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1. TG Income Computation and Disclosure Standards
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TECHNICAL GUIDE ON INCOME COMPUTATION AND DISCLOSURE STANDARDS
ISBN : 978-81-8841-000-0
TECHNICAL GUIDE ON INCOME COMPUTATION AND DISCLOSURE STANDARDS
The Institute of Chartered Accountants of India (Set up by an Act of Parliament)
www.icai.org
July/2017/P0000 (New)
New Delhi
Technical Guide on Income Computation and Disclosure Standards
Direct Taxes Committee
The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, NEW DELHI All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording otherwise, without the prior permission, in writing, from the publisher.
First Edition
:
Committee / Department :
E-mail
July, 2017
Direct Taxes Committee
: [email protected]
Website
:
www.icai.org
Price
: ` 165/-
ISBN No
:
978-81-8441-894-1
Published by
:
Publication Department on behalf of the Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi-110002
Printed by
:
Sahitya Bhawan Publications, Hospital Road, Agra- 282003 July 2017/1000 Copies
Foreword The Ministry of Finance vide Notification No. 87/2016 dated 29.09.2016 notified ten Income Computation and Disclosure Standards (ICDSs), operationalizing a new framework for computation of taxable income by all assessees (other than individual or a HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of Section 44AB of the Income-tax Act, 1961) following the mercantile system of accounting for the purpose of computation of income under the heads “Profits and gains of business or profession” or “Income from other sources”. These standards became applicable w.e.f. April 1, 2016 and shall apply accordingly to the assessment year 2017-18 and subsequent assessment years. These ICDSs will be a new paradigm for computing taxable income of the assessee. Taxable profits would now be determined after making appropriate adjustments to the financial statements [whether prepared under existing AS or Ind AS] to bring them in conformity with ICDSs. With regard to the recent developments in the field of taxation and also considering the need of augmenting the knowledge and competencies of the members of our fraternity the Direct Taxes Committee of the Institute of Chartered Accountants of India has come out with this Technical Guide. I would like to compliment CA. Sanjay K. Agarwal, Chairman Direct Taxes Committee, CA. N. C. Hegde, Vice-Chairman Direct Taxes Committee and all members of the Direct Taxes Committee particularly, CA. Tarun Jamnadas Ghia, who initiated this project and also provided his valuable unstinted inputs till the stage of finalization of the said publication. I am confident that the Direct Taxes Committee would keep up the good work of enhancing the knowledge & expertise of the members in the field of taxation.
Date: 5th July, 2017 Place: New Delhi
CA. Nilesh S. Vikamsey President, ICAI
Preface Winds of change are moving fast for all businesses and professions in the world. Therefore, with the changing environment, knowledge, efficiency, performance and skills of our members need to be continuously enhanced and sharpened to enable them to succeed in this competitive business environment. Continuous amendments have also been made in taxation laws which have rendered it necessary for members to update themselves with the legislative changes. One of the recent amendments brought in by the CBDT during the year 2015 was the notification of 10 Income Computation and Disclosure Standards (ICDSs) vide Notification no. 32/2015 dated 31st March, 2015. Although, the said notification dated 31st March, 2015 was rescinded on 29th September 2016vide Notification no. 86/2016, yet on the same date, 10 revised ICDSs were notified vide Notification no.87/2016.These ICDSs will have a significant impact on computation of taxable income. Therefore, the members need to be apprised about the change so that their knowledge and skills may be enhanced to the level where they can cater the needs of their clients efficiently. The 10 ICDSs notified by the CBDT vide notification no. 87/2016 dated 29.09.2016 are to be followed by all assessees (other than individual or a HUF who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB of the Income-tax Act, 1961) following mercantile system of accounting, for the purposes of computation of income chargeable to income tax under the head "Profits and gains of business or profession" or "Income from other sources". The said notification shall apply to the assessment year 2017-18 and subsequent assessment years. The said notification has raised various concerns regarding the applicability, interpretation, implementation and impact of ICDSs on the taxability of an assessee, especially since these are applicable to almost all persons including small businesses and proprietorship concerns. The CBDT also sought suggestions of ICAI for smooth implementation of Income Computation and Disclosure standards (ICDSs) which were submitted to them from time to time. Through this technical guide, an effort has been made to gear up the members of our fraternity for implementation of ICDSs and to guide the
stakeholders about the significant changes and impact which will take place in computation of taxable income. Reference to Indian Accounting Standards (Ind-AS) and Accounting Standards (AS), to the extent as considered necessary has been made at many places in this technical guide. Also, this publication will assist the members to remove the ambiguity and guide them in implementation of the ICDSs in a more effective manner. I am extremely thankful to CA. Nilesh Shivji Vikamsey, President and CA.Naveen ND Gupta, Vice President of the Institute of Chartered Accountants of India who have been the guiding force behind bringing this Technical Guide. I have no words to effectively appreciate the untiring efforts of CA. Tarun Jamnadas Ghia, convenor of the study group constituted in Mumbai and other members of the study group viz-a viz CA. Padam Chand Khincha, CA. Gautam Nayak, CA. Sanjeev Pandit and CA. Milind Kothari who have provided their dedicated and active support to CA. Tarun Jamnadas Ghia in bringing out this publication. I whole heartedly appreciate the contribution made by each of them towards the profession. I also acknowledge the sincere efforts made by CA. Naveen N.D. Gupta, Vice President, ICAI and immediate Past Chairman, Direct Taxes Committee in ensuring that the work on the publication is not stopped by constituting study groups in various regions. I thank the contribution made by CA. Sanjay Vasudeva, under whose convenorship a group was constituted during 2016 in the Northern Region and the other members of his group namely CA. Sachin Vasudeva, CA. Assem Chawla, CA. Manoj Nagrath, CA. C.P. Tyagi and CA. Anuj Tiwari. I also thank the contribution made by CA. Manu Agarwal under whose convenorship a group was constituted during 2016 in the Central Region and the other members of his group namely CA. Sanjeev Verma, CA. Ashok Seth, CA. Rajiv Bansal, CA. Rajesh Bhalla, CA. Dhruv Seth, CA. Anshul Agarwal, CA. Uttam Kumar Sharma, CA. Pankaj Agarwal and CA. Rajiv Malhotra. I am also thankful for the contribution made by CA. Kemisha Soni under whose convenorship a group was constituted during 2016 in the Central Region and the other members of her group namely CA. Vijay Bansal, CA. Manish Dafria, CA. Prakash Chand Wohra Jain, CA. Manoj Gupta, CA. Pankaj Shah and CA. Chaitanya Maheshwari. I am also thankful for the contribution made by CA. K. Sripriya under whose convenorship a group was constituted during 2016 in the Southern Region and the other members of her group namely CA. N Madhan, CA. Balaji Venkatasubramaniam and CA. Anirrudh Sankaran. I also acknowledge the
contribution made by CA. Dhinal Ashvinbhai Shah, Central Council Member and CA. Ravikanth Kamath in this publication. Also, I wish to acknowledge the sincere contribution of all the members of the Direct Taxes Committee and am also appreciative of the valuable inputs provided by CA. Amarpal, CA. Amit Jain, CA. Sidharth Jain, CA. R. Bupathy, Past President, ICAI, CA. Sunil Bhansali, CA. Ravi Kumar Patwa, CA. Narender Rao B, CA. Vijay Gupta and CA. Ravi Tela, co-opted members & special invitees of the Direct Taxes Committee. Last but not the least, I appreciate the dedicated efforts of CA. Nidhi Singh, Secretary, Direct Taxes Committee, CA. Shrutika Oberoi and CA. Ravi Gupta, Executive Officers and Mr. Priyanshu Malhotra, Section Officer, Direct Taxes Committee for their technical and administrative assistance in bringing out this edition of the Technical Guide. Undoubtedly, this edition would guide and would be of great assistance to our members. CA. Sanjay Kumar Agarwal Chairman Direct Taxes Committee Date: 5th July, 2017 Place: New Delhi
CA. N.C. Hegde Vice-Chairman Direct Taxes Committee
Contents Foreword
(iii)
Preface
(v)
Terms, Abbreviations
(xi)
1.
Income Computation & Disclosure Standards – Background
1
2.
ICDS I : Accounting Policies
24
3.
ICDS II : Valuation of Inventories
39
4.
ICDS II : Construction Contracts
62
5.
ICDS IV : Revenue Recognition
85
6.
ICDS V : Tangible Fixed Assets
105
7.
ICDS VI : Effects of Changes in Foreign Exchange Rates
121
8.
ICDS VII : Government Grants
142
9.
ICDS VIII : Securities
170
10.
ICDS IX : Borrowing Costs
184
11.
ICDS X : Provisions, Contingent Liabilities & Contingent Assets
198
Terms, Abbreviations In this Technical Guide, the following terms and abbreviations occur often in the text. A brief explanation of such terms and abbreviations is given below. 1.
Act
The Income-tax Act, 1961
2.
AMT
Alternate Minimum Tax as defined in section 115JF
3.
AO
Assessing Officer as defined in section 2(7A)
4.
AS
Accounting Standards prescribed under the Companies Act, 2013 for company assessees and as notified under the Companies (Accounting Standards) Rules, 2006
5.
AS(IT)/IT-AS
Accounting Standards notified by the Central Government under section 145(2) vide Notification No. 9949 [F.No.132/7/95-TPL]/SO 69(E), dated 25-1-1996
6.
Assessee
As defined in section 2(7)
7.
AY
Assessment Year as defined in section 2(9)
8.
Board/CBDT
The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963
9.
Circular
A circular or instructions issued by the Board under section 119(1)
10.
Committee
Committee constituted by the Government
11.
FY
Financial Year
12.
FASB
Financial Accounting Standards Board
13.
FIFO
First In First Out
14.
GAAP
Generally Practices
15.
HUF
Hindu Undivided Family
16.
IAS
International Accounting Standard
17.
IASB
International Accounting Standards Board
Accepted
Accounting
Principles/
18.
ICAI/Institute
The Institute of Chartered Accountants of India
19.
ICDS
Income Computation and Disclosure Standard(s) notified vide Notification No. 87/2016, dated 29.9.2016 by the Central Government under section 145(2)
20.
IFRS
International Financial Reporting Standards
21.
Ind AS
Indian Accounting Standards as notified under the Companies (Indian Accounting Standards) Rules, 2015
22.
IRDA
The Insurance Regulatory and Development Authority established under the Insurance Regulatory and Development Authority of India Act, 1999
23.
Limited Liability Partnership (LLP)
As defined in the Limited Liability Partnership Act, 2008
24.
MAT
Minimum Alternate Tax for the purposes of section 115JB
25.
MTM
Marked to Market
26.
NRV
Net Realisable value
27.
Person
As defined in section 2(31)
28.
POCM
Percentage of Completion Method
29.
Previous year
As defined in section 3
30.
Rule
Rule of the Income-tax Rules, 1962
31.
Rules
The Income-tax Rules, 1962
32.
Specified date
"Specified date", in relation to the accounts of the assessee of the previous year relevant to an assessment year, means the due date for furnishing the return of income under sub-section (1) of section 139
33.
SA
Standards on Auditing
34.
SCRA
Securities Contracts (Regulation) Act, 1956 (42 of 1956) xii
35.
Section
Section of the Income-tax Act, 1961
36.
STT
Securities Transactions Tax leviable under Chapter VII of the Finance (No.2) Act, 2004.
37.
TAS
Tax Accounting Standards
38.
Tax audit
The audit carried out under the provisions of section 44AB
39.
Tax auditor
Auditor appointed by an assessee to carry out tax audit.
40.
U/s
Under section
41.
FCTR
Foreign Currency Translation Reserve
xiii