1. Interplay of ‘ICDS’ and ‘Computation of Business Income’, including draft ICDS on Real Estate Transactions

2. ICDS - Roadmap May, 2017: September, 2016: January 2015:
Draft ICDS on Real Estate Transactions circulated by CBDT-open for comments
September, 2016:
CBDT notified revised 10 ICDS vide Notification No.87/2016
January 2015:
CBDT issued draft of 12 ICDS
October 2012:
Final report of the Committee and draft of 14 ICDS published
Year 1996:
Government notified 2 AS under section 145(2) of the IT Act
March, 2016:
CBDT issues 25 FAQ for further clarifications on ICDS
March 31, 2015:
CBDT notified 10 ICDS vide Notification No. 33/2015
July 2014:
Finance Act 2014 amended section 145(2) applicable from
December 2010
CBDT constituted AS Committee

3. ICDS No.
Name
Corresponding AS I
Accounting Polices 1 II
Valuation of Inventories 2
III
Construction Contract 7 IV
Revenue Recognition 9 V
Tangible Fixed Asset 10 VI
Effects of change in foreign exchange rates 11
VII
Government Grants 12
VIII
Securities 13 IX
Borrowing Costs 16 X
Provisions, contingent Liabilities and contingent assets 29 *
Draft ICDS on Real Estate Transactions
Guidance Note
* Not yet notified, Draft ICDS circulated for comments from industry.

4. BASIC POINTS
ICDS are applicable for computation of income chargeable under the head “Profits & gains of business or profession” or “Income from other sources”
The ICDS would not be applicable for:
Computation of income under any other head;
Maintenance of books of accounts and hence not relevant for MAT.
In case of conflict between provisions of IT Act or Rules and provisions of ICDS, provisions of IT Act and Rules shall prevail (refer Ques 4 of Circular 10/2017)
ICDS are mandatory [refer section 145(3)].
ICDS require certain disclosures to be made - Question arises where such disclosures should be made?
CBDT has vide Circular No. 10/2017 (Ques 25) clarified that disclosures required under ICDS shall be made in the tax audit repot in Form 3CD.
What, if the person is not required to subjected to tax audit?

5. ICDS- I- Accounting Policies

6. AS-1 – Disclosure of Accounting Policies
Key provisions ICDS – I
COMMENTS
Fundamental accounting assumptions are Going Concern, Consistency and Accrual
Concept of materiality and prudence has been diluted.
Treatment and presentation of transactions have to be governed by “substance over form”
Accounting policy can be changed if there exists a reasonable cause, however “reasonable cause” has not been defined.
MTM and expected losses not recognised unless provided by ICDS
Losses (other than those dealt by ICDS) would now be allowed only on actual occurrence thereof resulting in creation of DTA
Override settled position relating to allowability of anticipated loss as deduction in computation of business income [CIT v. Woodward Governor India Pvt. Ltd. 312 ITR 254 (SC)]
Reasonable cause not defined?
Whether convergence to Ind AS be regarded as reasonable cause ? [CIT v. George Oakes Ltd.: 303 ITR 357 (Mad.); CIT v. Indo Rama Synthetics Ltd: 180 Taxman 35 (Del.HC)]
ICDS is silent on the treatment of MTM unrealised gains. Circular 10/2017 (Ques 8) clarifies that MTM gains would also not be taxable applying same principle

7. COMMENTS
In CIT vs. V.S.Dempo and Co Pvt. Ltd.: 206 ITR 291 (Bom), the Court laid down the principles relating to allowability of loss and further held that entries in the books of account are not determinative factor for deciding the taxability
ABN Amro Securities India (P.) Ltd. v. ITO : 145 TTJ 702 (Mum.)- just because anticipated profits are not assessed to tax, it would not follow as a corollary thereto that anticipated losses cannot be allowed as deductions in computation of business income
Will result in accelerated taxation of income?
Whether penalty can be attracted in each case where the change in accounting policy is not accepted by the tax authorities, though necessary disclosure would be made by the assesse in its books of account and / or return ?

8. ICDS- I- Accounting Policies (Corresponding to AS-1)
Whether consistency begins with implementation of ICDS?
What about existing policies ?
Whether the assesse can still argue that the additions / deletions accepted by Revenue in preceding years should be accepted ?
Accounting policies to represent a true and fair view of the state of affairs and income…….How can not allowing M to M and other expected losses be not allowed and still position be “true and fair” ?
Transition provisions have been incorporated in all ICDS but may have major impact if there is change in accounting policy in the year of transition

9. ICDS- II- Valuation of Inventories

10. Key provisions ICDS – II
COMMENTS
Inventory is to be valued at lower of cost or NRV and the value of opening Inventory is to be same as closing inventory of preceding year
Inventory includes raw materials, WIP and finished goods
Cost of inventory comprise of (i) purchase cost; (ii) cost of services; (c) conversion cost & other cost incurred in bringing inventory to present location and condition
Valuation of inventory is required to be done by services providers also.
Whether consequent change in the method of valuation of opening stock possible ? [K.G. Khosla & Co. (P.) Ltd. v. CIT 99 ITR 574 (Delhi);  CIT v. Carborandum Universal Ltd. 149 ITR 759 (Mad)]
The method of valuation of inventories for a service provider has been incorporated in ICDS based on International best practices

11. Key provisions ICDS – II
COMMENTS
Fixed production overheads shall be allocated on normal capacity basis. Unallocated overheads be recognized as expenses in P&L account.
If abnormally high production, expense be allocated as per actual production so inventory may not be measured over cost.
Exclusions while computing costs of inventory :-
Abnormal wastage of material, labour and production cost;
Storage costs;
Indirect admin overheads, and
Selling costs
FIFO or Weighted average formula to be applied]
Raw materials and WIP be written below cost, only in case where the NRV of corresponding final product is expected to be lower than cost
- Duty drawbacks has been omitted in ICDS in view of valuation method provided under section 145A of the IT Act

12. Key provisions ICDS – II
COMMENTS
Inventory on the date of dissolution of partnership firm or AOP or BOI shall be valued at net realizable value
Adopts the ratio decidendi emanating from the decision of Bombay High Court in the case of  CIT v. A.N. Naik Associates, 265 ITR 346 (Bom)
SC in Shakti Trading Co V. CIT: 250 ITR 871 held that in case of dissolution and reconstitution without disruption of business, stock to be valued at cost and not FMV.
It would be advisable that there are more than 2 partners in the partnership firm and there should be continuity clause in the partnership deed in relation to reconstitution or retirement of the partner

13. ICDS- III- Construction Contracts

14. ICDS- III- Construction Contracts
Contract revenue and contract cost are determined as per ‘Percentage of Completion Method’ on the basis of following:
Portion of contract cost incurred as compared to the estimated total cost; or
Surveys of work performed; or
Completion of a physical portion of the contract work.
Progress payments and advances received are not determinative of stage of completion of project.

15. ICDS – III COMMENTS Retention Money:
Contract revenue in respect of retention money shall be recognized on basis of percentage of completion method (POCM) since the same forms part of Contract revenue [refer paragraph 10 of ICDS]
Retentions are progress billings which are not paid until the satisfaction of conditions or until defects rectified
Going forward, retention money shall be taxable on the basis of POCM.
Circular 10/2017 (Ques 11) clarifies that retention money shall be included, subject to reasonable certainty of ultimate collection.
If progress billings are not done, and retentions are billed on actual receipt, is it possible to overcome ICDS-III ?
The term “accrue” not defined in the IT Act [refer the following - E.D. Sassoon and Co. Ltd. vs. CIT : 26 ITR 27 (SC), CIT vs. Ashokbhai Chimanbhai vs CIT: 56 ITR 42 (SC), Amar Nath Khandelwal V CIT: 126 ITR 322 (Del)]
Reversal of Revenue:
Where contract revenue already recognised as income is subsequently written off in the books of accounts as uncollectible, it shall be recognised as an expense
Specific deduction provided under ICDS in respect of unrecoverable revenue already booked as income

16. ICDS – III COMMENTS Recognition of claims and incentives
Incentive/ claims to the extent probable to be recognised
to be recognized as per POCM
Contract Cost:
Contract cost includes allocated borrowing cost as per ICDS IX, Borrowing Costs
Aforesaid cost is also claimed as per POCM
Formula:
Sec. 36(1)(iii) provides for deduction in respect of interest expenses incurred for business purposes [proviso thereto applies only to capital assets].
Whether assessee can claim interest expenses as deduction? [Refer Lokhandwala Construction: 260 ITR 579 (Bom HC)]?
Transitional Provisions:
Contract revenue and costs associated with contract commenced on or before the March 31, 2016 but not completed, shall be recognized based on the method regularly followed by the person prior to the previous year beginning on the March 31, 2016.
Where: A = Borrowings;
B = Average qualifying asset;
C = Average Total Assets
A x B C

17. ICDS – III COMMENTS Recognition of Expected Losses
Future or anticipated losses shall not be allowed unless such losses are actually incurred.
Losses incurred shall be allowed only in proportion to the stage of completion
Deduction for foreseeable losses no longer allowable under normal provisions.
Refer the following –
CIT v. Triveni Engg. & Industries Ltd. 336 ITR 374 (HC)
Jacobs Engineering India (P.) Ltd v. ACIT (2011) 14 taxmann.com 186 (Mum. Trib.)
ACIT v. ITD Cementation India Ltd.: 160 TTJ 628 (Mum Trib.)
Revenue is recognized to the extent of cost at early stages.
Early stage of contract shall not extend beyond 25% of the stage of completion (paragraph 20)
Contract cost to be reduced by incidental income, excluding –
Interest
Dividend
Capital gain
Refer the following-
Tuticorin Alkali Chemicals & Fertilizers Limited Vs CIT: 227 ITR 172 (SC)
Bokaro Steel (P) Limited Vs CIT: 236 ITR 315 (SC)
Indian Oil Panipat Power Consortium: 315 ITR 255 (Del)

18. ICDS- IV- Revenue Recognition

19. ICDS – IV COMMENTS Revenue from sale of goods:
On transfer of property in goods to buyer, or transfer of all significant risk and rewards of ownership to buyer and no effective control of goods with seller.
Revenue is recognized only when there is reasonable certainty to ultimate collection.
Allows postponement of recognition of revenue only where there is uncertainty with respect to claim of escalation of price and export incentive (paragraph 5)
Postponement of revenue recognition not possible except in the situations specifically mentioned in ICDS
Interest Income:
Interest shall be accrued on time basis determined by amount outstanding and rates applicable.
However interest on refund of any tax, duty or cess shall be taxable on receipt basis.
Circular 10/2017 (Ques 13) clarifies that interest and royalty to be recognized even if collection uncertain. Deduction u/s 36(1)(vii) would be available for non-recovery.
Royalty Income:
As per contractual terms of agreement; or more appropriate method on systematic & rational basis.
Dividend Income:
As per provisions of the IT Act

20. Key provisions of ICDS – IV
COMMENTS
Provisions for recognition of revenue from service contracts:
Revenue from services shall be recognized on the basis of Percentage Completion Method (PCM).
Requirements provided for in ICDS III shall mutatis mutandis apply to recognition of revenue from service contracts
Done away with CCM, though it is still allowed as per AS 9.
Revenue from service contracts with duration of not more than 90 days may be recognized under completed contract method.
Transitional Provisions: Revenue for transaction (other than service) undertaken before March 2016 but not completed by the said date shall be recognized in accordance with the new provisions after considering the amount recognized in earlier years (Para 12).
Revenue for services transaction undertaken before March 2016 but not completed shall be recognized in accordance with method followed earier.

21. ICDS- IV- Revenue Recognition
Can assessee argue on the basis of principle of consistency that CCM accepted by Revenue in past assessments and therefore, ICDS would have no application ?
No concept of reasonable certainty of interest income and the same is to be recognised on time basis – what about interest on sticky loans ?

22. ICDS- V- Tangible Fixed Assets

23. ICDS – V COMMENTS Applicable to only Tangible Fixed Assets
Start up, commissioning of projects costs and test run costs to be capitalized
Depreciation on Goodwill will continue to be available [CIT vs. Smifs Securities Ltd. : (2012) 348 ITR 302 (SC) ]
Expenditure after test runs but before commercial production to be capitalized [Ques 15- Circular 10/2017]
Where fixed asset is acquired in exchange for another asset/ shares or securities, cost of acquired asset shall be recorded at FMV of asset so acquired
Under AS concept of cost usually relate to the FMV or NBV of asset given up, whereas e ICDS refers to FMV of asset acquired
Would have major depreciation impact which would also result in creation of DTA/ DTL
Concept of revaluation of asset not recognised
Cost of improvement (having increment to performance) to be capitalized, otherwise to be expensed off.
ICDS in line with the present situation
Where several assets are purchased for consolidated price, consideration to be apportioned to various assets on fair basis
In the absence of requirement of having valuer, fair basis would be subjective and prone to litigation
Revenue may not be bound to accept valuer report and allocate higher value to non- depreciable asset
Stand-by and service equipment are to be capitalized
Spares/ consumables to be expensed off unless used irregularly

24. ICDS- VI- Effects of Changes in Foreign Exchange Rates

25. ICDS – VI
COMMENTS
Monetary items – Converted into INR as per closing rate. Difference recognized as income or expense.
Presently, this was subject matter of dispute.
Revenue Non- Monetary Items
(like Inventory, fixed assets, investments)
Converted into reporting currency using exchange rate at the date of transaction.
However for inventory when NRV is determined as per ICDS II, then such inventory to be reported using the exchange rate that existed when such value was determined.
- This is subject to provisions of Section 43A & Rule 115
Forward exchange contract is defined as an agreement to exchange different currencies at a forward rate and includes a foreign currency option contract or another financial instrument of a similar nature
Wide coverage in ICDS- forex derivatives included.

26. Capital Monetary Items relating to Imported Assets
Borrowed Forex Loan and acquired depreciable asset from India
Provisions of section 43A of the IT Act would not apply
AS-11 (Paragraph 46A) provides for option to add / reduce the cost of acquisition
ICDS provides for difference to be transferred to the Profit and Loss account
Borrowed Forex Loan and acquired depreciable asset from outside India
Provisions of section 43A of the IT Act would apply and exchange difference on date of settlement will be recognised
AS-11 (Paragraph 46A) - provides for option to add / reduce the cost of acquisition
ICDS does not apply

27. ICDS – VI COMMENTS Foreign Operations:
The financial statements of a foreign operation shall be translated using the principles and procedures as if the transactions of the foreign operation had been those of the person himself.
Since accounting as per AS-11 is different, it could result in creation of DTA / DTL as the case may be
Forward Exchange Contracts:
Treatment is same as AS-11 (However, only those hedging transactions are covered in AS in respect of which there is an assets or liability at the year end)
Premium/ discount on hedging contract – amortized over life of contract;
Loss/gain on forward contract on restatement on MTM basis at year end – requires recognition in P&L’ profit/loss on settlement.
ICDS do not make any distinction between forward cover for capital or revenue purposes. Section 37 specifically bars allowance of capital expenditure.
If forward cover for capital assets, foreign exchange loss will be capitalized? [ACIT vs. Elecon Engg. Co. Ltd.: 230 CTR 1 (SC)]

28. COMMENTS Forward Exchange Contracts (Hedging )
Catena of judgement have held that income/ loss arising on revaluation on forward contracts are assessable as income/ loss [DCIT (IT) v. Bank of Bahrain & Kuwait 41 SOT 290 (Mumbai)(SB)].
Reliance Industries Limited v. CIT (LTU) : 147 ITD 323 (Mum.)- Forex loss computed at the end of the financial year on derivatives contract entered for hedging currency related risk has to be allowed as revenue expenditure
ICDS-I provides for recognition of gain or loss at the time of settlement and not on MTM basis. ICDS-1 is, thus, subject to ICDS-6.
Whether loss arising on settlement as per ICDS would be allowable deduction in view of section 43(5) of the IT Act ?
Section 43(5) does not apply [CIT v. Panchmahal Steel Ltd: 215 Taxman 140 (Guj); CIT v. Friends and Friends Shipping Pvt. Ltd : 217 Taxman 267(Guj); London Star Diamond Company (I) P. Ltd v. DCIT: 153 ITD 585 (Mum.)]
The aforesaid provision would apply [S. Vinodkumar Diamonds Private Limited v. ACIT: 59 SOT 124 (Mum.); Araska Daimond Ltd vs ACIT: 152 ITD 203 (Mum.)]

29. ICDS- VII- Government Grants

30. ICDS – VII
COMMENTS
Grant is recognised only if there is reasonable assurance that person shall comply with the conditions attached thereto and the grants shall be received
Recognition of Government grant shall not be postponed beyond the date of actual receipt.
Grant in respect of depreciable fixed assets is to be reduced from actual cost of such assets [Paragraph 5 of ICDS]
Grant in relation to non-depreciable asset or assets of a person requiring fulfilment of certain obligations shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.
ICDS deals with subsidies granted with intention to compensate cost of assets or revenue expenditure incurred by the assessee.
Requires all grants either to be reduced from cost of assets or recognised as income either immediately or over a period of time, depending on the nature of grant
The initial recognition of grants cannot be postponed beyond the date of actual receipt even though all the recognition conditions in accordance with AS are not met [paragraph 4(2) of ICDS]
Does not permit capital approach for recording of Government grants

31. ICDS – VII
COMMENTS
Where the grant cannot be directly related to the asset acquired, so much of the amount which bears to the total grant, the same proportion as such asset bears to all the assets in respect of or with reference to which grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to
Grant receivable as compensation for expenses or losses incurred in a previous year or for immediate financial support to the person with no further related costs, to be recognized as income of the period in which it is receivable
Whether both depreciable and non-depreciable asset would be included for apportionment ?
ICDS is in line with provisions of clause (xvii) to section 2(24) r.w.s Explanation 10 to 43(1) of the Act.

32. COMMENTS
Is it still possible to contend that subsidy granted for setting up an industry in backward area and generation of employment is capital receipt not liable to tax?
Taxability of subsidy / incentive, by whatever name called, is determined by the purpose for which the subsidy is granted and not the form / mode / manner in which the subsidy is received/ disbursed
[ V.S. S.V. Meenakshi Achi: 60 ITR 253 (SC); Sahney Steel and Press Works Ltd. and Others vs. CIT: 228 ITR 253(SC); Ponni Sugars & Chemicals Ltd vs. CIT: 306 ITR 392 (SC); Mepco Industries Ltd., Madhurai V CIT : 319 ITR 208 (SC)]
Whether incentive granted as percentage of capital investment should be reduced from the cost of capital asset(s) in view of Explanation 10 to section 43(1) of the Act ?
[Steel Authority Of India Ltd Vs. CIT: ITA No. 37,38,41/2010, 29/2011, dated 30/03/2012 (Del); CIT v. Ellora Time Pvt Ltd: Tax Appeal No of 2010 (Guj.); Sasisri Extractions Ltd. vs. ACIT: 307 ITR 127 (AT); Inventaa Chemicals Ltd. v. ACIT: 42 SOT 249 (Hyd); DCIT V. Dalmia Cement (Bharat) Ltd: 115 ITD 208 (Del.)]

33. ICDS- VIII- Securities

34. ICDS VIII
COMMENTS
Deals with securities held as stock-in-trade and not for securities held as investment
Since AS does not deal with securities held as stock-in-trade, therefore, the two are not strictly comparable
Does not deal with securities held by mutual funds, venture capital funds, banks and public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956
Apply to NBFCs
Would also apply in case of conversion of investment to stock-in-trade
The actual cost of a security shall comprise of its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess.
The actual cost of security acquired in exchange of other security or asset would be the fair value of security so acquired
ICDS specifically covers taxes, i.e., STT paid as part of cost of security
“Securities” shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956, other than Derivatives referred to in sub-clause (1a) of that clause
Derivatives excluded and accordingly ICDS-I would apply for treatment of MTM losses in case of derivatives

35. ICDS – VIII
COMMENTS
In subsequent year(s), security is to be valued at actual cost initially recognised or NRV at the end of previous year, whichever is lower and such comparison is to be done category wise and not for each individual security
Where unpaid interest has accrued before the acquisition of an interest-bearing security and is included in the price paid for the security, the subsequent receipt of interest is allocated between pre-acquisition and post-acquisition periods; the pre-acquisition portion of the interest is to be deducted from the actual cost
No requirement of determination of fair value at time of initial recognition
The value of security as on the beginning of a previous year shall the value of security as on the close of the immediately preceding previous year, in any other case (Para 11)
Whether the interest incurred during a particular year on loan borrowed for purchase of securities would be added to the cost of security where such interest is payable in the subsequent year?{Mithlesh Kumari: 92 ITR 9 (Del)}
Unlisted securities or those listed but not quoted on a recognised stock exchange with regularity from time to time shall be valued at actual cost initially recognised
Impairment and revaluation of unlisted or listed securities but not quoted on a recognised stock exchange not possible

36. ICDS- IX Borrowing Costs

37. Methodology prescribed for capitalization of ‘Borrowing Costs’:
Particulars
Specific Borrowings
General Borrowings
Method of Capitalization
Actual borrowing costs incurred during the period.
Pro rata borrowing costs allocation (excluding the specific borrowing and its cost) based on prescribed formula.
Commencement of Capitalization
From date of borrowing.
From the date of utilization
– to be capitalized only if the qualifying asset requires a period of 12 months or more for its acquisition, construction or production.
Cessation of Capitalization
When such asset is put to use/inventory ready for sale.
Suspension of capitalization
No such provision in ICDS – IX, with respect to suspension of capitalization during extended period in which active development is interrupted.
May result in litigation with respect to capitalisation of borrowing cost during suspended period.
Temporary Investments out of borrowed capital
Income on temporary investment is not deducted from the amount of borrowing costs incurred and would be now liable to tax as “Other Income”

38. ICDS – IX COMMENTS A x B C Qualifying asset means:
Land, building, machinery, plant or furniture, being tangible assets;
Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets;
Inventories that require a period of 12 months or more to bring them to a saleable condition.
Application of section 43(1) and proviso to section 36(1)(iii)?
Borrowing cost till the date of use may need to be capitalised even if an asset does not take substantial period of time to construct, i.e. no criteria of 12 months period for fixed assets
Formula prescribed for capitalisation of general borrowings:
Where,
A = borrowing cost
B = Average cost of qualifying asset as appearing on the first and last day of PY/ date of put to use, reduced by portion directly funded by specific borrowing.
C = Average cost of total assets as appearing on the first and last day of PY excluding assets to the extent funded by specific borrowings
A x B C

39. COMMENTS
ICDS has widened the period of capitalisation of borrowing cost from the date of borrowing funds / the date from which the utilisation commences, as the case may be
Since the capitalization period has been widened it will lead to lower interest expense to be debited to Statement of Profit and Loss resulting in higher net profit and hence allowability of higher depreciation over the life of the asset. Will give rise to DTA/ DTL.
In case the asset is not put to use, capitalisation under ICDS will be higher than that under AS-16 where under capitalisation stops when all activities to prepare the asset for its use are complete.
CBDT has clarified that interest portion which is to be disallowed as per section 14A, 43b, 40(a)(i) etc. should be reduced from the borrowing cost before capitalization and only the balance portion must be capitalized.

40. ICDS- X- Provisions, Contingent Liabilities and Contingent Assets

41. ICDS – X
COMMENTS
Not applicable to “Executory contracts” but Onerous contracts are not specifically excluded from the ambit of executory contracts
Specific mandate to allow deduction for provisions made on the basis of reliable estimate would reduce litigation
ICDS militates against the concept of prudence
Provisions shall be recognised when it is reasonably certain that an outflow of resources embodying economic benefit will be required to settle the obligation [refer paragraph 5 of ICDS ]
In the absence of any definition, scope, parameters to determine “reasonable certainty”, the same could result in litigation
Provision for warranty allowed as expenditure upholding the test of “probable” warranty obligation? [Rotork Controls India P Ltd. : ITR 62 (SC)]
An enterprise should not recognise contingent asset, unless realisation is reasonably certain [refer paragraph 11 of ICDS ]

42. Draft ICDS on Real Estate Transaction

43. Draft ICDS
COMMENTS
Draft ICDS adopts basic principles for recognition of income & expenses for real estate developers as prescribed in Guidance Note issued by ICAI
Draft provides that project, whose economic substance is similar to a construction contract, revenue and cost relatable thereto must be recognized by way of POCM.
Indicators have been prescribed to determine if economic substance of the project is similar to a construction contract [para 3(2)]
‘Guidance Note on Accounting for Real Estate Transactions’ was introduced in 2006, which was revised in the year 2012, as AS-7 did not strictly apply to real estate developers.
Vide Circular No.10/2017, the CBDT clarified that no specific ICDS was notified for recognition of income/ expense by real estate developers (refer Question 12 of the Circular). ICDS-III not applicable to developers.
Dispute regarding constitution of AOP not clarified.

44. Draft ICDS
COMMENTS
For POCM, following conditions must be cumulatively satisfied:
Expenditure incurred on construction & development is >=25% of total construction & development costs;
Atleast 25% of saleable area secured by agreements with buyers; and
Atleast 10% of total revenue as per agreements with buyers are realized and reasonable certainty as to receipt of balance.
Condition that all critical approvals must have been obtained conspicuous by its absence in ICDS.
In view of clarification that ICDS based on Guidance Note of ICAI, illustrations appended to Guidance Note should equally apply to ICDS.
Hitherto, for computation of business income, real estate developers had the option to follow POCM or any other reasonable method like project completion, if followed consistently [Manish Buildwell Ltd.: 245 CTR 397 (Del), Prestige Estate Projects (P) Ltd. vs. Dy. CIT: 129 TTJ 680 (Bang.)]

45. Draft ICDS
COMMENTS
For applying POCM, provisions of ICDS-III on construction contract shall apply.
For other projects, i.e., projects not meeting indicators prescribed for construction contracts, revenue should be recognized in accordance with ICDS IV relating to Revenue Recognition in case of sale of goods.
Other Highlight: Transferable Development Rights (TDRs): Cost of TDRs acquired by (i) direct purchase or (ii) by development & construction of built-up area, shall be the actual cost incurred by the assesse. Cost for development right acquired by way of giving up rights over existing structures or open land shall be fair value of development right so acquired.
Henceforth, option to follow project completion method not available.
Draft ICDS is applicable for determination of ‘business income’ and/or ‘income from other sources’ from, inter-alia, JDAs.
Income taxable under the head ‘capital gains’ in the hands of land owners (individuals/ HUFs) entering into a specified registered JDA with developer(s) would be governed by newly inserted sub-section (5A) to section 45 of the Act.
Aforesaid section provides for taxation in the year in which certificate of completion is issued and not in the year of transfer i.e., when JDA is entered

46. COMMENTS
Notable variances in draft ICDS vis-a-vis Guidance Note:
Particulars
As per Guidance Note
As per draft ICDS
Conditions for application of POCM
Mandatory to obtain all ‘critical approvals' as per para 5.3 (a).
No such condition in view of Real Estate (Regulation & Development) Act,
Cap on recognition of Revenue under POCM.
Stage of completion to be determined as per various methods viz. ‘project cost’ method, survey, technical estimation, etc.
Revenue recognized as per any method cannot exceed revenue as per ‘project cost’ method.
No such cap as regards the revenue to be recognized.
Choice of method given in ICDS 3 on Construction Contracts.

47. COMMENTS Particulars As per Guidance Note As per draft ICDS
Value of TDRs acquired by way of giving up rights
Lower of:
fair value of right given up or acquired (whichever is more clearly evident);
net book value of the portion of the asset given up.
Fair market value of development rights acquired
Definition of 'project'
Smallest set of units which are linked with common set of amenities
Eg. common set of amenities may include gymnasium, club house, restaurant, etc.
Smallest set of units which are linked with common set of basic facilities.
Basic facilities may include facilities such as lift, water tanks, etc., which are part and parcel of independent dwelling units.
Comments in respect of the draft were invited by the CBDT till

48. Question & Answers

49. Vaish Associates Advocates
THANK YOU
Rohit Jain, Advocate
Partner
Vaish Associates Advocates