- ICDS stands for ‘Income Computation & Disclosure Standards’. It lays down the general principles to be adopted for computation of taxable income and for disclosure of information in the Tax Audit Report (Form 3CD).
- Taxable income of assessee following mercantile system of accounting shall be computed with reference to ICDS. It is applicable to both corporate and non-corporate assessee with certain exceptions. It also covers the resident and the non-resident assessee.
- ICDS is not Accounting Standards (AS) but they have been derived from the existing AS with specific deviations. It does not provide any explanations or illustrations like AS does.
- They were notified on 31st March 2015 by CBDT in the exercise of powers conferred to it u/s 145(2) of the Income Tax Act, 1961.
- The notified ICDS will be applicable from the financial year 2016-17 onwards i.e. the assessment year 2017-18. For the ease of taxpayers, several transitional provision notifications have been issued.
- ICDS is not meant for the maintenance of books of accounts or for the preparation of financial statements.
- ICDS shall apply irrespective of the accounting standards adopted by companies i.e. either Accounting Standards or Ind-AS.
Applicability of ICDS
Section 145(2) gives Central Government a right to notify accounting standards that are to be followed by any class of assessee or in respect of any class of income.
Newly substituted section 145 of Income Tax Act,1961 for reference
(Note: It shall be substituted retrospectively with effect from the 1st day of April 1997)
Any class of income here (as referred in section 145(1)) means
‘Profit and Gain from Business and Profession’ and
‘Income from Other Sources’
Note: For the other 3 heads of income (i.e. Salary, House Property and Capital Gains), ICDS is not applicable and will continue to be governed by existing accounting standards.
Any class of assesses here means all the assesses except for the following:
- If the assessee follows the cash system of accounting for the purpose of computation of income. (As per Notification dated 29.09.16)
- In case of an individual or HUF who is not required to get accounts audited for the previous year in accordance with the provisions of section 44AB of the said Act.
- If the assessee only derives income from the head Salary, House Property, and Capital Gain. Or it will not be applicable to the extent of income from the above-mentioned 3 heads.
- If Minimum Alternate Tax u/s 115JB is computed on book profit that is net profit as shown in the Profit and Loss Account prepared under the Companies Act subject to certain specified adjustments.
- As the provisions of ICDS are applicable for computation of income under the regular provisions of the Act, the provisions of ICDS shall not apply for computation of MAT.
Specific clarification has been issued for the applicability of ICDS
- In the case of Non-corporate assessee (Individual & HUF) only if the books of accounts are required to be audited u/s 44AB of Income Tax Act,1961.
- It will be applicable irrespective of whether the companies have adopted Accounting Standards or IND-AS for the preparation of financial statements.
- If the assessee is covered by the presumptive scheme of taxation under section 44AD or 44AE or 44ADA or 44B or 44BB or 44BBA of the Income-tax Act, 1961.
- If the assessee has income (for e.g. interest, royalty, fees for technical services u/s 115A of the Act) which needs to be computed on a gross basis.
- If Alternate Minimum Tax u/s 115JC is computed on adjusted total income which is derived by making specified adjustments to the total income as per the provisions of the Income Tax Act,1961. (Note: AMT u/s 115JC is applicable to non-corporate assessee).
- In the case of Banks, NBFCs, Insurance companies, Power sector etc.
- General provisions of ICDS shall apply to all unless there are sector-specific provisions contained in the ICDS or the Act.
Consequences of not following ICDS
If there is any conflict between the provisions of ICDS and Income Tax Rules, 1962, then the provisions of Income Tax Rules which deal with specific circumstances shall prevail. As per Sec 145(3), if the Assessing officer is not satisfied with the
- Correctness or completeness of the accounts of the assessee
- Where the method of accounting provided in sub-section (1) has not been regularly followed
- Income has not been computed in accordance with the ICDS,
then the assessing officer may make an assessment to the best of his judgment in the manner provided in Sec 144. Non-compliance of ICDS may further lead to protracted litigation.
Changes made in Form 3CD
The Form 3CD (Tax Audit Report) has already been revised for making mandatory disclosures in compliance with ICDS.
Sub clause (e) & (f) of Clause 13 has been inserted in Form 3CD .
- Clause 13(e) requires reporting of addition/deduction to net profit under each ICDS.
- Clause 13(f) requires disclosures to be made under each ICDS.
- Disclosure for each ICDS cannot exceed 500 characters.
- If it exceeds then the same needs to be printed separately on the letterhead of the audit firm and uploaded along with the .xml file of accounts on the Income-tax portal.
List of ICDS and their corresponding AS notified
|ICDS no.||Name of ICDS||AS no.||Name of AS|
|ICDS – I||Accounting Policies||AS -1||Disclosure of Accounting Policies|
|ICDS – II||Valuation of Inventories||AS -2||Valuation of Inventories|
|ICDS – III||Construction Contracts||AS -7||Construction Contracts|
|ICDS – IV||Revenue Recognition||AS -9||Revenue Recognition|
|ICDS – V||Tangible Fixed Assets||AS -10||Accounting of Fixed Assets|
|ICDS – VI||Effects of changes in Foreign Exchange Rates||AS -11||The effect of changes in Foreign Exchange Rates|
|ICDS – VII||Government Grants||AS -12||Accounting for Government Grants|
|ICDS – VIII||Securities||AS -13||Accounting for Investments|
|ICDS – IX||Borrowing Costs||AS -16||Borrowing Costs|
|ICDS – X||Provisions, Contingent Liabilities & Contingent Assets||AS -29||Provisions, Contingent Liabilities & Contingent Assets|