The first ever decision on ICDS has been pronounced by Delhi High Court in a writ petition filed by The Chamber of Tax Consultants assailing its constitutional validity. The Court has read down the provisions of section 145(2) enabling the Central Government to notify only such standards which do not seek to override binding judicial precedents interpreting statutory provisions contained in the Act. Some of the ICDS have been struck down fully and few selected provisions of other ICDS which were inconsistent with judicial precedents have been knocked off.
Here is a summary of the important observations of the Court on the conflicting provisions of ICDS and the final decision of the Court thereon.
|
ICDS
|
Observations
|
Final Decision
|
|
ICDS I – Accounting Policies
|
Non-acceptance of the concept of prudence in
ICDS is per se contrary to the provisions of the Act. This concept is
embedded in Section 37(1) of the Act which allows deduction in respect of
expenses “laid out” or “expended” for the purpose of business. It is
acknowledged by the Courts also.
|
ICDS is unsustainable in law.
|
|
ICDS II – Valuation of Inventories
|
The requirement to value inventories at market
value in case of the dissolution of a firm, where its business is taken over
by other partners is contrary to the decision of the Supreme Court in the
case of Shakti Trading Co. vs. CIT 250 ITR 871.
Where the assessee regularly follows a certain
method for valuation of goods then that will prevail irrespective of the ICDS
because of a non-obstante clause in Section 145A.
|
ICDS is held to be ultra vires the Act
and struck down.
|
|
ICDS III – Construction contracts
|
ICDS requires recognition of the retention
money as a part of the contract revenue on the basis of percentage of
completion method. However, the retention money does not accrue to the
assessee until and unless the defect liability period is over. The treatment
to be given to the retention money depends upon the facts of each case and
the conditions attached to such amounts.
|
To that extent, Para 10(a) of ICDS is held to
be ultra vires.
|
|
Para 12 of ICDS III read with Para 5 of ICDS
IX, provides that no incidental income can be reduced from the borrowing cost
while recognising it as a part of contract costs. This is contrary to the
decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315
wherein it was held that if an Assessee receives any amounts which are
inextricably linked with the process of setting up of its plant and
machinery, such receipts would go to reduce the cost of its assets.
|
This particular provision of ICDS is struck
down.
|
|
ICDS IV – Revenue Recognition
|
ICDS 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. It is contrary to the
decision of the Supreme Court in the case of CIT vs. Excel Industries
Limited 358 ITR 295 wherein it was held that, until and unless the right
to receive export incentives accrues in favour of the assessee, no income can
be said to have accrued.
|
This particular provision in Para 5 of ICDS is
ultra vires the Act and struck down.
|
|
|
The proportionate completion method as well as
the contract completion method have been recognised as valid method of
accounting under mercantile system of accounting by the Courts. However, Para
6 of ICDS permits only one of the methods, i.e., proportionate completion
method for recognising revenue from service transactions and therefore, it is
contrary to the Court decisions.
|
This particular provision in Para 6 of ICDS is
ultra vires the Act and struck down.
|
|
ICDS VI – Effects of Changes in Foreign
Exchange Rates
|
In Sutlej Cotton Mills Limited vs. CIT 116
ITR 1 (SC), it was held that exchange gain/loss in relation to a loan
utilised for acquiring a capital item would be capital in nature. ICDS
provides contrary treatment.
ICDS does not allow recognition of marked to
market loss/gain in case of foreign currency derivatives held for trading or
speculation purposes. This is also not in consonance with the ratio laid down
by the Supreme Court.
|
ICDS is held to be ultra vires the Act
and struck down as such.
|
|
|
Circular No. 10 of 2017 clarifies that Foreign
Currency Translation Reserve Account balance as on 1st April 2016 has to be
recognised as income/loss of the previous year relevant to the AY 2017-18. It
is only in the nature of notional or hypothetical income which cannot be even
otherwise subject to tax
|
|
|
ICDS VII – Government Grants
|
ICDS provides that recognition of government
grants cannot be postponed beyond the date of actual receipt. It is contrary
to and in conflict with the accrual system of accounting.
|
To that extent it is held to be ultra vires
the Act and struck down.
|
|
ICDS VIII – Securities (Part A)
|
The method of valuation prescribed under ICDS
is different from the corresponding AS. Therefore, the assessees will be
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.
|
To that extent it is held to be ultra vires
the Act and struck down.
|
It is relevant to note that the Delhi High Court has held that the ICDS is not meant to overrule the provisions of the Act, the Rules there under and the judicial precedents applicable thereto as they stand. There may be instances, other than those taken up before the Delhi High Court, where the provisions of ICDS are contrary to and/or overrule the judicial precedents applicable, in view of the ratio of the Delhi High Court, such provisions of ICDS will also have to give way to the provisions of the Act, the Rules there under and the judicial precedents applicable. To illustrate, ICDS IX on Borrowing Costs requires capitalization of interest to Qualifying Assets. Work-in-progress in the case of a builder / developer will qualify as a qualifying asset as defined in ICDS IX. A question arises as to whether the requirement of capitalizing borrowing costs to inventory as per ICDS is in conflict with section 36(1)(iii) of the Act. The Bombay High Court has in the case of CIT vs. Lokhandwala Construction Industries (2003) 260 ITR 579 (Bom) held that interest on funds borrowed for construction of work-in-progress in case of a builder is a period cost. Similar is the view expressed in the Technical Guide of ICAI on ICDS in para 4.5 of Chapter X titled ‘ICDS IX: Borrowing Costs’. The ratio of the decision of Delhi High Court will be applicable to such cases as well.
The decision of the Delhi High Court is the only decision of the competent court in the country. A question arises as to whether the decision of the Delhi High Court under consideration is binding throughout the country or it is binding only to cases falling within the jurisdiction of the Delhi High Court. In this connection it is relevant to note that Bombay High Court in the case of Group M. Media India Pvt. Ltd. vs. Union of India [(2017) 77 taxmann.com 106] was dealing with a case where the Bombay High Court was concerned with an instruction which had been struck down by the Delhi High Court. The Court, observed as under – “Therefore, in view of the decision of this Court in Smt. Godavaridevi Saraf (supra), the officers implementing the Act are bound by the decision of the Delhi High Court and Instruction No.1 of 2015 dated 13th January, 2015 has ceased to exist. Therefore, no reference to the above Instruction can be made by the Assessing Officer while disposing of the petitioner’s application in processing its return u/s. 143(1) of the Act and consequent refund, if any, u/s. 143(1D) of the Act. Needless to state that the Assessing Officer would independently apply his mind and take a decision in terms of Section 143 (1D) of the Act whether or not to grant a refund in the facts and circumstances of the petitioner’s case for A.Y. 2015-16.”
In view of the above observations of the Bombay High Court, it appears that the ratio of the decision of the Delhi High Court could be considered to be binding on all the officers implementing the Act.
BCAS had made number of suggestions through representations (November 20161 to scrap ICDS and December 20152 on specific aspects of all 10 ICDS) which did not find favour in the formulation / implementation of ICDS. When the need of the hour is to bring tax certainty, bringing more cohesiveness amongst laws and bring reduction in multiplicity of compliances, ICDS in their present form are taking things in a contrary direction. It is unfortunate that the tax payers have to seek judicial intervention to arrest anomalies that are already pointed out through well reasoned representations.
This intervention and Court’s strictures seem to be a beginning of the battle over ICDS. Time will only tell as to what would be fate of these and many more controversial provisions of ICDS.
1 https://www.bcasonline.org/resourcein.aspx?rid=389
2 https://www.bcasonline.org/files/res_material/resfiles/1612152944merged_document.pdf
