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Practical Application - ICDS

Practical Application - ICDS. By –Direct Tax Team, JCAG 13 th May 2017 JCAG-2 nd RRC - Jaipur. Challenging year ahead !!!!!. Background. Index. Background ICDS 1 -Accounting Policy ICDS 2 - Valuation of Inventories ICDS 3 -Construction Contract ICDS 4 - Revenue Recognition

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Practical Application - ICDS

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  1. Practical Application - ICDS By –Direct Tax Team, JCAG 13th May 2017 JCAG-2nd RRC - Jaipur

  2. Challenging year ahead !!!!! (c) JSCO

  3. Background (c) JSCO

  4. Index • Background • ICDS 1 -Accounting Policy • ICDS 2 - Valuation of Inventories • ICDS 3 -Construction Contract • ICDS 4 - Revenue Recognition • ICDS 5 - Tangible Fixed Assets • ICDS 6 -Foreign exchange • ICDS -7 Government Grant • ICDS-8 Securities • ICDS-9 Borrowing Cost • ICDS-10 Provision, Contingent liabilities and contingent assets (c) JSCO

  5. Accounting Standard – Concept and role • J.K. Industries Ltd vs Union of India [2007] 80SCL 283 (SC) – Concept and objectives of accounting standards • An accounting standard is a policy document and an attempt to overcome some of the deficiencies of accountancy i.e to reduce the subjectivity and lay down rules • Accounting income is real income • However, on account of artificial set of rules used in computation of taxable income one finds that accounting income differs from taxable income • Looking to these problems, the evolution of Accounting Standards and their greater application is necessary as it results in reducing the need for tax laws to depend upon artificial rules • If accounting standards are capable of in determination of taxable income, the tax laws do not have need to lay down the rules for computation • However, It is important to note that Accounting standards and taxation of income are two independent subjects (c) JSCO

  6. 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. Delegated Legislation . What is the limitation to it • 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 • Finance Act, 2014 amended section 145(2) of the Act to substitute “accounting standards” with “income computation and disclosure standards” (ICDS). • Easwar Committee – Deferment of ICDS – However it was not heeded • Revised ICDS mandated on 29th September 2016 – Retrospective ? (c) JSCO

  7. Key features of ICDS • Effective Date of ICDS is 01 st April, 2016 i.e. FY:2016-17 & AY: 2017-18. • ICDS applicable to • All Assesses i.e. Corporate & Non Corporate Assesses except individual & HUF not required to get tax audit in PY ) + • Mercantile System + • PGBP/IFOS • No Net Worth or Turnover Criteria Prescribed for applicability. • Entity need not to maintain Books of accounts for ICDS. ICDS is only for computation of income under the head “Profit and gains of business or profession” or “Income from other sources” Q1 • ICDS is meant for normal computation of income and not for Minimum Alternate Tax (MAT) Calculation. However, it is applicable for calculation under AMT (Q6) • Applicability to assesses covered by presumptive taxation u/s 44AD,44AE, 44ADA, 44B, 44BB, 44BBA ? Q3 – Relevant provisions shall apply. Practically ??? (c) JSCO

  8. Key features of ICDS • In the case of conflict between the provisions of the Income‐tax Act, 1961 and Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. • Case of conflict between HC / SC rulings and ICDS? – Q2 - The ICDS have been notified after due deliberation and after examining judicial views for bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in the absence of authoritative guidance on these issues under the Act for computing Income under the head “Profits and gains of business or profession” or Income from other sources. Since certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and subsequent assessment years. • Case of conflict between rules & ICDS ? Q4- Rules which deal with specific circumstances shall prevail • How will ICDS apply to companies which adopted IND-AS ? Q5- No effect • In the event between ICDS and scope of total income (Section 5) what would prevail ? Can it bring to charge any item which is not “Income” ? • Section145(3) – AO has the power to make best judgment assessment u/s 144 if he is not satisfied about that – Income not computed as per ICDS • Removal of May, usually, Generally – Replaced by SHALL • Theme of ICDS - Preponement of Tax – So much working justified ?? (c) JSCO

  9. AS/IND-AS (NACAS) ICDS (CBDT) IT Act (Parliament ) AS (ICAI) Confusion !!!!! You have so many standards that it results in no standard !!!!!! (c) JSCO

  10. Comparative Analysis (c) JSCO

  11. Comparative Analysis (c) JSCO

  12. Comparative Analysis (c) JSCO

  13. Comparative Analysis (c) JSCO

  14. Extract of Form 3CD – Point 13d - f (c) JSCO

  15. Extract of Income Tax Return

  16. Extract of Income Tax Return

  17. Computation (c) JSCO

  18. ICDS – I – Accounting Policies (c) JSCO

  19. ICDS – Accounting Policies Considerations in selection and change of Accounting Policies • Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. • For this purpose, the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; • marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard. Q9 - Mark to market gain also not recognised unless specifically provided Materiality ? • No concept of materiality in ICDS unlike, AS-1 or TAS-1 • As ICDS does not recognize materiality as an accounting policy the AO may try to make additions of small items of expenses and try to levy penalty also on the ground that the same is not disclosed. • However – accounting policies should be such that discloses “true and fair view” and not “true and correct” and only material impact needs to be disclosed during change of accounting policy and therefore, no significant tax impact should be there (c) JSCO

  20. ICDS – Accounting Policies Prudence ? • Based upon the concept of ‘prudence’, AS-1 precludes recognition of anticipated profits and requires recognition of expected losses. • Concept of Prudence was part of TAS-1 , Provision should be made for all known liabilities and losses even if amount not ascertainable • 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. • Specifically, 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. • Theme of all the ICDS (c) JSCO

  21. ICDS I – Accounting Policies Example: (c) JSCO

  22. ICDS – Accounting Policies Accounting policies (AP) AS permits change in AP when 1)Required by the statute 2)Compliance with AS 3)More appropriate presentation of FS As per ICDS, AP shall not be changed without a reasonable cause 1) Change in statute (other than ITA) reasonable cause? 2) Change in AS reasonable cause? 3) Meaning of reasonable cause is a debatable issue. Q9 -Under the Act, ‘reasonable cause’ is an existing concept and has evolved well over a period of time conferring desired flexibility to the tax-payer in deserving cases. Accounting Policy or Income Computation Policy ?? It is case of legislative misfire ?? (c) JSCO

  23. ICDS- Accounting Policy • Whether ICDS -1 is legislative misfire • Preamble of ICDS clearly states that ICDS are not for the purpose for maintenance of books of accounts. • One view – ICDS- 1 has gone beyond the mandate • Second view – It is just a disclosure standards and provides a theme where no other standard exist (c) JSCO

  24. Disclosure • All significant accounting policies adopted by a person shall be disclosed. • 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. • Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item. • If the fundamental accounting assumptions of Going Concern, Consistency and Accrual (what if not required to be followed ? ) are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed. (c) JSCO

  25. ICDS-II Valuation of Inventories (c) JSCO

  26. ICDS-II Valuation of Inventories Scope Expanded • The committee report while issuing the Draft Standard (in August 2012) stated that the scope has been expanded to include service sector. • The Draft prescribed that the service sector assesse shall value the inventories at cost • Currently - “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. Definition of inventory – does not include services ? • The costs of services, in case of service providers, shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads. • Difficulty would arise in case of services whose chargeability depends on the success of the service. • It may not be possible to ascribe a value to WIP for certain types of service revenues like commission . (c) JSCO

  27. ICDS-II Valuation of Inventories 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. • 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. • However, as per CIT vs British Paints India Ltd., the correct income for the year should be bought to tax and each year is an independent and self contained unit of assessment (c) JSCO

  28. ICDS-II Valuation of Inventories Valuation of inventory in case of certain dissolutions In case of partnership firm, AOP or BOI inventory on the date of dissolution shall be valued at the net realizable value, whether or not business is discontinued • There is no specific provision for allowing such NRV as the cost to the successor of the business – Double Taxation • Also this is contrary to law settled by Apex court in the case of Sakthi Trading Co. v. CIT & A.L.A. Firm v. CIT (c) JSCO

  29. Disclosure • 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. (c) JSCO

  30. ICDS- III Construction Contract (c) JSCO

  31. Key Pointers • Income to be recognised on Percentage of completion method. • Contract costs shall comprise of : • (a) costs that relate directly to the specific contract; • (b) costs that are attributable to contract activity in general and can be allocated to the contract; • (c) such other costs as are specifically chargeable to the customer under the terms of the contract; and • (d) allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs – not part of accounting standard • What about depreciation ? If yes, then which one ? • 43B expenditure – whether considered or not ? • Fluctuations in Foreign exchange rate in case of foreign projects • Contract started before 1st April 2016 will be considered as per previous recognition method followed (c) JSCO

  32. ICDS- III Construction Contract Comparatives AS-7 (c) JSCO

  33. ICDS- III Construction Contract Comparatives AS-7 (c) JSCO

  34. Disclosure • 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. (c) JSCO

  35. ICDS IV- Revenue Recognition (c) JSCO

  36. ICDS IV- Revenue Recognition • Scope – Goods, Services, Interest, Royalty and Dividend • Sale of Goods -Property Transferred + Significant risk & reward + Reasonable certainty of ultimate collection (Not in others) • Rendering of services – Percentage Completion method • Less then 90 days – Completed (Substantially Completed ) Contract – • Indeterminate number of acts over specified period of time – May be Straight line method – Contract wise or total ? • Interest – Time basis • Q 13 - Even on NPA – Time Basis – Take deduction later – What about IFOS • Interest on refund of any tax, duty or cess – Receipt basis • Discount or premium on debt security – accrue over period of maturity • Royalty – Agreement or systematic basis – Foreign payments – Many DTAA make it taxable on paid basis. Then what will be applicability or TDS deduction/15CB ? • Dividend - As per Section 8 of act • Q 14 - Shall also apply for computation of these incomes on gross basis for arriving at the amount chargeable to tax. (c) JSCO

  37. ICDS IV- Revenue Recognition • Export incentive – • Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved. • But it ideally should be part of Government Grant • Transitional provision • Service – started before 1st April 2016 – as per previous method • Goods – started before 1st April 2016 – as per ICDS (c) JSCO

  38. ICDS IV- Revenue Recognition (c) JSCO

  39. Disclosure • 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. (c) JSCO

  40. ICDS V- Tangible Fixed Assets (c) JSCO

  41. ICDS – V- Tangible Fixed Assets • Is there any need for the same ?? • Acquisition – Actual Cost defined under 43(1) – Act will anyways prevails • Depreciation – ICDS itself provides as per section 32 • Disposal – any gain or loss is under purview of CG which is not under purview of ICDS – V • Expenditure incurred on test runs, experimental production and all the expenses till the plant has begun commercial production shall be capitalized. Expenditure incurred after the plant has begun commercial production shall be treated as revenue expenditure. Q15 (c) JSCO

  42. ICDS V- Tangible Fixed Assets (c) JSCO

  43. ICDS V- Tangible Fixed Assets (c) JSCO

  44. Disclosure • 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. (c) JSCO

  45. ICDS VI- The effects of changes in foreign exchange (c) JSCO

  46. ICDS VI- The effects of changes in foreign exchange Revenue Items • Revenue monetary items (like trade receivables, payables, bank balance, etc.) – No impact - valued at closing rate • Revenue non-monetary item – No impact – valued at transaction date (c) JSCO

  47. Capital Monetary Items • No change as such • However earlier in Domestic assets – no prescription given , therefore used to be considered as Capital nature income /loss not taxable/deductable . • Shell Company of China Ltd. [22 ITR 1 (CA)] • Sutlej Cotton Mills Ltd., [(1979) 116 ITR 1 (SC)] • 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 ? (c) JSCO

  48. ICDS VII- Government Grant (c) JSCO

  49. Government Grant • Assistance by Government • In cash or kind to a person • For past or future compliance with certain condition • Can be called as subsidies, cash incentives, duty drawbacks, waiver , concessions and reimbursement (c) JSCO

  50. ICDS VII- Government Grant (c) JSCO

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