1. INCOME COMPUTATION AND DISCLOSURE STANDARDS - (‘ICDS’) III, IV & X
April 1, 2017
Presentation by :
Anjali Agrawal

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 March 31, 2015 introduced 10 ICDS to be effective from April 1, 2015 and thus, the same was applicable from AY onwards
However, in January 2016, Income-tax Simplification Committee recommended deferment of ICDS

3. What is ICDS?
On July 6, 2016 via press release application of ICDS postponed by one year – to apply from AY and onwards.
On September 29, 2016:, Revised ICDS notified effective from AY and Form 3CD was amended
Recently, on March 23, 2017, CBDT has issued certain clarifications by way of FAQs.

4. List of Notified ICDS ICDS Income Computation and Disclosure Standards
Equivalent AS
Equivalent
IND AS
ICDS I
Accounting Policies
AS-1/5
IND AS-1 and 8
ICDS II
Valuation of Inventories
AS-2
IND AS-2
ICDS III
Construction contracts
AS-7
IND AS-11
ICDS IV
Revenue Recognition
AS-9
IND AS-18
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

5. 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
However, Individuals and HUFs not subject to tax audit u/s. 44AB exempted
ICDS are mandatory in nature
Not for the purpose of maintenance of books of account
In case of conflict between ICDS and Act, the Act shall prevail

6. 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

7. Specimen for computing Taxable Income under ICDS framework
Particulars
Amt
Profit / loss as per profit and loss statement
XXX
Add/ Less: Adjustments as per ICDS
xxx
Adjusted Income as per ICDS*
Add/ Less: Adjustments as per the provisions of the Act
Total Income
* For any non compliance with ICDS appropriate disclosure should be made.

8. Fundamental Issues
Can ICDS bring to charge any item which is not “income”?
In the event of inconsistency between ICDS and principle of “accrual” what would prevail?
Whether the decisions of the Supreme Court or a jurisdictional court interpreting the provisions of the Act would prevail over the ICDS, in case of any conflict?

9. Scope of delegated legislation
Settled law that a notification cannot override the statute. This view is supported based on following decisions :
CIT v. Sirpur Paper Mills [(1999)(237 ITR 41)(SC)]
CIT v. Taj Mahal Hotels [(1971)(82 ITR 44)(SC)]
Durga Dass Devki Nandan Vs. ITO (200 Taxman 318)(HP) :
“It is settled law that the CBDT cannot issue a circular, which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute; A delegate or person authorized to issue delegated legislation cannot virtually set at naught the provisions of the main statute.”
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.

10. ICDS III - CONSTRUCTION CONTRACTSΩ

11. Retention Money Retentions - AS/Ind AS –
“amounts of progress billing which are not paid until satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified”
AS/Ind AS –
Silent on treatment of retention money.
It requires separate disclosure of retention money.
Recognition of revenue is based on PCM method, subject to ultimate recovery.

12. Retention Money Judicial View – Committee Report –
More than 6 High Courts have held that retention money doesn’t accrue during the performance of contract based on the principle of ‘accrual’
For instance:
CIT vs. Simplex Concrete Piles India Pvt. Ltd. (179 ITR 8) (Cal HC);
CIT vs. East Coast Constructions & Industries Ltd. (283 ITR 297)(Mad HC);
CIT vs. Associated Cables Pvt. Ltd. (286 ITR 596)(Bom HC);
CIT vs. P&C Constructions Pvt Ltd (318 ITR 113)(Mad HC)].
Committee Report –
To overcome unintended meaning given by judicial pronouncements.

13. Retention Money ICDS – FAQ of CBDT
Contract revenue defined to include the initial amount of revenue agreed in the contract, including retentions.
Further, contract revenue is to be recognized by reference to the stage of completion of contract activity.
FAQ of CBDT
Retention money, being part of overall contract revenue, shall be recognized as revenue subject to reasonable certainty of its ultimate collection condition contained in para 9 of ICDS – III. (Q 11)

14. Whether Retentions is taxable on PCM basis under ICDS
Possible view –
ICDS cannot override the concept of accrual u/s. 5
‘Accrual’ of income is dealt u/s. 4 and 5 of the IT Act.
ICDS is only a computational provision
A computational provision cannot bring to tax something which is not income accrued u/s 5.
Under ICDS I itself, ‘accrual’ is regarded as one of the fundamental accounting assumptions
ICDS only defines Contract Revenue to include “Retention Money”. Recognition criteria is still the same i.e. when there is reasonable certainty of its ultimate collection.
Whether Retention Money taxable on PCM basis under ICDS

15. Expected Loss Expected Loss: AS/Ind AS– Committee Report –
Total contract costs exceed total contract revenue
AS/Ind AS–
Expected loss is allowed – prudence
Committee Report –
To remove differential treatment between income and losses.
ICDS III is silent on treatment of Expected Loss
CIT vs. Triveni Engineering & Industries Ltd. (336 ITR 374) (Delhi HC),
CIT vs. Advance Construction Co. Pvt. Ltd. (275 ITR 30) (Gujarat HC),
Mazagon Dock Ltd. v. Jt. CIT (29 SOT 356)(Mum);
Jacobs Engineering India (P.) Ltd. ( 14 taxmann.com 186)(MumT);
ITD Cementation India Ltd (36 taxmann.com 74) (MumT).

16. Expected Loss ICDS I - ICDS X-
Principle of ‘prudence’ not regarded as one of the principles for selecting accounting policy
Expected loss shall not be recognised unless such recognition is in accordance with any other ICDS
ICDS X-
Unlike AS 29, ICDS X does not allow creation of provision for ‘onerous contracts’

17. Expected Loss Judicial Pronouncements –
Courts have allowed deduction for expected losses on construction contract considering commercially accepted accounting principles. See:
CIT vs. Triveni Engineering & Industries Ltd. (336 ITR 374) (Delhi HC);
CIT vs. Advance Construction Co. Pvt. Ltd. (275 ITR 30) (Gujarat HC);
Mazagon Dock Ltd. v. Jt. CIT (29 SOT 356)(Mum);
Jacobs Engineering India (P.) Ltd. ( 14 taxmann.com 186)(MumT);
ITD Cementation India Ltd (36 taxmann.com 74) (MumT).

18. Whether Expected Loss an allowable deduction after ICDS
Possible view –
Prima facie, such loss won’t be allowed, since today’s legal position was based on the accounting treatment;
However, if it is concluded that ICDS – I is a legislative misfire, then 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 analyzed on case to case basis.

19. Implication of non-allowance of expected loss
Example :-
Expected loss in the 1st year of a 3 year contract is Rs. 300.
Actual Loss on completion of the contract in the third year is Rs. 240.
It can be observed that, without any actual income there would be taxable income u/s. 115JB, for wrong estimation of loss even though no deduction is allowable for same.
Year
Book Profit
Profit as per Income Tax I
(300)
(100) II -
III 60
(40)

20. Limit for Early Stage of Contract
Treatment during early stage of contract-
If during early stage of contract, the outcome of the contract cannot be estimated reliably, both AS and ICDS require that the contract revenue is recognised only to the extent of costs incurred.
AS/Ind AS–
The AS do not provide for any criteria on what is the early stage of a contract. Hence, under AS, where the outcome cannot be estimated reliably, no profits may be recorded even if say, 50% of project is already completed.

21. Limit for Early Stage of Contract
GN on accounting for Real Estate Transactions:
Rebuttable presumption for completion of early stage:
All critical approvals necessary for commencement of the project have been obtained.
When the stage of completion of the project reaches a reasonable level of development i.e. 25 % of the construction and development costs
At least 25% of the saleable project area is secured by contracts or agreements with buyers.
At least 10% of the contract consideration are realised at the reporting date and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts.
Committee Report –
To avoid ambiguity and litigation

22. Limit for Early Stage of Contract
ICDS –
The foregoing treatment is allowed only till 25% of stage of completion is achieved.
Possible view –
It appears to be good move on part of legislature to specify limit.
However, method of computing 25% limit has not been provided.
In case of uncertainty, one can still postpone recognition;
Further, tax department would be more interested in combining and segmenting of contract.

23. Treatment of Incidental Income under ICDS
AS/Ind AS –
Allows reduction of any incidental income from the contract costs.
Committee Report –
It is judicially settled that pre-construction income is not reduced from cost of construction.
ICDS –
Allows reduction of incidental income other than interest, dividend or capital gains.
in the case of Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT (227 ITR 172), wherein the Court has held that interest income earned by the assessee from surplus funds available during the setting up of a factory would be revenue in nature and thus, taxable as income in the year of accrual. However, in its latter decision in the case of CIT vs. Bokaro Steel Ltd. (236 ITR 315), the Court has held that if the assessee receives any amount (for instance, interest income from advances given to contractors or any other incidental income) which is inextricably linked with the process of setting up the plant, then such receipts will go on to reduce the cost of the plant. Hence, it was held that such receipts are capital in nature and cannot be taxed as income.

24. Treatment of incidental income under ICDS
Judicial Pronouncements –
When the income is inextricably linked to acquisition of asset, the income shall reduce the cost of asset. Such income is capital in nature and cannot be taxed. (CIT v. Bokaro Steel Ltd. 236 ITR 315 (SC))
In following HC decisions, interest income inextricably linked to a project has been held to be capital in nature:
CIT vs. Jaypee DSC Ventures Ltd. (17 taxmann.com) (Del)
Karnal Co-operative Sugar Mills Ltd. vs CIT (233 ITR 531) (P & H)
Phoenix Lamps India Ltd. vs. CIT (50 taxmann.com 320)(All)
Koshika Telecom Ltd. vs. CIT (287 ITR 479) (Del)
Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255 (Del.)
NTPC Sail Power Company (P.) Ltd. v. CIT [2012](25 taxmann.com )(Del)
PCIT v. Facor Power Ltd. [2016] 66 taxmann.com 178 (Delhi).
Further, this wont apply to other assessees who are setting up their own plants./buildings

25. Whether incidental income is taxable under ICDS
Possible view –
It is arguable that since the Committee has suggested the said change in ICDS on the basis that the issue is judicially settled, the said change would apply only in the context of such investments and activities, which are not directly relatable to construction contracts.
ICDS, being a computational provision cannot bring to tax something, which is not regarded as ‘income’ under the provisions of the Act.
The same can be effected only through amendment in the Act as was done in the case of government grants.
Besides, this ICDS wont apply to assessees who are setting up their own plants/buildings.

26. Transitional provisions of ICDS III
Contract revenue and contract costs associated with uncompleted construction contract as on March 31, 2016 shall be recognized based on the method regularly followed by the person prior to the previous year beginning on the 1st day of April, 2016.
Hence, ICDS would not effect the tax treatment of contracts which are already in progress as on March 31, 2016.
Applicable even to transition provisions of ICDS IV relating to service contracts.

27. ICDS IV – REVENUE RECOGNITION

28. Recognition of revenue from Sale of Goods
No change in criteria for recognition of revenue from sale of goods in AS – 9 and ICDS.
The key criteria is that the significant risks and rewards in the goods are transferred.
The recognition criteria under Ind AS 18 is also similar (though more detailed). However, under Ind AS, the revenue is required to be measured at ‘fair value’.
Eg. In case of deferred consideration, Ind AS requires the sales consideration to be recognised at the discounted value of the consideration and the difference between the fair value and the nominal value is to be recognised as interest income.

29. Recognition of revenue from Service Transactions
AS 9 –
Permits both the methods of revenue recognition.
Ind AS 18:
Permits on PCM basis for recognition of revenue from service transactions
Committee Report –
To reduce litigation and alternatives, only PCM is recommended
ICDS –
Permits only PCM, except where the duration of the contracts is < 90 days.

30. Recognition of income from Service Transactions
Judicial Pronouncements –
As both the methods are permitted in commercial accounting principle, hence any method can be followed.
Bilahari Investment (P.) Ltd. (299 ITR 1) (SC): Service provider - follow completed contract method
Possible view –
The terms used in the standards are ‘revenue recognition’ not income recognition. However, in case of Lohia Machine (152 ITR 308), Supreme Court has upheld the power of rule making authority restrict the manner of computation to any one of the possible methods.
In the past, the department had accepted the completed contract method and because of such acceptance, the assessee had followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting which the department has earlier accepted. It is only in those cases where the department records a finding that the method adopted by the assessee results in distortion of profits, that the department can insist on substitution of the existing method. Further, in the instant case, it was found the various statements produced that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, was revenue neutral. [Para 20]
Therefore, there was no reason to interfere with the impugned judgment of the High Court and, accordingly, the instant appeal was to be dismissed. [Para 22]

31. Implication of following CPM method in Books
Possibility of MAT liability:
Say, service contract will take 3 years for execution and expected profit is Rs
TDS Mismatch:
ICDS does not require raising of a bill - if the transaction is covered by TDS then complication will increase, as the tax would be deducted in the year in which the bill is raised
Year
Income Tax
Books of Accounts
30%
18.5% 1
100 - 30 II
III
300
55.5

32. Recognition of Interest Income
AS 9 –
Interest income may be recognized on time basis. Usually, discount or premium on debt securities held is treated as though it were accruing over the period to maturity.
Ind AS 18 –
Interest shall be recognised using the effective interest method as set out in Ind AS 109.
ICDS –
Interest shall accrue on the time basis determined by the amount outstanding and the rate applicable, except in case of Interest on refund of any tax, duty or cess, which will taxed on receipt basis.

33. Recognition of Interest Income
Q – where a instrument provides coupon date, whether interest would still be taxable on time basis??
Judicial Pronouncements –
Right to receive - E.D. Sassoon & Co. Ltd. v. CIT (26 ITR 27) (SC)
Interest income to accrue on coupon date - DIT v. Credit Suisse First Boston (Cyprus) Ltd (351 ITR 323)(Bom.)
Possible view –
ICDS cannot override the concept of accrual u/s. 5, as explained by the courts.

34. Recognition of interest income from NPAs
AS 9/ Ind AS 18 –
Interest income may be recognised when no significant uncertainty as to measurability or collectability exists
Committee Report –
Due to specific provision of bad debt in the Act, revenue recognition should not be postponed.
ICDS –
Interest ‘shall’ be recognised on time basis. No clause requiring postponement of recognition of interest in case of uncertainty.

35. Recognition of interest income from NPAs
FAQ of CBDT –
‘As a principle, interest accrues on time basis and royalty accrues on the basis of contractual terms. Subsequent non-recovery in either cases can be claimed as deduction in view of the amendment to section 36(1)(vii). Further, the provision of the Act (eg. Section 43D) shall prevail over the provisions of the ICDS.’ (Q 13)
Provision of the Act –
Section 43D: Interest income from NPAs of Scheduled Banks, Cooperative Banks, etc. is taxable in the year in which it is credited to the P&L A/c or the year of receipt, whichever is earlier.
Provision not applicable to NBFCs.
Accordingly, in our view, based on the business realities of such companies, the interest due on such NPAs cannot be said to result in any real income to such companies. It can at most be regarded as a notional income. Accordingly, the said income cannot be subject to tax under the charging provision of the Act itself.
Besides, attention may also be invited to the decision of the Delhi High Court in Commissioner of Income-tax v. Vasisth Chay Vyapar Ltd. (196 TAXMAN 169)(Delhi), wherein it has been held that ‘the assessee being an NBFC was governed by the provisions of the RBI Act. In such a case, interest income could not be said to have ‘accrued’ to the assessee having regard to the provisions of section 45Q of the RBI Act and Prudential Norms issued by the RBI in exercise of its statutory powers. As per these Norms, the ICDs had become NPA and on such NPA where the interest was not received and possibility of recovery was almost nil, interest could not be treated to have been accrued in favour of the assessee.” The foregoing decision has been followed by the Delhi High Court in Director of Income-tax v. Brahamputra Capital Financial Services Ltd. (12 taxmann.com 387)(Delhi). Further, similar view has been held in the following decisions:
CIT vs. India Equipment Leasing Ltd (293 ITR 350)(Mad);
CIT vs. Elgi Finance Ltd (293 ITR 357)(Mad);
CIT vs. Kailash Auto Finance Ltd. (2 taxmann.com 293)(All);
CIT vs. Kailash Auto Finance Ltd. (320 ITR 394)(All.);
CIT vs. Canfin Homes Ltd. (13 taxmann.com 43)(Kar.);
CIT vs. Coimbatore Lakshmi Inv. & Finance Co. Ltd. (11 taxmann.com 261)(Mad.);
DCIT vs. BhartiyaSamruddhi Finance Ltd. (58 SOT
)(DelT);
ACIT vs. Bobcards Ltd. [2013] (29 taxmann.com 234) (Mumbai - Trib.).

36. Recognition of interest income from NPAs
Judicial Pronouncements –
Real Income theory –
Shoorji Vallabhdas & Co. (46 TR 144) (SC):
No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise. ;
Godhra Electricity (225 ITR 746) (SC),
State Bank of Travancore v. CIT (158 ITR 102) (SC)

37. Recognition of interest income from NPAs
CIT v. Motor Credit Co. (P) Ltd. (127 ITR 572)(Mad)[SLP dismissed by SC in (149 ITR (Statutes) 93].
Where no income has resulted, it cannot be said that the income has accrued merely on the ground that the assessee has been following the mercantile system of accounting
Principle of accrual –
CIT vs. Vasisth Chay Vyapar Ltd. (196 Taxman169)(Delhi),
CIT vs. India Equipment Leasing Ltd (293 ITR 350)(Mad), etc.
DIT vs. Brahamputra Capital Financial Services Ltd. (12 taxmann.com 387)(Delhi).  
CIT vs. Elgi Finance Ltd (293 ITR 357)(Mad).

38. Recognition of interest income from NPAs
Possible view –
ICDS is a delegated legislation, cannot bring to tax something which has been held to be not ‘income’;
Besides it cannot override the concept of ‘accrual’ u/s. 5;
The explanation of CBDT does not hold good in case of ‘IOS’;
Recognition of interest on NPAs for NBFCs is governed by section 45Q of the RBI Act, which override any other law in India. Therefore, arguable that it overrides section 145 of the Act.
Here, reference may be drawn to the decision of Durga Dass Devki Nandan Vs. ITO (200 Taxman 318) (2011) (HP) wherein the Hon’ble High Court has held the following:
It is settled law that the CBDT cannot issue a circular, which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute;
A delegate or person authorized to issue delegated legislation cannot virtually set at naught the provisions of the main statute; and
The circular had to be read along with sections 40(b)(v) and has to be made subject to section 40(b)(v).
Further, we would also like to invite attention to section 45Q of the RBI Act, which reads as under:
“45Q. Chapter IIIB to override other laws.
The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
 Del HC in vasisth vyas held that in view of section 45Q, it will override income tax act.

39. Impact of ICDS IV on recognition of export incentive
AS 9–
Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved.
ICDS –
Para 5 – where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved.

40. Impact of ICDS IV on recognition of export incentive
Judicial Pronouncement –
Income to be recognised when there is corresponding third party liability to pay
See CIT v. Excel Industries Ltd. (358 ITR 295) (SC)
Possible view –
ICDS cannot override the concept of accrual as explained by the courts.
Additional argument can be taken that export incentive is outside the scope of the ICDS - EAC Vol 26, Q 32.

41. Impact of ICDS IV on treatment of Finance Lease
AS/Ind AS –
A separate AS is prescribed for accounting of leases
Committee Report –
Recommended a separate ICDS on leases, which has not been notified yet.
ICDS IV –
Excludes revenue recognition of items specifically dealt by other ICDS.

42. Impact of ICDS IV on treatment of Finance Lease
FAQ of CBDT:
At present there is no specific ICDS notified for leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions, as may be applicable. (Q 12)
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 a view may be taken that lease rentals are outside the purview of ICDS – IV.

43. Applicability to presumptive taxation
ICDS:
Applicable to all assessees following mercantile system of accounting, for the purposes of computation of income chargeable under the head “BI” or “IOS”.
FAQ by CBDT
‘ICDS is applicable to specified persons having income chargeable under the head BI or IOS. Therefore, the relevant provisions of ICDS shall also apply to the persons computing income under the relevant presumptive taxation scheme. For example, for computing presumptive income for a partnership firm under section 44AD of the Act, the provisions of ICDS on Construction Contract or Revenue recognition shall apply for determining the receipts or turnover, as the case may be. (Q 3)

44. Applicability to presumptive taxation
Possible View:
Section 145 applies only to assessee following a system of accounting. U/s. 44AA, assessee opting for presumptive taxation is not required to maintain books
ICDS are applicable for computation of ‘income’ not ‘gross turnover/receipts’ referred in section 44AD, etc.
The presumptive provisions being non-obstante provisions, would override section 145, including the ICDS.

45. Applicability to presumptive taxation
Possible view (cont.)
ICDS itself provides in case of conflict, provisions of Act would override.
Unlike old ICDS, preamble to revised ICDS provides for specific exclusion to individuals/HUFs not liable for tax audit u/s. 44AB. Assessees opting for presumptive taxation are neither required to maintain books nor get it audited. Hence, ICDS clearly not applicable for individuals and HUFs opting for presumptive taxation.
In case of other assessees too, if they determine the gross receipt on cash basis and not mercantile basis, ICDS would not apply since it applies to assessees following mercantile system of accounting.

46. Applicability to income taxable on gross basis
FAQ of CBDT-
The provisions of ICDS shall apply for computation of income which are liable to tax on gross basis like interest, royalty and fees for technical services for non- residents u/s. 115A of the Act for arriving at the amount chargeable to tax. (Q 14)
Section 115A provides for rate of taxation for non-resident assessees. TDS is deducted on this income under the Act at the time of credit or payment, whichever is earlier.
Generally therefore, the point of taxation of these types of income is at the time the income is credited or paid by the Indian resident.

47. Applicability to income taxable on gross basis
In case of a service provider receiving income as FTS, who raises the invoice on completion of the contract (on which TDS is deducted), due to foregoing clarification would now be required to offer income on PCM basis. This is unintended consequence, which would also create practical difficulty.

48. Applicability of ICDS 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.”

49. Applicability of ICDS to Real Estate Developers
Ind AS 11 – Scope:
“This Standard shall 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.”

50. Applicability of ICDS to Real Estate Developers
Committee Report –
“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”
FAQ Issued by CBDT:
“At present there is no specific ICDS notified for real estate developers, BOT projects and leases. Therefore, relevant provisions of the Act and ICDS shall apply to these transactions as may be applicable.”(Q 12)

51. Applicability of ICDS to 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.”

52. Applicability of ICDS to Real Estate Developers
Possible view –
There is enough ammunition available to conclude that ICDS – III will not apply to real estate developers.
‘Work Contract’ is different from ‘Construction Contract’
Principle of consistency
Both the methods are revenue neutral

53. Changes in revised ICDS IV
Recognition of revenue on straight line basis:
AS/Ind AS–
In PCM, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognised on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.
Similar exception was not provided in ICDS IV.
ICDS IV is now amended to provide for a similar exception.
Thus, service contracts for a specific period can be recognised on time basis instead of stage of completion contract. (Eg. AMC Contracts)

54. Changes in revised ICDS IV
Recognition of revenue on CPM for short contracts:
In case of short services, which fall in two financial years, application of PCM created practical difficulties as well as served no purpose.
Eg: Professional Consultancy services, Insurance agents, banking services, logistic services, etc.
To address this issue ICDS IV amended to provide
“7. Revenue from service contracts with duration of not more than ninety days may be recognised when the rendering of services under that contract is completed or substantially completed.”
Since PCM has practical applicability only on long contracts, the duration should have been 12 months.

55. Changes in revised ICDS IV
Taxability of interest on receipt basis:
ICDS earlier required all types of interest income to be recognised on time basis
It included even income receivable from Government on refunds.
ICDS is amended to provided that ‘Interest on refund of any tax, duty or cess shall be deemed to be the income of the previous year in which such interest is received.
43 taxmann.com 123 (Andhra Pradesh HC) M. Jaffer Saheb v. CIT
Section 5, read with section 244, of the Income-tax Act, Income - Accrual of (Interest on refund) - Assessment year Whether once income has legally accrued to assessee, i.e. assessee has acquired a right to receive same, though its valuation may be postponed to future date, determination or quantification of amount does not postpone accrual - Held, yes - As a result of Tribunal's order, dated , granting substantial relief to assessee for assessment year , assessee received refund alongwith interest for period from to which was brought to tax by Assessing Officer in assessment year ignoring claim of assessee to spread over said amount for respective assessment years - Whether interest on refund accrued from previous year relevant to assessment year and was chargeable to tax in respective years for which same was paid - Held, yes [Para 16] [In favour of assessee
[2011] 9 taxmann.com 265 (Kerala)
HIGH COURT OF KERALA
Smt. K. Devayani Amma v.
Deputy Commissioner of Income-tax*
C.N. RAMACHANDRAN NAIR AND V.K. MOHANAN ,JJ.
IT APPEAL NO OF 2009†
OCTOBER  28, 2009 
Section 5, read with section 244 of the Income-tax Act, Income - Accrual of - Assessment year Whether interest, under section 244(1A) accrues to assessee only when assessee is found to be eligible for refund of excess tax on revision of assessment based on orders in appeal and it is assessable to tax in assessment year in which such interest is granted to assessee along with refund - Held, yes
[1995] 212 ITR 385 (ORI.)
HIGH COURT OF ORISSA
Commissioner of Income-tax
Sri Popsingh Rice Mill
G.B. PATNAIK AND K.L. ISSRANI, JJ.
SPECIAL JURISDICTION CASE NO. 82 OF 1991
DECEMBER 17, 1994
Section 5, read with section 244 of the Income-tax Act, 1961 – Income – Accrual of – Assessment year – Whether income received by assessee by way of interest under section 244 on refund determined and quantified under section 240 was assessable only in year of receipt and not earlier on accrual basis – Held, yes

56. ICDS X – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

57. ICDS X – Major Changes S .No
AS 29 - Provisions, Contingent Liabilities and Contingent Assets
ICDS X- Provisions, Contingent Liabilities and Contingent Assets 1
Recognition of provision
A provision should be recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation;
A provision should be recognised when it is reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation 2
Recognition of contingent asset
Contingent Asset is recognised when inflow of resources is ‘virtually certain’
Contingent Asset is recognised when it is ‘reasonably certain’ that inflow of economic benefit will arise. 3
Reversal of provision
Provision to be reversed when it is no longer probable that outflow of resources would be required.
Provision to be reversed if it is no longer reasonably certain that an outflow of resources embodying economic benefits will be required to settle the obligation

58. ICDS X – Major Changes S . No
Accounting Standard 29 - Provisions, Contingent Liabilities and Contingent Assets
ICDS X- Provisions, Contingent Liabilities and Contingent Assets 4
Reimbursement
Reimbursement to be recognized when it is virtually certain that reimbursement would be received
Substitutes the words ‘virtually certain’ with the words ‘reasonably certain’ 5
Enactment of Law
When a new law is to be enacted, an obligation in that regard arises only when it is virtually certain that the law would be enacted
Obligation arises on enactment of the legislation

59. Impact on Provision on Warranty
Accounting Standard –
Provision of warranty can be recognised.
Committee Report –
To remove differential treatment between recognition of income and expense.
Judicial Pronouncement –
Supreme Court has upheld the allowance of provision for warranty in case of Rotork Controls v CIT 314 ITR 62 (SC)

60. Impact on Provision on Warranty
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.
Our view –
The view taken by Supreme Court still holds good.

61. Impact on current treatment of Contingent Asset
Accounting Standard –
Requires recognition when there is virtual certainty of inflow of economic benefits.
Committee Report –
To remove differential treatment between recognition of income and expense.
Judicial Pronouncements –
Basic concept of accrual & real income theory applicable for taxation of income

62. Impact on current treatment of Contingent Asset
ICDS –
Requires recognition of contingent asset if it becomes ‘reasonably certain’ that inflow of economic benefit will arise.
Our view –
ICDS being a computational provision cannot override the concept of accrual u/s 5, as explained by the courts.

63. Treatment of loss on Onerous contract
Accounting Standard –
If an enterprise has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision. Onerous Contract means a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
ICDS X -
Does not deal with recognition of loss arising out of onerous contract.
Our view –
Prima facie, such loss won’t be allowed. However, if it is concluded that ICDS – I is a legislative misfire, then relying on commercial accounting principle the loss should be allowed.

64. Clarifications issued by CBDT
Impact of transitional provisions of ICDS X:
Para 20 requires that the provision/assets for FY shall be recognised after taking into account the amount, if any recognised in earlier years in respect of the same item;
It is clarified that the intent behind the said para is to avoid any ‘double taxation’ or ‘double deduction’ of same income/expense, due to applicable of ICDS.
Post-retirement expenditure dealt with in AS-15 not covered by ICDS X:
There is no specific exclusion for employee benefits such as provident fund, gratuity, etc. in ICDS X;
Hence, there was an ambiguity whether ICDS X can apply to such benefits and whether provision for such liabilities (without discounting for present value) will be allowable under ICDS X.
It is clarified that ICDS X would not apply to such benefits.

65. Consequence of non-compliance with ICDS
Section 145(3)-
AO has the power to make best judgement assessment u/s. 144 if he is not satisfied about the :-
correctness or completeness of the accounts of the assessee ; or
method of accounting is not regularly followed ;or
Income not computed as per ICDS.
Hence, on not complying with ICDS, the AO can ignore the books of the assessee and do a best judgement assessment.
Therefore, in case of any deviation from the ICDS, there should be a proper disclosure giving the reasoning for such deviation in the computation.

66. THANK YOU!