Section (S.) 145 of the Income-tax Act, 1961 (ITA) provides that taxable income of an assessee falling under the heads “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting which is regularly employed by the assessee. It further provides that the Central Government (CG) may notify, from time-to-time, Income Computation & Disclosure Standards (ICDS) to be followed by any class of taxpayers or in respect of any class of income.

Based on the recommendations of the ICDS Committee and public representations on the draft ICDS, the CG had notified 10 ICDS (‘ICDS, 2015’) vide notification dated 31st March, 2015 for compliance by all assessees following mercantile system of accounting for computing ‘business’ and ‘other sources’ income w.e.f. 1st April, 2015.

However, several issues were raised by stakeholders on ‘ICDS, 2015’ and thereafter CG referred the issues to the ICDS Committee for issuing proper clarifications/ guidance. In the interim, CG also deferred the effective date of ICDS applicability by one year (i.e. to FY 2016-17) pending issue of appropriate clarifications/ guidance by ICDS Committee as well as revision of the Tax Audit Report to capture disclosures required in terms of ICDS.

The ICDS Committee after considering the issues raised by stakeholders, suggested a two-step approach for smooth implementation of ICDS i.e.

• Changes in the ICDS, 2015; and

• Issue of FAQs for clarifying on rest of the pending issues.

Considering the ICDS, Committee recommendations, CG rescinded1 the ICDS 2015 and notified revised2 ICDS (‘revised ICDS’) to be applicable from FY 2016-17 and thereafter. Further, CG amended3 Form 3CD (tax audit report) for ICDS related disclosure requirements and for quantifying adjustment to profits or loss for complying with ICDS.

The following table provides a glimpse of changes brought in through revised ICDS as well provides details (in brief) of clarifications provided by CBDT through FAQs:

Caption Particulars
1. General
Revised ICDS • ICDS does not apply to individuals/ HUF not required to get their accounts audited under Section 44AB of ITA

• Under transitional provision of each ICDS, consequential changes are made to give effect to the change in effective date of ICDS applicability i.e. FY 2016-17

FAQs • ICDS are not meant for maintenance of books of account/ preparing financial statements however, accounting policies mentioned in ICDS-I (Accounting Policies) being fundamental in nature shall apply while computing ‘business’ and ‘other sources’ income (Q. 1)

• Provisions of ICDS are notified, after due deliberations and examination of judicial precedents, to bring certainty and therefore shall be applicable to such transactional issues, even if inconsistent with judicial precedents (Q. 2)

• In case of conflict between ICDS and Income Tax Rules, 1962 (‘Rules’), Rules shall prevail over ICDS (Q. 4)

• ICDS apply for computation of ‘business’ and ‘other sources’ income, irrespective of the accounting standards adopted by the companies i.e. either accounting standards or Ind-AS (Q. 5)

• ICDS provisions are applicable to the assessee’s computing income under the presumptive tax scheme [e.g. ICDS-III (Construction Contracts) or ICDS IV (Revenue recognition) shall apply for determining receipts/ turnover presumptive income of a firm under Section 44AD of ITA] (Q 3)

• Provisions of ICDS shall apply for computation of income liable to tax on gross basis like interest, royalty and fee for technical services for non-residents under S.115A of the ITA (Q.14)

• General provisions of ICDS not applicable to the assessee’s governed by sector specific provisions contained in ITA or ICDS (Q .7)

• ICDS not applicable for computing Minimum Alternative Tax (MAT) under
S. 115JB of the ITA since MAT is computed on ‘book profit’ i.e. Net profit as per P&L a/c prepared under Companies Act, 2013 subject to specified adjustments in ITA (Q. 6)

• ICDS applicable for computing Alternative Minimum Tax (AMT), applicable to non-corporate assessee, since AMT is computed on adjusted total income based on the normal provisions of the ITA, subject to specified adjustments (Q. 6)

• Net effect on the income due to application of ICDS to be disclosed in tax return. Further, the disclosures required as per ICDS shall be made in the tax audit report however there shall not be any separate disclosure requirements for assessees who are not liable tax audit (Q. 25)

2. ICDP-II (Accounting Policies)
Revised ICDS No Change
FAQs • Market to Market (MTM) loss or expected loss shall not be recognised unless permitted by any other ICDS however is silent on MTM gains or expected profits. FAQs provides that the same principle, on a mutatis mutandis basis, shall apply to MTM gains or expected profits (Q. 8)

• An accounting policy shall not be changed without ‘reasonable cause’. However the term ‘reasonable cause’ is undefined. FAQs state that ‘reasonable cause’ is an existing concept and has evolved well over a period of time, conferring desired flexibility to the taxpayer in deserving cases (Q. 9)

• ICDS-I shall govern those derivatives which are not covered within the scope of ICDS-VI/VIII. Therefore, MTM loss on such derivatives may not be tax deductible (Q. 10)

3. ICDS-II (Inventory valuation)
Revised ICDS • ICDS 2015 provided items which will form part of ‘cost of services’ in case of a ‘service provider’. The reference to ‘service provider’ is omitted from the cost of services however the ambiguity continues with regards to applicability of inventory valuation to service provider as the same is not included in scope exclusion of ICDS-II as provided in the scope exclusion of accounting standard dealing with Valuation of Inventories

• Standard costing method of inventory valuation permitted if standard cost approximates actual cost

• In respect of retail method of measuring inventory, cost is determined by reducing appropriate percentage of gross margin from the sales value. ICDS now requires that an average percentage for each retail department under retail method is to be mandatorily used

FAQs No FAQs related to ICDS-II
4. ICDS III – Construction Contract
Revised ICDS Transitional provisions now provide for complete grandfathering in respect of construction contracts which commenced on or before 31st March, 2016 but not completed by the said date and therefore contract revenue and contract costs from such construction contracts shall be recognised based on the method regularly followed by the assessees prior to 31st March, 2016
FAQs • Retention money needs to be recognised as revenue on billing if there is reasonable certainty of its ultimate collection, even if such receipt is contingent on satisfaction of certain performance criteria (Q. 11)

• As presently there are no ICDS notified for real estate developers, built operate transfer projects and leases and therefore these transactions shall be governed by the existing provisions of ITL and ICDS, as may be applicable (Q. 12)

5. ICDS IV – Revenue Recognition
Revised ICDS Revenue recognition criteria for service contracts (in addition to percentage completion method (POCM) as provided by ‘ICDS 2015’)

• Option provided to recognise service revenue on straight line basis, over the specific period, in a case where the services are provided by an indeterminate number of acts over a specific period of time

• Option provided to recognise service revenue on completion or when
substantially completed, in a case where duration of the service contract is not
more than 90 days

• Transitional provisions of ICDS-IV is linked to
transitional provisions of ICDS III and therefore service contract which
commenced on or before 31st March, 2016 but not completed by the said date shall
be recognised based on the method regularly followed by the assessee prior to
31st March, 2016

• Revenue recognition criteria for interest income (in addition to
recognition on time basis as provided by ‘ICDS 2015’)

• Interest on refund of any tax, duty or cess shall deemed to be the income
of the year in which such interest is received by the assessee


FAQs Interest accrues on time basis and royalty accrues on the contractual term and therefore needs to be recognised even when the criteria of reasonable certainty of ultimate collection is not met. Any subsequent non-recovery in either cases can be claimed as bad debts under S. 36(1)(vii) of the ITA. Further, specific provisions of ITA (e.g. S. 43D) shall prevail over the provisions of ICDS (Q. 13)
6. ICDS V – Tangible assets
Revised ICDS No significant change
FAQs Expenses incurred after trial run and experimental production but before commencing commercial production, shall need to be capitalised (Q. 15)
7. ICDS VI – Effects of changes in foreign exchange rates
Revised ICDS • Distinction between integral and non-integral foreign operation removed. Accordingly, it now requires that financial statements of a foreign operation should be translated as if the transactions of the foreign operation are that of the taxpayer himself, irrespective of whether foreign operations are integral or non-integral.

• Non-monetary item, being inventory, which is carried at net realisable value shall be converted by using the exchange rate that existed when such value was determined

FAQs Foreign currency translation reserve balance as on 1st April, 2016 (opening balance) pertaining to exchange differences on monetary items for non-integral operations shall be recognised in financial year 2016-17 to the extent not recognised as income in the past (Q.16)
8. ICDS VII – Government Grants
Revised ICDS No significant change
FAQs Transitional provisions require recognition of Government grant as per ICDS which meet the recognition criteria on or after 1sy April, 2016. Further, ICDS provides that recognition shall not be postponed beyond actual receipt and therefore Government grants actually received prior to 1st April, 2016 shall deemed to be recognised on its receipt and accordingly shall not be governed by ICDS but shall be governed by the existing provisions of the ITA.4 (Q. 17)
9. ICDS VIII – Securities
Revised ICDS • Definition of securities amended to include share of a company in which public are not substantially interested

• In addition to FIFO method, revised ICDS now also permits weighted average method for ascertainment of cost of securities

• Revised ICDS introduces new ‘Part B’ to deal with securities (which includes derivatives within its ambit) held by scheduled bank or public financial institutions and provides that the classification, recognition and measurement of securities shall be in accordance with the extant guidelines issued by Reserve Bank of India and any claim for deduction in excess of the said guidelines shall not be permissible. To this extent, provisions of ICDS-VI relating to forward exchange contract shall not apply

FAQs • Interest income on securities which was taxed on accrual basis however not actually received till the date of sale of such security (broken period interest), shall be allowable as deduction while computing income arising from sale of such security (Q.18)

• Illustration provided in the FAQ on valuation of securities based on the accounting standards (i.e. individual scrip wise) as well as based on the bucket approach as suggested in ICDS (i.e. category-wise valuation). The illustration highlights that valuation as per ICDS may be higher than valuation as per books on individual scrip-wise basis (Q.19)

10. ICDS IX – Borrowing cost
Revised ICDS • ICDS 2015 did not provide the criterion of substantial period of time5 for classifying any tangible or intangible asset (except for inventory) as qualifying asset requiring capitalisation for specific as well as general purpose borrowing

Amended ICDS provides that qualifying asset shall be such assets, for the general purpose borrowing, that necessarily require a period > 12 months for the acquisition, construction or production. However, no threshold is provided for borrowing for specific purpose

• Amendments made in normative formulae for computing general purpose borrowing cost

• Period clarified when the capitalisation will cease; and

• Certain amendments in the formulae to exclude specific borrowing cost as well as the assets related to specific purpose borrowing.

FAQs • Borrowing cost considered for capitalisation shall exclude borrowing cost which are specifically disallowed under the specific provisions of the ITA (Q. 20)

• Bill discounting charges and other similar charges are covered under the definition of borrowing cost (Q. 21)

• Allocation of general borrowing cost amongst different qualifying assets shall be done on asset-by-asset basis (Q. 22)

11. ICDS X – Provisions, Contingent Liabilities and Contingent Assets
Revised ICDS No significant change
FAQs • Illustration provided to explain the impact of transitional provision which were introduced with the intent that there should neither be double taxation nor should there be escape of any income due to application of ICDS from a particular date (refer note for the illustration) (Q. 23)

• Provisioning for employee benefits which are otherwise covered by accounting standard shall continue to be governed by specific provisions of ITA and are not dealt with by ICDS (Q.24)

Reader are also requested to note that while ICDS has been postponed to FY 2016-17 onwards however certain amendments (refer Section 2(24)(xviii) relating to taxability of Government grant and proviso to Section 36(1)(iiii) which deals with disallowance of interest cost for assets not put to use) as carried out by Finance Act, 2015 in the ITA are also in the statute book and are already in force from 1st April, 2015.
Note: Impact of transitional provisions of ICDS-X as explained by way of illustration in the FAQ (Q. 23)

No. Particulars Amounts in million
A Provision required as per ICDS as on 31st March, 2017 for items brought forward from 31st March, 2016 30
B Provisions as per ICDS for FY 2016-17 50
C Total gross provision (A+B) 80
D Less: Provision already recognised in computation of taxable income in FY 2015-16 or earlier years 20
E Net provision as per ICDS in FY 2016-17 to be recognised as per transition provision 60

We are responsible for what we are, and whatever we wish ourselves to be, we have the power to make ourselves.

– Swami Vivekananda

1 Notification No. 86 of 2016 dated 29th September, 2016

2 Notification No. 87 of 2016 dated 29th September, 2016

3 Notification No. 88 of 2016 dated 29tj September, 2016

4 This is irrespective of the fact that the conditions attached to such grant are satisfied on or after 1st April, 2016

5 Generally, a period of 12 months is considered as a substantial period of time

6 Accounting Standard 15 on Employee Benefits

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