Income Computation and Disclosure Standards introduced under section 145 vide Finance Act (No.2), 2014 – ICDSs may be withdrawn
Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section 145(1) requires income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” to be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee, subject to the provisions of section 145(2). Under section 145(2), the Central Government is empowered to notify in the Official Gazette from time to time, income computation and disclosure standards (ICDSs) to be followed by any class of assessees or in respect of any class of income.
Accordingly, the Central Government had, vide Notification No.S.0.892(E) dated 31.3.2015, in exercise of the powers conferred by section 145(2), notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “Income from other sources”. This notification was to come into force with effect from 1st April, 2015, to be applicable from A.Y. 2016-17.
However, the Central Government has, vide Notification No.S.0.3078(E) dated 29.9.2016, rescinded Notification No.S.0.892(E) dated 31.3.2015. Simultaneously, vide Notification No.S.0.3079(E) dated 29.9.2016, the Central Government has notified ten new ICDSs to be applicable from A.Y.2017-18.
The newly notified ICDSs have to be followed by all assessees (other than an individual or a Hindu undivided family who is not required to get his accounts of the previous year audited in accordance with the provisions of section 44AB) following the mercantile system of accounting, 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”, from A.Y.2017-18.
The Income Tax Simplification Committee has recommended deferral of ICDS considering that taxpayers are already grappling with regulatory changes like Companies Act, Ind-AS and GST; there is scope for litigation on many aspects of ICDS; ICDS merely results in multiplicity of accounting methods, increased compliance burden of multiple records, etc. which outweigh the benefits to be gained by application of ICDS. The Committee has also recognized that ICDS at best brings timing difference between accounting and taxable income.
Further, there is no international precedent on ICDS. The dual set of new standards for accounting under Ind-AS and tax computation under ICDS increases complexity, tax uncertainty and compliance burden for Ind-AS companies.
It is suggested that the Income Computation Disclosure Standards may be withdrawn and necessary amendments be proposed under the Income Tax Act, 1961 itself.