ICDS.


37

ICDS V – Tangible Fixed Assets – Analysis

Whether ICDS V is a legislative misfire ?

The term, „Actual cost‟ has been defined u/s 43(1) of the Act. Further, to deal with specific scenarios,

fourteen Explanations are appended to the aforesaid definition by the legislature

The claim of depreciation is again specifically dealt with under section 32 of the Act. In fact, the ICDS

itself provides that depreciation has to be computed in accordance with the provisions of the Act

As regards transfer of fixed assets, ICDS is applicable for computation of income chargeable under the

head “Profit and gains of business or profession” or “Income from other sources”, whereas, gain or loss on

transfer of fixed asset is dealt under the head capital gains hence, ICDS becomes inconsequential. In any

case, provisions relating to changing and computation of capital gains in case of transfer of fixed assets has

been elaborately dealt with in Chapter IV - E of the Act.


38

ICDS VI – Effects of changes in foreign exchange rates –

Analysis

Whether exchange gain on conversion of non-monetary item of a non-integral operation at closing

exchange rate be taxable?


• Such exchange difference is accumulated in foreign currency translation reserve.


• Not to differentiate between integral and non – integral operations


• Parliament can not choose to tax as income an item which in no rational sense can be regarded as a citizen‟s

income. (Navnit Lal C. Javeri v. K. K. Sen (56 ITR 198) (SC))

A possible view –

• ICDS being a computational provision cannot bring to tax altogether new kind of income.


39

ICDS VII – Government Grants – Background

Amendment in definition of income u/s 2(24) by Finance Act, 2015 :-

“(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or

concession or reimbursement (by whatever name called) by the Central Government or a State Government

or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or

reimbursement which is taken into account for determination of the actual cost of the asset in accordance

with the provisions of Explanation 10 to clause (1) of section 43”

It is worthwhile to note that, such an important amendment was not part of the Finance Bill tabled

for discussion, but was introduced at the time of placing the Finance Bill to vote. Even the Finance

Minister in his speech just stated that few amendments are done to align the Act and ICDS.


40

ICDS VII – Government Grants – Background

Type of subsidy may be covered in the nature of Income, which courts have held as non – taxable :-

Subsidy granted for setting up new unit/expansion of existing business is a capital receipt. (Ponni Sugars &

Chemicals Ltd. (306 ITR 392) (SC))

Subsidy to setup a new unit in a backward area. (Reliance Industries Ltd. (339 ITR 632) (Bombay))

Subsidy for construction of multiplex theatre complexes.(Chaphalkar Brothers (351 ITR 309) (Bombay))

Incentive by way of additional quota for free sale of sugar for setting up a new sugar factory/expansion.

(Kisan Sahkari Chini Mills Ltd. (2 taxmann.com 274) (Allahabad))

Grant given for research in the field of telecommunications, which in turn would benefit the Nation and

public at large, has been held as capital receipt. (India Telephone (215 Taxman 82) (Karnataka))

Type of subsidy not covered by amendment / ICDS :-

Carbon credit -

Prepayment of sales tax deferral loan -


41

ICDS VII – Government Grants – Analysis

Whether recognition of government grant cannot be postponed beyond the date of actual receipt?


• Mere receipt of a grant is not necessarily a conclusive evidence that conditions attaching to the grant have been

or will be fulfilled.


• To reduce litigation and to provide certainty.


• Receipt is not concluding evdince for accrual of income - Godhra Electricity (SC) (225 ITR 746)

A possible view –



42

ICDS IX – Borrowing Costs – Overview

Commencement of capitalization

Specific borrowing – date of borrowing

General borrowing – date of utilization of funds

Cessation of capitalization

Fixed asset – put to use

Inventory – substantially all activities are completed

Transitional provision

Borrowing cost incurred on or after April 1, 2015, shall be governed by ICDS.


43

ICDS IX – Borrowing Costs – Analysis

Whether formula given for capitalization of general borrowing has any flaw?,


• Provides for a period multiplier, for capitalization of general borrowing cost.

ICDS –

A *B/C

• A = borrowing cost other than specific borrowing;

• B = average cost of qualifying asset appearing in the balance sheet on the first day and the last day of the

previous year;

• C = average of total asset appearing in the balance sheet on the first day and the last day of the previous year,

other than those assets which are directly funded out of specific borrowings.


44


Whether formula given for capitalization of general borrowing has any flaw? (Cont. …)

If the machinery is purchased on June 1, 2015 and is put to use July 1, 2015, for which period the interest has

to be capitalised ?

1 year

6 months

1 month

A possible view –

• Formula for allocation of borrowing cost to qualifying asset is given in para 6.

• Para 7 of ICDS deals with commencement of capitalization – states that :-

“capitalisation of borrowing costs shall commence . . . from the date on which funds were utilised.”

• Para 8 of ICDS deals with cessation of capitalization – states that :-

“capitalisation of borrowing costs shall cease . . . when such asset is first put to use”


45


Whether borrowing cost of fixed asset taking less than 12 months need to be capitalized?


• Borrowing cost incurred of fixed asset taking 12 months or more to be ready for intended use to be capitalized.

ICDS –

• Definition of qualifying asset in case fixed asset, doesn‟t require minimum period of 12 months.


46


Would there be any timing difference between AS and ICDS for cessation of capitalization of borrowing cost ?


• When asset is ready to use


• Wordings have been changed to align with the provisions of the Act

ICDS –

• When asset is put to use

A possible view –

• Though in common parlance both the words have different meaning, but courts have consistently taken a view that ready to use, means put to use for Income Tax purposes.


47


Whether general borrowing costs should be attributed to cost of inventory of real estate ?

Section 36(1)(iii) :-

“the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether

capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed

for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”

A possible view –

• Express provision of the Act shall override ICDS

• Interest is a period cost u/s 36(1)(iii) and unless specific borrowing for capital asset, expense has to be allowed.

• Lokhandwala Construction Inds. Ltd. 260 ITR 579 (Bombay HC) – will still hold good.

Note:- special bench in case of Wall Street Construction Ltd. (5 SOT 103) had held against the aforesaid

proposition in case of stock in trade. Reliance was placed on Bombay High Court decision Taparia Tools. However

the aforesaid decision has been reversed by Supreme Court (372 ITR 605)


48


What is other major impact of ICDS?

The provision in the AS providing for suspension of capitalization of borrowing costs during interruption of

active development of the qualifying asset is removed from the ICDS. Hence, there is no provision for

suspension of capitalization in the ICDS.


49

ICDS X – Provisions, Contingent Liabilities and Contingent

Assets – Analysis

What would be the treatment of loss on Onerous contract ?


If an enterprise has a contract that is onerous, the present obligation under the contract is recognised and

measured as a provision.

ICDS – X does not deal with recognition of loss arising out of onerous contract.


50


Assets – Analysis

Whether ICDS will have any impact on Provision on Warranty?


• Provision of warranty can be recognised.


• To remove differential treatment between recognition of income and expense.


• Supreme Court has upheld the allowance of provision for warranty in case of Rotork Controls v CIT 314 ITR 62 (SC)

ICDS –

• requires recognition of provision when it is reasonably certain that an outflow of resources embodying economic benefits would be required to settle the obligation.


51


Assets – Analysis

Whether ICDS will have any impact on Provision on Warranty?

A possible view –

• ICDS is in harmony with the view taken by Supreme Court


THANK YOU

53

Section 145

(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

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54

Section 145

(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144.

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Old section 145

(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee :

Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine :

Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee :

Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year.

(2) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.

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