ICDS Confused & Distorted History 1. Started in draft as Tax - PowerPoint PPT Presentation

K ARNATAKA S TATE L EVEL CA C ONFERENCE H OSTED BY B ANGALORE B RANCH OF SIRC OF ICAI 16th June 2018 ICDS – Confusion & Distortion – Final Position [After Delhi HC verdict and Revalidation thro Finance Act 2018] Including its Impact ( ) & Practical Issues (?) CA. K. G. A CHARYA acharya@kgacharya.com B ANGALORE

ICDS – Confused & Distorted History 1. Started in draft as Tax Accounting Standards 2. ICDS notified U/s.145(2) in March 2015 WEF AY 2016-17 - Later rescinded. 3. New amended ICDS notified in Sep. 2016 WEF AY 2017-18. - ICDS - in case of conflict, provisions of Act would prevail over ICDS. 4. FAQ-2 stated ICDS overrides judicial precedents although several taxpayers deviated from ICDS treatment for AY 2017-18 by considering Provisions of Act (as interpreted by settled judicial precedents). Above position of taxpayers affirmed in Nov 2017 by Delhi HC in “CTC v. Union of India”, 5. which struck down many provisions of ICDS as ultra vires (as interpreted by judicial precedents). 6. Finance Act 2018 WREF AY 2017-18 amended IT Act incorporating ICDS provisions. a. Retrospective - unexpected [Reason - many taxpayers already complied & not to put them into inconvenience !!] b. ICDS applicable to All taxpayers (other than individuals & HUFs who are not s.t tax audit U/s.44AB) following Accrual system for computing business income or IOS. Unfortunately, amendments in IT Act wrt ICDS do not expressly provide that it applies only to assessees to whom ICDS are applicable. ?? What does ICDS Version 2016 contain - What part of it was struck down - What part of it has been restored thro IT Act?? 2 CA K G Acharya ICDS & ?

Final Notified 10 ICDS Sec No. Delhi HC Struck down - AS ICDS Title (9 Sec. Amended X ITA 2018) Disclosure of Accounting Policies 1 I 36(1)xviii) & 40A(13) Fully Valuation of Inventories 2 II 145A Fully 44AD, 50C, 43CA, Para 10 (a) Retention money Construction Contracts 7 III & 12 incidental income 43CB Para 5 export incentive & Revenue Recognition 9 IV 145A, 43CB & 145B 6 PCM on Services Accounting for Tangible Fixed Assets 10 V 2(11), 43(1), 43(6), 35D - Fully Effects of Changes in Forex Rates 11 VI 43A, 43AA Expln.10 to S.43(1), Para 4(2) GG recd. cannot be Accounting for Government Grants 12 VII 145B postponed after receipt. Investment Vs. Accounting for Investments / Securities 13 VIII Business- Circular. Part A Fully 145A S.36 (1) (iii), Expn.8 to Borrowing Costs 16 IX Para 5 incidental income S.43 (1), Rule 8D Provisions, Cont. Liabilities &. Assets 29 X - S.43B, S.40A(7) 60 270 53  Total Pages Draft ICDS on Real Estate Transactions issued in May 2017. Not yet notified - ??!!?? 3 CA K G Acharya ICDS & ?

ICDS - I: Accounting Policies Delhi HC X ADD back ( ) 1. Disallowance of exp. debited on a/c of exercising Prudence Delhi HC X @ 36(1)xviii) & 40A(13) @ a. Expected losses b. Marked to Market Loss [MTM Gains not to be considered – FAQ-8] c. Any other 2. Disallowance of expenditure debited on account of Materiality !!! 4 CA K G Acharya ICDS & ?

Accounting Policy – ‘Removal of Prudence’ objected but not sustained ! Delhi High Court Contrary to decisions in Triveni Engineering & Industries Ltd (2011) 49 DTR 253 (Del) & Advance Construction Co. Pvt. Ltd. (2005) 275 ITR 30 (Guj). – Expected loss must be allowed forthwith. ICDS-I, which does away with the concept of 'prudence’ - contrary to the Act & binding judicial precedents - So unsustainable in law. IT Act 2018 a. Deduction of MTM loss or other expected loss to be computed as per ICDS - S.36 (1) (xviii) b. No deduction/ allowance of any MTM loss or other expected loss shall be allowed, except those which are allowable as per provisions of S.36(1)(xviii) – S.40A(13) Present position By inserting S. 36(1), jurisdiction of S. 37(1) is ousted wrt MTM / OE Loss. ?? Issues ?? 1. What MTM losses / Other EL allowable as per ICDS r/w S.36 & S.40A?? 2. Disclose Accounting Policy or Computational Policy ?? 3. How will absence of “Going Concern” Assumption impact Tax ?? 4. “Materiality” not covered in ICDS – Will it impact tax computation materially ?? CA K G Acharya ICDS & ? 5

Position wrt Issues in ICDS - I: Accounting Policies 1. What MTM losses or Other EL are allowable as per ICDS r/w. S.36 & S.40A?? Prudence followed on case to case basis in following cases and cannot be allowed generally. [as argued by the Dept in CTC case] ICDS-2: Cost or market price whichever is lower. a. ICDS-3: Contract loss allowed in proportion. b. ICDS-4 : Revenue need not be recognized if there is no reasonable certainty of its collection. c. ICDS-6: Hedging losses allowed (except for covering highly probable or firm commitment contracts). d. ICDS-8: Securities held as stock measured at cost or NRV WIL (but with “bucket principle valuation” only) e. ICDS-10: Recognizes provision. f. 2. Disclose Accounting Policy or Computational Policy ?? 2. Disclose Accounting Policy or Computational Policy ?? • ICDS is for computation of Income & not for maintenance of books of a/cs. [Preamble in all 10 ICDS] • FAQ-1 ICDS is Not for Accounting – but AP being fundamental shall be applicable for computing TI !! • TG of ICAI 3.6: “Computational Policy” !!! • TG of ICAI 3.6: “Computational Policy” !!! 3. How will absence of “Going Concern” Assumption impact Tax ?? 3. How will absence of “Going Concern” Assumption impact Tax ?? • Capital assets revaluations do not affect tax computations • ICDS decline to recognize losses in valuation of assets on MTM basis • ICDS decline to recognize losses in valuation of assets on MTM basis 4. 4. “Materiality” not covered in ICDS – Will it impact tax computation materially ?? • ICDS-1 requires True & Fair [materiality embedded] and NOT True & Correct • TG of ICAI 6.11 – ICDS is not driven by quantum considerations. • TG of ICAI 6.11 – ICDS is not driven by quantum considerations. 6 CA K G Acharya ICDS & ?

ICDS - II: Valuation of Inventories Delhi HC X ( ) ADD back 1. Change in value of Stock – A. If other than "FIFO or Weighted Average or Specific identification" Cost formula is applied. B. Distribution expenses also to be included in cost of inventory TG of ICAI 10.4: If incurred at distribution depots – Don’t consider. 2. Consider Value of inventory for service provider !!??!! [To the extent not recognized as revenue - See ICDS IV] TG of ICAI Says otherwise # 3. Inventory valued @ NRV on dissolution date, during dissolution of Delhi Firm, AOP or BOI whether business is discontinued or not. HC X 4. Like in AS - Standard cost technique now acceptable in ICDS V-2016 along with Retail method - But in case of Retail Cost Tech. - "An Average percentage for each retail dept. is to be used.“ [Ver. 2016] 7 CA K G Acharya ICDS & ?

Valuation of Inventories Delhi high court In case of dissolution of firm Value inventory @ If firm is continued Cost or market value WIL – Sakthi Trading Co. -SC If firm is discontinued Market price only - A.L.A.Firm - SC ICDS II is held to be ultra vires the Act and struck down as such. [Delhi HC has struck down entire ICDS II for a defect in one para!!] IT Act, 2018 – S.145A: i. Valuation of Inventory shall be at lower of actual cost or NRV computed as per ICDS. ii. Inclusive method continued and Extended to services also Valuation of purchase & sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) 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. Expl.1: For the purposes of this section, any tax, duty, cess or fee under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. 8 CA K G Acharya ICDS & ?