SKP Tax Alert
Volume 9 Issue 33 | 29 March 2017
CBDT announces 25 clarifications on ICDS - many positives but ambiguity persists
The Central Board of Direct Taxes (CBDT) has recently issued[1] clarifications on 25 questions related to the application of the Income Computation and Disclosure Standards (ICDS). With these clarifications, all doubts on the cancellation or deferral of ICDS appear to have been put to rest.

ICDS require accounting profit to be recast for tax purposes by modifying financial numbers in areas of Revenue Recognition, Accounting Policies, Inventory Valuation, Securities, Borrowing Costs, Provision for Expenses, etc.

We discuss below the clarifications provided by the CBDT. For the sake of convenience, we have classified these clarifications under appropriate categories.

Applicability of ICDS
  • ICDS should not be applied for maintaining books of account. The Accounting Policies referred by ICDS I are fundamental in nature and should be applied for computing taxable income.
  • ICDS will override Court judgments.
  • If there is a conflict between ICDS and any specific rule for computing taxable income under the Income Tax Rules, 1962 (Rules), the specific rule shall prevail.
  • ICDS shall apply to companies adopting Indian Accounting Standards (Ind AS).
  • ICDS shall not apply for the computation of Minimum Alternate Tax (MAT). However, ICDS will apply for the computation of Alternate Minimum Tax (AMT).
  • ICDS shall apply to Banks, Non-Banking Financial Institutions, Insurance companies, Power sector, etc. unless any sector-specific provisions are given under the Income Tax Act, 1961 (Act) or under the ICDS.
  • ICDS I, dealing with Disclosure of Accounting Policies, requires that accounting policies should not be changed unless there is a reasonable cause. The CBDT has now clarified that the term ‘reasonable cause’ is an existing concept under the law and has evolved over a period of time.
Revenue Recognition
  • ICDS provisions will apply for incomes which are taxable on a gross basis, particularly interest, royalties and fees for technical services earned by non-residents, and incomes governed by presumptive taxation schemes (e.g. Section 44AD, 44AE, 44ADA, 44B, 44BB, 44BBA, etc.).  The turnover/gross receipts in such cases should be calculated as per ICDS requirements.
  • Mark to Market Gains and expected gains governed under ICDS I shall not be taxable.
  • Retention money shall be offered to tax as a part of overall contract revenue on a completion basis unless there are doubts regarding reasonable certainty of its ultimate collection.
  • There are no separate considerations for the application of ICDS on real estate developers and Build-Operate-Transfer (BOT) projects.
  • Interest income should be recognised on time basis and royalty income should be recognised as per contractual terms. Revenue recognition in such cases cannot be postponed if there are doubts regarding reasonable certainty of ultimate collection. 
Borrowing Costs
  • Capitalisation of borrowing costs will be made only for borrowing costs which are otherwise allowed as a deduction under the Act. Borrowing costs disallowed under section 14A, 40(a), etc. are not eligible for capitalisation.
  • Bill Discounting Charges and other similar charges will be considered as borrowing costs.
  • General Borrowing costs need to be capitalised on an asset-by-asset basis. 
Foreign Exchange Difference
  • Derivative instruments will be governed by ICDS VI, dealing with Treatment of Foreign Exchange Differences (unless they are held as stock-in-trade, in which case ICDS VIII shall apply).  If ICDS VI does not apply, then ICDS I shall apply.
  • Balance amount in the Foreign Currency Translation Reserve as on 1 April 2016 shall be treated as taxable income for FY 2016-17, to the extent it relates to monetary items. 
Disclosure requirements
  • Disclosure of financial impact under respective ICDS should be made in the Return of Income.  Other disclosures required under ICDS should be made as a part of the tax audit report. Where tax audit is not applicable, these other disclosures are not required to be made.
Other clarifications
  • Expenditure incurred after conducting test runs and experimental production but before the commencement of commercial production will be treated as capital expenditure.
  • ICDS will not apply to government grants which received before 1 April 2016 but where conditions relating to grants are fulfilled on or after 1 April 2016. This is based on the reasoning that the taxability of government grants should not be postponed beyond the actual receipts.
  • Where securities are sold on a cum-interest basis, the interest not actually received but offered to tax on an accrual basis will be considered as a part of the cost of the securities sold.
  • Illustrations have been provided demonstrating the valuation of inventory of securities held as stock-in-trade under the Bucket Approach and application of transitional provision for recognition of the provision for expenses.
  • ICDS will not apply to expenditure on employee benefits covered by Accounting Standard 15 and dealt with by specific provisions of the Act.

[1] Circular No. 10/2017
SKP's comments
The CBDT has provided some welcome clarifications regarding the application of ICDS provisions.  However, at certain places, the clarifications are bound to increase compliance burden on taxpayers. In certain areas, the clarifications do not assist in resolving the ambiguity faced by taxpayers.

The clarifications that Mark-to-Market gains and expected gains will not be taxed are welcome.  Similarly, provisions for employee benefit expenses that are governed by Accounting Standard 15 are kept outside the purview of ICDS. Much needed clarity has also been provided regarding the disclosure requirements.

However, certain clarifications do not ease the taxpayer’s burden and seek to expand the coverage of ICDS, like the clarifications stating that ICDS will override Court judgments and ICDS will apply to taxpayers governed by gross-basis taxation (non-residents) and presumptive taxation. In fact, ICDS overriding court’s decision would unsettle the settled legal position through a Circular and would lead to numerous litigations.

The CBDT has also avoided taking a position on contentious areas such as application of ICDS to real estate developers and BOT projects and elaborating on what would be a ‘reasonable cause’ to justify a change in the accounting policy. Apart from the questions dealt with the CBDT, certain other ambiguities around ICDS still remain unanswered.

Taxpayers will need to recalibrate their tax positions in light of these clarifications. It is important to note that these clarifications are issued by way of a Circular and not through the amendments in the Income Tax Act. Therefore, while these clarifications are binding on the tax authorities, they are not binding on the taxpayers and judicial authorities. Hence, it will be open for taxpayers to challenge these clarifications before appellate authorities. 

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