Income Computation and Disclosure Standards

• Taxation
• ||
• July 27, 2019

Income Computation and Disclosure Standards (ICDS) have been notified u / s 145 (2) of the Income Tax Act, 1961 vide Notification No. S.O. 3079 (E) dated September 29^th 2016. On 23^rd March, 2017, certain clarifications were issued by CBDT by way of FAQs.

Below mentioned are the 10 ICDS that are notified up to the date:

1. Accounting Policies
2. Valuation of Inventories
3. Construction Contracts
4. Revenue Recognition
5. Tangible Fixed Assets
6. Effect of Changes in Foreign Exchange Rates
7. Government Grants
8. Securities
9. Borrowing Costs
10. Provisions, Contingent Liabilities & Contingent Assets

Applicability of ICDS:-
ICDS is applicable to all assesses having Income under the head Business or Profession or Income under the head Other Sources and following mercantile system of accounting.

1. ICDS is not applicable to any of the following assesses:
   • Person not having Income under the head Business or Profession or Income under the head Other Sources
   • Person following cash system of accounting
   • Individual who is not required to get his accounts audited u / s 44AB
   • HUF who is not required to get his accounts audited u / s 44AB

2. ICDS shall be applicable irrespective of accounting standards adopted by the companies i.e. AS or Ind-AS, and it shall not apply for computation of MAT but shall apply for computation of AMT.

3. Tax officer has power for best judgment assessment in case of non-compliance with ICDS.

A Gist of Income Computation and Disclosure Standard V (ICDS V) relating to Tangible Fixed Assets
ICDS deals with the treatment i.e. recognition and valuation of tangible fixed assets.

1. Various terms used in ICDS V:
   Tangible fixed asset is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business (concept is same as that of AS-10, but wordings are somewhat different).Fair value of an asset is the amount at that asset could be exchanged between knowledgeable, willing parties in case of an arm’s length transaction (arm’s length price is defined under section 92F (ii) of Income Tax Act, 1961).

2. Identification of tangible fixed assets:
   The definition of tangible fixed assets given above provides criteria for determining whether an item is to be classified as tangible fixed asset. Stand‐by equipment and servicing equipment are to be capitalized. Machinery spares shall be charged to revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalized (this is in line with AS 10).

3. Components of actual costs:

• The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes, and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost.
• The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of:
  • price adjustment, changes in duties; or
  • exchange fluctuation as specified in ICDS on the effects of changes in foreign  exchange rates.
• Administration and other general overhead expenses shall be deducted from the cost of tangible fixed assets. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset.
• The expenditure incurred on start‐up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalized. The expenditure incurred after the plant has started commercial production, i.e., production intended for the purpose of sale or captive consumption, shall be treated as revenue expenditure.
  (Above mentioned components of actual costs are in line with AS 10)

4. Self-constructed tangible fixed assets:
   In arriving at the actual cost of self‐constructed tangible fixed assets, the same principles shall apply as mentioned above. Any internal profits shall be eliminated in arriving at such costs.

5. Non-monetary consideration:
   As per ICDS-V, when a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so acquired shall be its actual cost. When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed asset so acquired shall be its actual cost.

6. Repairs and improvements
   Any expenditure that increases the future benefits from the existing asset beyond its earlier assessed standard of performance needs to be added to the actual cost.The cost of an addition or extension to an existing tangible fixed asset in the nature of capital expenditure and which becomes an integral part of the existing tangible fixed asset needs to be added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used after the existing tangible fixed asset is disposed of, shall be treated as separate asset.

7. Depreciation:
   Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act.

8. Transfers:
   Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act (which may depend on whether the asset is depreciable or not).
   
   AS-10 says that items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement (it should be noted that ICDS does not allow any expected loss).

9. Disclosures:
   Following disclosure shall be made in respect of tangible fixed assets, namely:

• Description of assets or block of assets;
• Depreciation rate;
• Written down value or Actual cost;
• Additions or deductions during the year;
• Allowable depreciation; and
• WDV (Written down value) at the end of year.

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