ICDS stands for Income Computation and Disclosure Standards. They have been issued by CBDT (Income Tax Dept) and are applicable from Financial Year 2016-17. As the name suggest, they are meant for Computation of Income under the head “Profits and gains of business or profession” or “Income from other sources” for Tax purpose and mandate certain Disclosures to be made to Tax authorities. Books of Accounts should be continued to be maintained according to Accounting Standards.
There are two ICDS notified which deal with Recognition of Revenue viz. ICDS III (Construction Contracts) and ICDS IV (Revenue Recognition). ICDS III does not expressly exclude Construction by Builders and Developers nor is it comprehensive enough to cover unique characteristics of Revenue from Real Estate Transaction within their scope. In order to bring clarity and uniformity in computation of income from real estate transactions, CBDT introduced draft ICDS on Real Estate Transactions in May 2017 which is largely driven by ICAI’s Guidance Note on real estate transactions.
With the introduction of this ICDS, Government intends to recognize “Percentage of Completion Method (POCM)” of determining profits/loss and derecognize “Project Completion Method” atleast for Income Tax calculation. Thus, uniform method of computation will not only bring steady flow of tax to Government but also reduce litigation linked to method of income recognition.
Having understood primary object of this ICDS, let us now summarize the important points of this ICDS.
Apart from Real Estate Projects understood in common parlance, this ICDS would apply to income from:
1. Sale of land, building and also rights arising from them (i.e. development rights, TDRs, tenancy rights)
2. Long term lease (which is in nature of Finance Lease) of Land
3. Redevelopment of existing buildings and Joint development agreements
4. Development and sale of residential (incl. Independent houses) as well as commercial premises
The revenue will have to be recognized as per this ICDS only if Economic Substance of Project is similar to Construction Contracts, which requires meeting of various basic but important parameters provided in the ICDS.
It is utmost important to understand the term “Project” defined under ICDS. “Project” would mean an apartment or a shop or a building or a plot which is dependent on common but basic facilities such as water supply, power supply, an elevator or connecting road which are necessary for effective use of those apartment, shop, building or plot. The ICDS requires that a larger venture shall be split into smaller projects when these basic conditions are fulfilled.
“Project Costs” include cost of acquiring land, clearing its title, cost of development rights, specific cost attributable to project and allocated general costs. Interest on Loans should be embedded in Project Cost as per ICDS IX and cannot be separately claimed as expense.
“Project Revenue” would include any amount collected towards amenities, parking spaces over and above sale value of flats, commercial units or plots.
POCM means that the project revenue and project cost shall be recognized as revenue and cost to the extent of stage of completion of the project on the last date of the financial year for that project. However, the Project Revenue shall be recognized only when all the following conditions are met:
(a) The expenditure incurred on construction and development costs (excluding the land cost) is 25% or more of the total expected construction and development costs;
(b) 25% or more of the saleable project area is secured by contracts or agreements with buyers; and
(c) 10% or more of the total revenue as per the agreements of sale or any other legally enforceable documents are realized in respect of each of the contracts and it is reasonably certain that the parties to such contracts will comply with the payment terms as defined in the contracts.
Till the time all of the above conditions are not met, installments received from customers will be classified under “Advance from Customers”.
(a) the proportion that costs incurred for project completed upto the end of Financial Year bear to the estimated total costs; or
(b) Surveys of work performed; or
(c) Completion of a physical proportion of the project.
The percentage of work completed as certified by Engineer under RERA may not be useful as it would include cost of land whereas computation of POCM as prescribed under this ICDS does not include land cost.
The TDRs are acquired in different ways and accordingly method of determining their cost would change as below:
|Mode of Acquisition||Cost|
|Direct purchase||Cost of purchases|
|Development and construction of built-up area||Amount spent on development or construction of built- up area|
|Giving up of rights over existing structures or open land||Fair value|
The TDRs may be either sold or may be utilized for developing a project. If development rights are utilized in a real estate project by a person, the cost of acquisition shall be added to the project costs.
Whereas if TDRs are sold revenue should be recognized if
(a) Title to the development rights is transferred to the buyer; and
(b) It is reasonable to expect that the revenue will be ultimately collected
The assessee will have to provide certain “Disclosures” as required under this ICDS.
The step on part of CBDT to reduce litigation and bring clarity by prescribing this ICDS is a welcome move. Though the ICDS is drafted on the basis of Guidance Note on real estate transactions issued by ICAI, there are certain minor changes which are likely to result in recognition of revenue earlier.
Authored by Keval Mamania, Chartered Accountant
(Republished with Amendments)