CA Kinjesh Thakkar
1. Background
On 31 March 2015, the Central Board of Direct Taxes (“CBDT”) notified the Income Computation and Disclosure Standards (“ICDS”) in exercise of powers conferred by section 145(2) of the Act vide notification no. 32/2015.
Section 145 of the income tax provides:
“145 Method of accounting
(1)……
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of Assessees or in respect of any class of income.
(3)….”
However, the said ICDS was replaced by a new set of ICDS (Revised ICDS) which became effective from assessment year 2017-18 on-wards. Further, the said replacement of ICDS was accompanied by another notification amending Tax audit report form No. 3CD in the Income Tax Rules, 1962 to provide details of adjustments with respect to ICDS and disclosures as per ICDS. Further, Circular no. 10/2017 dated 23 March 2017 (FAQs on ICDS) was issued for clarifying these issues.
Chamber of Tax Consultants (‘CTC’) filed a writ petition against CBDT and Union of India challenging notification on ICDS and also the circular clarifying the issues.
Hon’ble Delhi High court on Constitutional Validity in the case of Chamber of Tax Consultants & Anr Vs. Union Of India & Ors:
- Where there is a binding judicial precedent, by virtue of Articles 141 and 144 of the Constitution, it is not open to the executive to override it unless there is an amendment to the Act by way of a validation law.
- To that extent, Section 145 (2), as amended, has to be read down to restrict powers of the central government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act; the power to enact a validation law is an essential legislative power that can be exercised, in the context of the Act, only by the Parliament and not by the executive.
3. Summary of Delhi High court analyzing ICDS:
ICDS I does away with the concept of ‘prudence’ which is contrary to the Act and to binding judicial precedents.
- ICDS II pertaining to valuation of inventories eliminates the distinction between a dissolution with discontinuance and dissolution without discontinuance while valuing inventories which is contrary to the decision of the Supreme Court in Sakti Trading Co. v. CIT.
- In ICDS III,the treatment to retention money will have to be determined on a case to case basis by applying settled principles of accrual of income. Further, ICDS III read with ICDS IX, dealing with borrowing costs, provides that no incidental income can be reduced from borrowing cost, the same being contrary to the decision of Hon’ble Supreme Court in CIT v. Bokaro Steel Limited is struck down.
- ICDS-IV requires an assessee to recognize income from export incentive in the year of making of the claim if there is ‘reasonable certainty’ of its ultimate collection. This is contrary to the decision of Hon’ble Supreme Court in CIT v. Excel Industries Limited and is therefore, struck down. Further, the proportionate completion method as well as the contract completion method have been recognized as valid method of accounting under the mercantile system of accounting by the Supreme Court in CIT v. Bilhari Investment Pvt. Ltd. Thus recognizing only one method of accounting i.e. proportionate completion method under ICDS is struck down.
- ICDS-VI which states that marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed, is contrary to Supreme Court in Sutlej Cotton Mills Limited v. CIT. It is, therefore, held to be ultra vires the Act and struck down.
- ICDS VII which provides that recognition of government grants cannot be postponed beyond the date of accrual receipt, is in conflict with the accrual system of accounting. To that extent it is struck down as such.
- Part A of ICDS VIII is held to be ultra vires the Act and is struck down as such.
Conclusion
- Hon’ble Delhi High court Judgement seeks to remove anomalies and controversies in ICDS with decisions of Hon’ble Supreme Court. It seeks to provide that the decisions of Hon’ble Supreme Court are interpretation of Act and a delegated legislation cannot override the Act.
- Thus, based on ratio of Hon’ble Delhi Court, one can conclude that if any decision of Hon’ble Supreme court is in conflict with ICDS, ratio laid down by said Apex Court will sustain.
(The Contents of this article are views expressed by author in its personal capacity and to the best of his knowledge of author. These views are based on the existing provisions of direct tax law and its interpretation, which are subject to change from time to time. No responsibility is assumed to update the views consequent to changes in law. Moreover, the article does not provide any advice/opinion/assurance that the revenue authorities/courts will concur with the views expressed herein. The article is simply for reference purpose only)
