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HC upholds ICDS validity but strikes down key provisions

Business Standard |
Pranay Bhatia, International Liaison Partner |

09 November 2017

The ICDS is not meant to overrule the provisions of the (Income Tax) Act: HC

The Delhi High Court has upheld the constitutional validity of the Income Computation and Disclosure Standards (ICDS), but only to the extent that they do not go against judicial pronouncements and the provisions of the Income-Tax (I-T) Act.

These standards played a key role in improving India’s position in the World Bank’s ease of doing business rankings, released recently.

“The ICDS is not meant to overrule the provisions of the (Income Tax) Act, the rules thereunder, and the judicial precedents applicable thereto as they stand,” said the court on Wednesday, striking down the ICDS provisions that went against judicial pronouncements and the I-T Act.

Hearing the petitions filed by the Chamber of Tax Consultants and others, the court also said wherever the ICDS amends the judicial pronouncements and I-T provisions, it should be brought by the legislature and not the executive.

For instance, the court struck down ICDS I, which does away with the concept of prudence, a key accounting principle to ensure assets and income are not overstated and liabilities and expenses not understated. According to this principle, a company might provide for bad and doubtful debts based on prudence, due to a doubt regarding non-realisation of sales booked in earlier years. This is not allowed, as deduced by the ICDS.

The court said, “ICDS I, which does away with the concept of 'prudence', is contrary to the (IT) Act and binding judicial precedents and is, therefore, unsustainable in law.”

Under ICDS I, expected and mark-to-market losses are not allowed as a deduction, even though standard accounting principles generally allow it.

The court also held ICDS II ultra vires. This standard pertains to the valuation of inventories and eliminates the distinction between a continuing partnership business and the one after a partner quits. This is contrary to the decision of the Supreme Court in Shakti Trading Co. case, said the court. “ICDS II is held to be ultra vires the Act and struck down as such,” it said.

Ajay Singh, president of the Chamber, said the court was fair enough to restrict the powers of  the Centre to notify the ICDS so far as those were contrary to judicial pronouncements and the provisions of the I-T Act.

When asked whether the Chamber, a not-for-profit organisation with its mandate to disseminate knowledge in the field of taxation and other fields, would appeal against the court upholding the constitutional validity of the standards, he said it was still studying the finer points of the judgment.

The court also ordered against a provision in ICDS IV which requires an assessee to recognise income from export incentive in the year of making of the claim if there is “reasonable certainty” of its ultimate collection.                                                                                                                                     

“The I-T Act provides enabling provisions to simplify computation of taxable income, thereby making the ICDS a delegated legislation. Hence, the ICDS cannot provide for taxation which is not within the ambit of the provisions of the I-T Act or accounting principles,” said Pranay Bhatia, partner, tax & regulatory services, BDO India.

Amit Maheshwari of Ashok Maheswary & Associates said, “The court verdict would make the life of taxpayers simpler, and the fear that the established tax positions would be undermined is somewhat reduced.”

The ICDS have 10 standards, which basically advance some income and postpone some expenses to arrive at the profitability of companies. Earlier, tax accounting was done on a conservative basis to recognise income as and when it arose.

“This is a big relief as the combination of IndAS, ICDS, and IFRS have led to a lot of confusion within the industry. To my mind, ICDS should ideally be deferred till IndAS settles in,” said Girish Vanvari, partner and head – tax, KPMG India.

IndAS, or Indian Accounting Standards, are adopted by Indian companies and issued by the country’s Accounting Standards Board. IFRS, or International Financial Reporting Standards, are global accounting standards issued by the IFRS Foundation and the International Accounting Standards Board. 

ICDS explained 

  •  Helped India improve on World Bank’s ease of doing business ranking
  •  Court strikes down provisions that go against judicial pronouncements in the I-T Act
  •  Changes to judicial pronouncements and I-T provisions should come via the legislature and not the executive
  •  ICDS comes into effect from the current assessment year – 2017-18
  •  ICDS advances some revenues and postpones some expenditure for taxation

Business Standard 09112017