Objective

A reader should be able to come to his / her own conclusion by applying the legislative enactments and judicial pronouncements to the facts of the case. While re-producing any portion of legislative enactment or judicial pronouncement, it is para phrased and emphasis is supplied by way of underline.

Structure-:

1 Citation of the Enactment 4 Background-: 7 Situation after Enactment
2 Entering the subject 5 Situation before Enactment 8 Judgements affected
3 Take away points 6 Enactment 9 Author’s Personal opinion

Citation of the Enactment

Vide Notification no 87/2016-Income Tax dated 29th September, 2016 Central Government notified amended ICDS u/s 145(2) with effect from the assessment year 2017-18.

CBDT issued a Circular No. 10/2017-Income Tax dated 23-Mar-2017 and the question no 2 reads as follows

Take away points

1. Legislature is well within its power to bridge this gap. The author, per se, does not have a problem with the contents of the ICDS.

2. If Q-2 is accepted as it is or is held to be correct, it will give CBDT an un-restricted power to amend the substantive law including but not limited to nullifying any judgement of even a Supreme Court because the word “judicial pronouncements” obviously includes a judicial pronouncement by Supreme Court of India.

3. In view of the jurisprudence on delegated authority referred in this article, the Q-2 of above circular will not be valid.

4. There are very less deviations from normal AS or Ind-AS. Also those u/s 14A, 40(a) etc. will prevail over ICDS. The author really wonders as to why there was a need to notify these ICDS? The Govt could have simply said that the AS means As / Ind-as as per Co law / ICAI and in case of conflict with Act / Rules, the Act / rules will prevail.

Situation before Enactment

5. Undoubtedly there was [is] is significant difference in the accounting treatment under Generally Accepted Accounting Principles [GAAP] and the one as per the Income Tax Law.

6. It is said that the Income Tax Law sits on the shoulders of the books of account. The assessees sometimes have also used these as loopholes for tax planning. There is [was] a need to reduce this gap.

7. Just 3 examples are enough to explain the gravity.

a) There is no concept of “accured but not due” under Income Tax Law – Refer E D Sasoon SC followed in Exi—etc.

b) In respect of construction contracts, the GAAP require proportionate completion method whereas tax laws allow completed contract method.

c) Based on judicial pronouncements, to tax a capital receipt, a specific mention is a must in section 2(24) which gives an inclusive definition of “income”

d) No doubt both the above concepts are better systems for measurement of economic performance as per GAAP. Legislature is well within its power to bridge this gap. The author, per se, does not have a problem with the contents of the ICDS.

Brief journey of how ICDS came into being

9. Consider the preface of the report of committee appointed by CBDT in 2010 which gave its report in 2012.

The Finance Act, 1995 empowered the Central Government to notify the Accounting Standards.

The intention in framing the Standards under the Income-tax Act is to compute the income precisely and objectively.

In 1996, two Accounting Standards relating to disclosure of accounting policies and disclosure of prior period and extraordinary items and changes in accounting policies were notified.

The Government constituted a committee in July 2002 for formulation of Accounting Standards for the purposes of notification under the Income-tax Act. This Committee recommended for notification of the Accounting Standards issued by the ICAI without any modification along with consequential legislative amendments to the Act for preventing any revenue leakage.

Subsequently, the CBDT has constituted the present Committee to harmonise the Accounting Standards …..

The Committee formulated the drafts of Tax Accounting Standards on the issues covered by the rest of the fourteen Accounting Standards issued by the ICAI. The committee while framing the Tax Accounting Standards, broadly, adhered to the principles of ‘reduction of litigation’, ‘minimization of alternatives’ and giving ‘certainty to issues’. 

Enactment

Notification No. SO 3079(E) [NO.87/2016 (F.NO.133/23/2015-TPL)], DATED 29-9-2016

Section 145 of The Income-Tax Act, 1961 – Method Of Accounting – Revised Income Computation And Disclosure Standards (ICDS) Notified Under Section 145(2)

In exercise of the powers conferred by sub-section (2) of section 145(2) of the Income-tax Act, 1961, the Central Government hereby notifies the ICDS as specified in the Annexure to this notification 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 of the said Act)

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”.

2. This notification shall apply to the assessment year 2017-18 and subsequent assessment years.

ANNEXURE

Income Computation and Disclosure Standard I relating to accounting policies

Preamble

This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.

In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

CBDT issued a Circular No. 10 of 2017 dated 23-Mar-2017 and the question no 2 reads as follows

Question 2: Certain ICDS provisions are inconsistent with judicial precedents. Whether these judicial precedents would prevail over ICDS?

The ICDS have been notified after due deliberation and after examining judicial views for bringing certainty on the issues covered by it. Certain judicial pronouncements were pronounced in the absence of authoritative guidance on these issues under the Act for computing Income under the head “Profits and gains of business or profession” or Income from other sources. Since certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and subsequent assessment years.

Situation after Enactment

10. Undoubtedly, ICDS is a baby of CBDT which itself is an administering authority under the Income Tax Act, 1961.

11. There is a direct conflict in the following sentences

In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.

Since certainty is now provided by notifying ICDS under section 145(2), the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and subsequent assessment years.

12. IT is well known a fact that Judiciary does not make a law it only interprets the law. Thus binding judgements of any court is nothing but correct interpretation of of provisions of the Income Tax Act 1961 itself.

13. Secondly, this has been embedded in the Act itself.

Orders of Appellate Tribunal.

254. (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.

(2)…

(3)…

(4) Save as provided in section 256 or section 260A, orders passed by the Appellate Tribunal on appeal shall be final.

Decision of High Court or Supreme Court on the case stated.

260. (1) The High Court or the Supreme Court upon hearing any such case shall decide the questions of law raised therein, and shall deliver its judgment thereon containing the grounds on which such decision is founded, and a copy of the judgment shall be sent under the seal of the Court and the signature of the Registrar to the Appellate Tribunal which shall pass such orders as are necessary to dispose of the case conformably to such judgment.

(1A) Where the High Court delivers a judgment in an appeal filed before it under section 260A, effect shall be given to the order passed on the appeal by the Assessing Officer on the basis of a certified copy of the judgment.

(2) The costs of any reference to the High Court or the Supreme Court which shall not include the fee for making the reference shall be in the discretion of the Court.

14. Above sections of the Income Tax Act, 1961 and Article 141 of the Constitution of India states that an order / judgement of Supreme Court will be law of land it is very clear that the decisions of Supreme Court, High Court and even the Tribunals are integral part of the Income Tax Act, 1961

15. Thus a notification u/s 145(2) can-not over-rule /nullify the decisions of Supreme Court, High Court and even the Tribunals.

Jurisprudence on delegated authority

16. The Constitution Bench of the Supreme Court in the case of Subramanian Swamyv. Director CBI [2014] 8 SCC 682 was looked at to determine the parameters to be kept in mind when the constitutionality of a provision vis-a-vis Article 14 was to be considered.

17. The two well settled aspects of Article 14 to render provisions unconstitutional and invalid were as under:

a) discrimination, based on an impermissible or an invalid classification (intelligible differentia without a rational nexus), and

b) excessivedelegation of powers to the executive, in the form of delegated legislation or by way of conferment of authority to pass administrative orders.

18. There are a plethora of the judgements which has settled that an Act of Parliament is Supreme [ of course unless in conflict with Constitution of India]

19. Then comes the Rules and then the Notification.

Author’s Personal opinion

20. There are very less deviations from normal AS or Ind-AS. Also those u/s14A, 40(a) etc. will prevail over ICDS. The author really wonders as to why there was a need to notify these ICDS? The Govt could have simply said that the AS means As / Ind-as as per Co law / ICAI and in case of conflict with Act / Rules, the Act / rules will prevail.

21. If at all the legislature wants it that way, it should have been done in following manner.

a) Central Government may insert a separate schedule to the Income Tax Act, 1961 [on the lines of schedule II to the Companies Act, 2013] which forms integral part of the Act itself.

b) It will contain the main and core GAAP in respect of which there is less probability of change like concept of accrual etc.

c) The computation and disclosure part may be brought as part of Income Tax Rules, 1962 or may be separate rules like Income Computation and Disclosure Standard Rules, 2017.

22. It can be compared with rule 8D for quantification of dis-allowance u/s 14A.

23. Once the core GAAP becomes part of the Act, there will be requisite certainty without having the hanging sword of “excessive delegated authority”.

Memorandum to the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015

Accounting Standards Committee Final Report Constitution Of The Committee, Dated 14-8-2012

(Author CA. Yogesh S. Limaye can be reached at yogesh@salcoca.com)

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