General Provisions relating to ICDS

General provisions relating
to ICDS
ICDS - I, II, III, IV
CA NEMISH J. SHAH
(B.Com, D.I.S.A., A.C.A.)

2 | P a g e
nemishjshah@gmail.com
ICDS is applicable for computation of income chargeable under the head
“Profits and gains from business or profession” or “Income from other
sources”
ICDS is not for the purpose of maintenance of books of account.
In the case of conflict between the provisions of Income Tax Act, 1961 (“the
Act”) and ICDS, the provisions of the Act shall prevail to that extent.
Clarifications:
 Provisions of ICDS are notified, after due deliberations and
examination of judicial precedents, to bring certainty and therefore
shall be applicable to such transactional issues, even if inconsistent
with judicial precedents.
 In case of conflict between ICDS and Income Tax Rules, 1962
(“Rules”), Rules shall prevail over ICDS
 ICDS apply for computation of ‘business’ and ‘other sources’ income,
irrespective of the accounting standards adopted by the companies i.e.
either accounting standards or Ind-AS
 ICDS provisions are applicable to the assessee’s computing income
under the presumptive tax scheme [e.g. ICDS-III (Construction
Contracts) or ICDS IV (Revenue recognition) shall apply for
determining receipts/ turnover presumptive income of a firm under
Section 44AD of the Act.]
 Provisions of ICDS shall apply for computation of income liable to tax
on gross basis like interest, royalty and fee for technical services for
non-residents under Section 115A of the Act
 General provisions of ICDS not applicable to the assessee’s governed
by sector specific provisions contained in the Act or ICDS
 ICDS not applicable for computing Minimum Alternative Tax (MAT)
under Section 115JB of the Act since MAT is computed on ‘book profit’
i.e. Net profit as per P&L a/c prepared under Companies Act, 2013
subject to specified adjustments in the Act
 ICDS applicable for computing Alternative Minimum Tax (AMT),
applicable to non-corporate assessee, since AMT is computed on
adjusted total income based on the normal provisions of the Act,
subject to specified adjustments

3 | P a g e
 Net effect on the income due to application of ICDS to be disclosed in
tax return. Further, the disclosures required as per ICDS shall be made
in the tax audit report. However, there shall not be any separate
disclosure requirements for assessee’s who are not liable tax audit.
 ICDS not applicable to individual or HUF assessee not liable to tax
audit as per Section 44AB of the Act, those assessee who are following
cash system of accounting and those assessee who do not have
“Income from business or profession” or “Income from other source”.
 ICDS is not for the purpose of maintenance of books of account but
only for computation of income under the Act and disclosure thereof.
ICDS I: Accounting Policies
Applicability
 ICDS does not apply to individuals/HUF who are not required to get
their accounts audited under Section 44AB
Fundamental Accounting Assumptions
 Going Concern
 Consistency
 Accrual
Selection and change of Accounting Policies
 Accounting policies adopted by a person shall represent a true and fair
view of the state of affairs and income of business, profession or
vocation
 Governed by the Substance over legal form
 Marked to market loss or an unexpected loss shall not be
recognized (unless it so required by other ICDS).
 Accounting policy shall not be changed without reasonable cause
Disclosure
 All significant accounting policies shall be disclosed
 Any change in accounting policy having material effect shall be
disclosed along with the amount to the extent ascertainable, and if not
ascertainable, that fact shall be indicated
 Any change in accounting policy having no material effect in the
current Financial Year but is reasonably expected to have a material

4 | P a g e
effect in the subsequent Financial Years, then such change shall be
appropriately disclosed in the year in which the change is adopted and
also in the year in which such change has material effect for the first
time.
 Disclosure of accounting policies or of changes therein cannot
remedy a wrong or inappropriate treatment of the item.
 Disclosure of fundamental accounting assumptions are required only if
they are not followed.
 Market to Market (MTM) loss or expected loss shall not be recognized
unless permitted by any other ICDS. However, it is silent on MTM
gains or expected profits. FAQs provide that the same principle, on a
mutatis mutandis basis, shall apply to MTM gains or expected profit.
 ICDS-I shall govern those derivatives which are not covered within the
scope of ICDS-VI/VIII. Therefore, MTM loss on such derivatives may
not be tax deductible.
 ‘reasonable cause’ is an existing concept and has evolved well over a
period of time, conferring desired flexibility to the taxpayer in
deserving cases

5 | P a g e
ICDS II: Valuation of inventories
Applicability:
 Valuation of inventories, except:
o Work-in-progress under ‘construction contract’ including directly
related service contract which is dealt by ICDS-III
o Work-in-progress dealt in with other ICDS
o Shares, debentures and other financial instruments held as
stock-in-trade which is dealt by ICDS-VIII
o Producers’ inventories of livestock, agriculture and forest
products, mineral oils, ores and gases to the extent that they are
measured at net realizable value
o Machinery spares, which can be used only in connection with a
tangible fixed asset and their use is expected to be irregular,
dealt by ICDS-V
Important Notes:
 Inventories shall be valued at Cost or Net Realizable Value, whichever
is lower
 Valuation Methods:
o FIFO
o Weighted Average Cost
o Retail Method
o Standard Costing
o Specific Identification Method for goods that are not
interchangeable
 Standard Cost Method or Retail method is allowed provided the
results approximate the actual cost.
 Change in method of valuation of inventory cannot be done without a
reasonable cause.
 Inventory on the date of dissolution of partnership firm or AOP or BOI,
whether the business is continued or not, shall be valued at Net
Realizable Value
 Interest and other borrowing costs shall not be included in the costs of
inventories, unless they meet the criteria for recognition of interest as
a component of the cost as specified in the ICDS on borrowing costs.

6 | P a g e
COST
Cost of Inventories:
Cost of inventories shall comprise of all costs of purchase, costs of
services, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
Cost of purchase: It consist of purchase price including duties and taxes,
freight inwards and other expenditure directly attributable to the acquisition.
Trade discounts, rebates and other similar items shall be deducted in
determining the costs of purchase.
Cost of services: It consist of labour and other costs of personnel
directly engaged in providing the service including supervisory
personnel and attributable overheads
Cost of conversion: It include costs directly related to the units of production
and a systematic allocation of fixed and variable production overheads that
are incurred in converting materials into finished goods.
Fixed production overheads: It shall be those indirect costs of production
that remain relatively constant regardless of the volume of production.
Variable production overheads: It shall be those indirect costs of production
that vary directly or nearly directly, with the volume of production.
Allocation of variable overheads: It shall be assigned to each unit of
production on the basis of the actual use of the production facilities.
Allocation of Fixed overheads:
 Allocation based on the normal capacity of the production facilities
 The actual level of production shall be used when it approximates to
normal capacity.
 Low production or idle plant: Unabsorbed overheads shall be
recognized as an expense in the period in which they are incurred
 Abnormally high production: The amount of fixed production
overheads allocated to each unit of production is decreased so that
inventories are not measured above the cost.

7 | P a g e
Illustration:
Fixed Overhead for FY 2016-17 – Rs. 1,20,000
Normal Production capacity: 40,000 units per year
Absorption rate: 1,20,000/40,000 = Rs. 3 per unit
Case 1 Case 2
Actual
Production/year
30,000 units 60,000 units
Fixed overheads
absorbed
Rs. 90,000
(30,000 * 3)
Rs. 1,80,000
(60,000 * 3)
Actual Fixed
overhead
1,20,000 1,20,000
Treatment Rs. 30,000 to be
treated as expense for
FY 2016-17
Absorption Rate to be
decreased to Rs. 2 per
unit
(1,20,000/60,000)
Other costs:
Other costs shall be included in the cost of inventories only to the extent
that they are incurred in bringing the inventories to their present location
and condition.
Exclusions from cost:
 Abnormal amounts of wasted materials, labour, or other production
costs
 Storage costs, unless those costs are necessary in the production
process prior to a further production stage
 Administrative overheads that do not contribute to bringing the
inventories to their present location and condition
 Selling Costs
Disclosures:
 The accounting policies adopted in measuring inventories including the
cost formulae used.
 Where Standard Costing has been used as a measurement of cost,
details of such inventories and a confirmation of the fact that standard
cost approximates the actual cost
 The total carrying amount of inventories and its classification.

8 | P a g e
ICDS III: Construction Contracts
Important Notes:
 Contract Revenue and Contract Cost should be recognized by
reference to the stage of completion of the contract activity i.e.
percentage completion method.
 Stage of completion shall be determined with reference to:
o Proportion of contract cost incurred for work performed upto the
reporting date to the estimated total contract cost
 Contract cost related to future activity or advance payment
to subcontractor are to be excluded
 Such cost are recognized as an asset and represent as due
from customer and classified as work-in-progress
o Surveys of work performed
o Completion of physical proportion of contract work
 During the early stages of a contract, where the outcome of the
contract cannot be estimated reliably, contract revenue is recognized
only to the extent of costs incurred. The early stage of a contract shall
not extend beyond 25 % of the stage of completion.
 Retention money to be included in contract revenue. ICDS
militates against the basic principle that revenue accrues only when
the assessee gets the right to receive/amount becomes payable.
 Interest, dividend or capital gains cannot be reduced from contract
cost and need to be recognized separately.
 Losses cannot be recognized fully but only to the extent of
proportion to the stage of completion and such losses should
have actually incurred.
Contract Revenue:
 Contract revenue shall be recognized when there is reasonable
certainty of its ultimate collection and includes retention money
 Contract revenue also include variations in contract work, claims,
incentive payments
o To the extent it is probable that it will result in revenue
o And capable of being reliably measured

9 | P a g e
 Recognized Contract Revenue becomes uncollectible subsequently and
written off in books of account, it shall be recognized as an expense
and not as an adjustment of the amount of contract revenue.
Contract Costs:
 Includes cost related to specific contract, cost attributable to contract
activity in general, cost specifically chargeable to the customer under a
contract and borrowing cost as per ICDS on borrowing cost.
 Cost which is not attributable to any contract or contract activity is to
be excluded
 Cost incurred in securing the contract are also included if they are
separately identified and it is probable that the contract shall be
obtained
Combining and Segmenting Construction Contracts:
 Where a contract covers a number of assets, the construction of each
asset should be treated as a separate construction contract when
o Separate proposals have been submitted for each asset
o each asset has been subject to separate negotiation
o the costs and revenues of each asset can be identified
 A group of contracts, whether with a single customer or with several
customers, should be treated as a single construction contract when
o the group of contracts is negotiated as a single package
o the contracts are so closely interrelated that they are, in effect,
part of a single project with an overall profit margin
o the contracts are performed concurrently or in a continuous
sequence
Disclosures:
 The amount of contract revenue recognized as revenue and the
method used to determine the stage of completion of contracts in
progress
 For contracts in progress at the reporting date:
o Amounts of cost incurred and recognized profits (less recognized
losses) upto the reporting date
o Amount of advances received
o Amount of retentions

10 | P a g e
Transitional Provisions:
Contract revenue and contract costs associated with the construction
contract, which commenced on or before 31.03.2016 but not completed by
the said date, shall be recognized based on the method regularly followed
for such contracts before 01.04.2016.

11 | P a g e
ICDS IV: Revenue Recognition
Important Notes:
 Revenue recognition in case of sale of goods shall be done when the
property in the goods is transferred for a price or all significant risks
and rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a degree
usually associated with ownership.
 Revenue shall be recognized when there is reasonable certainty of its
ultimate collection. Claims for escalation of price and export incentives
shall be postponed to the extent of uncertainty involved.
o Condition for reasonable certainty is not provided for taxation of
interest, royalty and dividend. Non-recovery can be claimed as
deduction u/s. 36(1)(vii) as per FAQs.
 Revenue recognition from service transaction will be done as per
percentage completion method and ICDS on construction contract shall
apply. Exceptions:
o When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognized on a
straight line basis over the specific period.
o Revenue from service contracts with duration of not more than
90 days may be recognized when the rendering of services under
that contract is completed or substantially completed.
 Interest shall accrue on the time basis determined by the amount
outstanding and the rate applicable.
 Discount or premium on debt securities held is treated as though it
were accruing over the period to maturity.
 Dividends are recognized in accordance with the provisions of the Act.
 Royalties shall accrue in accordance with the terms of the relevant
agreement
Disclosures:
 In a transaction involving sale of good, total amount not recognized as
revenue during the previous year due to lack of reasonably certainty of
its ultimate collection along with nature of uncertainty
 the amount of revenue from service transactions recognized as
revenue during the previous year

12 | P a g e
 the method used to determine the stage of completion of service
transactions in progress
 For service transactions in progress at the end of previous year:
o amount of costs incurred and recognized profits (less recognized
losses) upto end of previous year
o the amount of advances received
o the amount of retentions
Dated: May 15, 2017
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional
advice or a formal recommendation. Persons should seek independent professional advice before relying on the
information in this Article. The author does not accept any liabilities for any loss or damage of any kind arising out
of any actions taken in reliance thereon.

General Provisions relating to ICDS

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to General Provisions relating to ICDS

Similar to General Provisions relating to ICDS (20)

Recently uploaded

Recently uploaded (20)

General Provisions relating to ICDS