Income Computation and Disclosure Standards (ICDS)are intended to prevail over the judicial precedents that are contrary. Section 145 permits Central Government to notify ICDS but not to bring about changes to settled principles laid down in judicial precedents which seek to interpret and explain statutory provisions contained in the Income-tax Act (Act)
• Article 265 of the Constitution of India states that no tax shall be levied or collected except under the authority of law. The Section 145(2) does not permit changing the basic principles of accounting that have been recognized in various provisions of the Act unless, of course, corresponding amendments are carried out to the Act itself.
• In case the ICDS seeks to alter the system of accounting, or to accord accounting or taxing treatment to a particular transaction, then the legislature has to amend the Act to incorporate desired changes.
• The Central Government cannot do what is otherwise legally impermissible. Therefore, the following provisions of ICDS are held as ultra vires and are liable to be struck down:-
(1) ICDS I : It does away with the concept of 'prudence' and is contrary to the Act and to binding judicial precedents. Therefore, it is unsustainable in law.
(2) ICDS II : It pertains to valuation of inventories and eliminates the distinction between a continuing partnerships in businesses after dissolution from the one which is discontinued upon dissolution. It fails to acknowledge that the valuation of inventory at market value upon settlement of accounts on a partner leaving which is distinct from valuation of the inventory in the books of the business which is continuing one.
(3) ICDS III : The treatment of retention money under Paragraph 10 (a) in ICDS-III will have to be determined on a case-to-case basis by applying settled principles of accrual of income.
a. By deploying ICDS-III in a manner that seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the fact that it is contrary to the settled position, in law, and to that extent para 10 (a) of ICDS III is ultra vires.
b. Para 12 of ICDS III, read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of the SC in CIT v. Bokaro Steel Limited [1999] 102 Taxman 94 (SC).
(4) ICDS IV : It deals with the bases for recognition of revenue arising in the course of ordinary activities of a person from sale of goods, rendering of services and use by others of the person's resources yielding interest, royalties or dividends.
a. Para 5 of ICDS-IV requires an assessee to recognize income from export incentive in the year of making of the claim, if there is 'reasonable certainty' of its ultimate collection. This is contrary to the decision of the SC in Excel Industries [2013] 38 taxmann.com 100 (SC).
b. As far as para 6 of ICDS-IV is concerned, the proportionate completion method as well as the contract completion method have been recognized as valid methods of accounting under the mercantile system of accounting by the SC in CIT v. Bilhari Investment Pvt. Ltd. [2008] 168 Taxman 95 (SC). Therefore, to the extent that para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method, it is contrary to the above decisions, held to be ultra vires.
(5) ICDS VI : It states that marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed that is not in consonance with the ratio laid down by the SC in Sutlej Cotton Mills Limited v. CIT [1979] 116 ITR 1 (SC).
(6) ICDS VII : It provides that recognition of governmental grants cannot be postponed beyond the date of accrual receipt. It is in conflict with the accrual system of accounting. To this extent, it is held to be ultra-virus.
(7) ICDS VIII : It pertains to valuation of securities.
a. For those entities which aren't governed by the RBI to which Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS.
b. In effect, such entities are required to maintain separate records for income-tax purposes for every year, since the closing value of the securities would be valued separately for income-tax purposes and for accounting purposes.
Refer:[2017] 87 taxmann.com 92 (Delhi)
• Article 265 of the Constitution of India states that no tax shall be levied or collected except under the authority of law. The Section 145(2) does not permit changing the basic principles of accounting that have been recognized in various provisions of the Act unless, of course, corresponding amendments are carried out to the Act itself.
• In case the ICDS seeks to alter the system of accounting, or to accord accounting or taxing treatment to a particular transaction, then the legislature has to amend the Act to incorporate desired changes.
• The Central Government cannot do what is otherwise legally impermissible. Therefore, the following provisions of ICDS are held as ultra vires and are liable to be struck down:-
(1) ICDS I : It does away with the concept of 'prudence' and is contrary to the Act and to binding judicial precedents. Therefore, it is unsustainable in law.
(2) ICDS II : It pertains to valuation of inventories and eliminates the distinction between a continuing partnerships in businesses after dissolution from the one which is discontinued upon dissolution. It fails to acknowledge that the valuation of inventory at market value upon settlement of accounts on a partner leaving which is distinct from valuation of the inventory in the books of the business which is continuing one.
(3) ICDS III : The treatment of retention money under Paragraph 10 (a) in ICDS-III will have to be determined on a case-to-case basis by applying settled principles of accrual of income.
a. By deploying ICDS-III in a manner that seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the fact that it is contrary to the settled position, in law, and to that extent para 10 (a) of ICDS III is ultra vires.
b. Para 12 of ICDS III, read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of the SC in CIT v. Bokaro Steel Limited [1999] 102 Taxman 94 (SC).
(4) ICDS IV : It deals with the bases for recognition of revenue arising in the course of ordinary activities of a person from sale of goods, rendering of services and use by others of the person's resources yielding interest, royalties or dividends.
a. Para 5 of ICDS-IV requires an assessee to recognize income from export incentive in the year of making of the claim, if there is 'reasonable certainty' of its ultimate collection. This is contrary to the decision of the SC in Excel Industries [2013] 38 taxmann.com 100 (SC).
b. As far as para 6 of ICDS-IV is concerned, the proportionate completion method as well as the contract completion method have been recognized as valid methods of accounting under the mercantile system of accounting by the SC in CIT v. Bilhari Investment Pvt. Ltd. [2008] 168 Taxman 95 (SC). Therefore, to the extent that para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method, it is contrary to the above decisions, held to be ultra vires.
(5) ICDS VI : It states that marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed that is not in consonance with the ratio laid down by the SC in Sutlej Cotton Mills Limited v. CIT [1979] 116 ITR 1 (SC).
(6) ICDS VII : It provides that recognition of governmental grants cannot be postponed beyond the date of accrual receipt. It is in conflict with the accrual system of accounting. To this extent, it is held to be ultra-virus.
(7) ICDS VIII : It pertains to valuation of securities.
a. For those entities which aren't governed by the RBI to which Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS.
b. In effect, such entities are required to maintain separate records for income-tax purposes for every year, since the closing value of the securities would be valued separately for income-tax purposes and for accounting purposes.
Refer:[2017] 87 taxmann.com 92 (Delhi)
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