Author in this articles discusses discrepancy in ICDS and Section 145B Income Tax Act, 1961 in respect of year in which a non-export incentive will be charged to tax. ICDS taxes non-export incentive in the year in which reasonable certainty of its realisation is achieved but section 145B taxes the same in the previous year in which it is received, if not charged to income-tax in any earlier previous year.
Consider an example.
A company is eligible for a non-export incentive. It has during FY 2017-18, complied with the criteria of reasonable certainty for receiving a non-export incentive. The company has accounted for the same in books as per accounting standards.
When it comes to taxation under the Income Tax Act, 1961, the newly inserted Section 145B determines the point of time when it is chargeable to tax which reads as follows.
Taxability of certain income.
145B. (1) Notwithstanding anything to the contrary contained in section 145, the interest received by an assessee on any compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the previous year in which it is received.
(2) Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.
(3) The income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income-tax in any earlier previous year.
Author’s personal opinion
Thus the above non-export incentives will be chargeable to tax only in the year of receipt [as contrary to year when reasonable certainty is reached as contemplated in ICDS] as it is not covered by sub section (2).
Lacuna
| Point of Taxation of | Sec 145B | ICDS |
| non export incentive or any other government grant | Receipt | Becomes due |
ICDS VII – Government Grants prescribes the simple formula as that of revenue recognition where the critical test is “reasonable Certainty” which is consonance with the normal accounting standards as well.
On perusal of memorandum to Finance Bill, 2018, it is not in consonance with the intention of the parliament. Parliament wanted to give ICDS the same status as that of Income Tax Act, 1961.
Entering the subject
The government made Income Computation and Disclosure Standards mandatory with effect from FY 2016-17 by issuing a notification u/s 145 of the Income Tax Act, 1961.
It created some problems of the amendments being declared “ultra virus”. Refer – Decision of Delhi High Court in the case of the Chamber of Tax Consultants v Union of India dated November 7, 2017 with citation [2017] 87 taxmann.com 92 (Delhi)/[2018] 252 Taxman 77 (Delhi)/[2018] 400 ITR 178 (Delhi)/[2017] 299 CTR 137 (Delhi).
To overcome this technical anomaly, the Finance Act, 2018 made amendments to clauses 10, 11, 13, 15 & 45 – Amendments in relation to notified Income Computation and Disclosure Standards, with an opening paragraph
At present, section 145 of the Act empowers the Central government to notify Income Computation and Disclosure Standards (ICDS). In pursuance, the central government has notified ten such standards effective from 1st April 2017 relating to Assessment year 2017-18.
These are applicable to all assesses (other than an individual or a Hindu undivided family who are not subject to tax audit under section 44AB of the said Act) for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources”.
In order to bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS, it is proposed to —
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Situation before Enactment
The relevant portion of ICDS VII – Government grant which was notified is as follows.
G. Income Computation and Disclosure Standard VII relating to government grants
Recognition of Government Grants
4(1) Government grants should not be recognised until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received.
4(2) Recognition of Government grant shall not be postponed beyond the date of actual receipt.
Treatment of Government Grants
5. Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to.
6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income.
7. Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to.
8. The Government grant that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs, shall be recognised as income of the period in which it is receivable.
9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate.
10. The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost.
2(24) Income includes
(i)..
(ii)…
[(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than,—
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be
Explanation 10 to clause (1) of section 43;
[Explanation 10.—Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.]
Enactment
The extract of Memorandum to finance Bill 2018 is re-produced to peruse intention of the parliament.
Amendments in relation to notified Income Computation and Disclosure Standards.
[Clause 10, 11, 13, 15 & 45]
At present, section 145 of the Act empowers the Central government to notify Income Computation and Disclosure Standards (ICDS). In pursuance, the central government has notified ten such standards effective from 1st April 2017 relating to Assessment year 2017-18.These are applicable to all assesses (other than an individual or a Hindu undivided family who are not subject to tax audit under section 44AB of the said Act) for the purposes of computation of income chargeable to income-tax under the head “Profits and gains of business or profession” or “Income from other sources”.
In order to bring certainty in the wake of recent judicial pronouncements on the issue of applicability of ICDS, it is proposed to —
(i) amend section 36 of the Act to provide that marked to market loss or other expected loss as computed in the manner provided in income computation and disclosure standards notified under sub-section (2) of section 145, shall be allowed deduction.
(ii) amend 40A of the Act to provide that no deduction or allowance in respect of marked to market loss or other expected loss shall be allowed except as allowable under newly inserted clause (xviii) of sub-section(1) of section 36.
(iii) insert a new section 43AA in the Act to provide that, subject to the provisions of section 43A, any gain or loss arising on account of effects of changes in foreign exchange rates in respect of specified foreign currency transactions shall be treated as income or loss, which shall be computed in the manner provided in ICDS as notified under sub-section (2) of section 145.
(iv) insert a new section 43CB in the Act to provide that profits arising from a construction contract or a contract for providing services shall be determined on the basis of percentage of completion method except for certain service contracts, and that the contract revenue shall include retention money, and contract cost shall not be reduced by incidental interest, dividend and capital gains.
(v) amend section 145A of the Act to provide that, for the purpose of determining the income chargeable under the head “Profits and gains of business or profession,—
(a) the valuation of inventory shall be made at lower of actual cost or net realizable value computed in the manner provided in income computation and disclosure standards notified under (2) of section 145.
(b) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation.
(c) inventory being securities not listed, or listed but not quoted, on a recognised stock exchange, shall be valued at actual cost initially recognised in the manner provided in income computation and disclosure standards notified under (2) of section 145.
(d) inventory being listed securities, shall be valued at lower of actual cost or net realisable value in the manner provided in income computation and disclosure standards notified under (2) of section 145 and for this purpose the comparison of actual cost and net realisable value shall be done category-wise.
(vi) insert a new section 145B in the Act to provide that-
(a) interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received.
(b) the claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realisation is achieved.
(c) income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.
Recent judicial pronouncements have raised doubts on the legitimacy of the notified ICDS. However, a large number of taxpayers have already complied with the provisions of ICDS for computing income for assessment year 2017-18. In order to regularise the compliance with the notified ICDS by a large number taxpayers so as to prevent any further inconvenience to them, it is proposed to bring the amendments retrospectively with effect from 1st April, 2017 i,e the date on which the ICDS was made effective and will, accordingly, apply in relation to assessment year 2017-18 and subsequent assessment years
Situation after Enactment – what went wrong
Parliament intended to bring ICDS at par with the Income Tax Act, 1961 without any changes or dilution.
To be more precise, it was expected that ICDS will bridge the gap between accounting standards and the Income Tax Act except where IT dept wants to advance the taxability of any transaction / event.
First and foremost, ICDS can not over-ride Act.
Secondly, the wording of section 145B does not by itself reflect what has been stated in ICS – VII.
Suggestion-:
A schedule is undoubtedly an integral part of Act and it would have given the desired effect including changing the definition of income as well.
When the legislature intended to give an over-riding effect to ICDS i.e. to over ride even the Act or be at par with the Act while amending the Income Tax Act, 1961, they could simply have inserted additional Schedule to the Income Tax Act, 1961.
Author Bio
Courtesy-: CA Kishor B. Phadke