24 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)

24. 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) 

Chamber of
Tax Consultants vs. UOI; [2017] 87 taxmann.com 92 (Delhi)

The Chamber of Tax
Consultants challenged the validity of Income Computation and Disclosure
Standards (ICDS)notified by the Department. The Delhi High Court held as under:

Article 265 of the
Constitution of India states that no tax shall be levied or collected except
under the authority of law. Section 145(2) does not permit changing the basic
principles of accounting that have been recognised 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 vs. 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 used by others of the person’s resources yielding interest,
royalties or dividends.

a.  Para 5 of ICDS-IV 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. This is contrary to
the decision of the SC in Excel Industries [2013] 38 taxmann.com 100.

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 vs. Bilhari Investment Pvt. Ltd. [2008] 168
Taxman 95. 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 vs. CIT [1979] 116 ITR 1.

(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 vires.

(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.