IND AS vs Income Tax Act, 1961: Impact on Taxable Profit – Part 1

Introduction:

For the purpose of calculating taxable profit we make some adjustments to book profit and these adjustments (say allowance or disallowance) increased in Indian Accounting Standards (IND AS). Fair vale measurement, leases, revenue from contract with customers are some of the topics which have curve in and out as compared to existing accounting standards. Therefore these changes should also be considered while calculating taxable profit of the entity.

In this article we are going to discuss these changes and their impact on calculation of taxable profit.

Considering the principals of IND AS following are the possible addition and deductions from the book profit for the entities who covered under Indian accounting standards.

Sr. No.	Particulars	Amount (In Rs.)
A.	Profit as per profit and loss account (Sch.III)	XXXX
–	Add:- (Items not allowed under income tax or incomes chargeable )
1.	Depreciation as per books (including those charged on ROU Asset)	XXXX
2.	Interest Expenses (including on lease liability)
3.	Any amount by whatever name called payable to Preference shareholders (includes dividend and interest)
4.	Fair Value Recognition of Investment (includes Shares, Debentures, Securities)
5.	Revaluation of Assets
6.	Deferred Tax Expenses
7.	In case of shares and securities held as stock in trade then category wise valuation difference(as required by ICDS)
8.	Any Notional loss on transfer of asset under financial lease
9.	Notional loss on transfer of shares of Special purpose vehicle to Real estate investment trust or infrastructure investment trust.
10.	Lease re-measurement loss on lease liability
11.	Impairment of assets
12.	Provision for bonus(Employee Benefit)
13.	Current Service cost of Post-employment benefits
14.	Contract Revenue calculated as per ICDS (POCM etc.)
15.	Impairment of goodwill
16.	Foreign exchange loss debited to P and L which relates to Monetary liability on acquisition of asset.
17.	Notional interest debited to profit and loss account related to Government loan received at concessional interest rate (Government grant).
18.	Government grant received but not taxed due to IND AS (Because ICDS stats that “Recognition of Government grant shall not be postponed beyond the date of actual receipt”.)
19.	Actual Lease rental received during the year of financial lease until asset finally transferred.
B	Less:- (Items not chargeable to tax)
1.	Contract revenue recognized by applying method other than Percentage Completion method.
2.	Financial Lease Interest income
3.	Any Notional gain on transfer of asset under financial lease
4.	Notional gain on transfer of shares of Special purpose vehicle to Real estate investment trust or infrastructure investment trust.
5.	Fair Value recognition gain
6.	Lease Re-measurement Gain
7.	Deferred Tax income
8.	Foreign exchange Gain Credited to P and L which relates to monetary liability on acquisition of asset.
9.	Deferred income credited to profit or loss account related to government loan received at concessional rate (government grant)
C	Less:- (Items allowed as deduction)
1.	Depreciation on Assets
2.	Depreciation on assets which is given on lease (Whether it is financial or operating lease depreciation always allowed to lessor under income tax act until asset finally transferred)
3.	Lease Payment (Only amount actually paid or payable during the year towards lease rent is allowed for the lessee.)
4.	Employee Bonus (Actual Bonus paid to employees up to due date of return.)
5.	Actual amount of gratuity paid during the year.
6.	Actual interest payment of government loan received at concessional interest rate.

Apart from above there are also differences in recognition and measurement in Indian accounting standard and in income tax (Income computation and disclosure standards). Following are some adjustment which we need to make before ascertainment of taxable profit to the asset and liabilities recognized in the books of account.

1. Calculation of borrowing cost eligible for capitalization:-

IND AS 23 Borrowing Cost:

Borrowing cost capitalization rate is calculated by taking weighted average borrowing cost bears to the total outstanding general borrowings.

ICDS IX on Borrowing Cost:

In income tax ICDS provides calculation of general borrowing cost eligible for capitalization by taking average of opening and closing qualifying asset bears to the average of total assets. So there is difference in calculation and therefore acquisition cost of fixed asset.

2. Decommissioning cost of Fixed asset:-

IND AS 16 Property, Plant and Equipment:

a) Present value of decommissioning cost capitalized to the fixed asset.

b) Asset measured using the exchange rate on the date of transaction. And no subsequent change unless recognized at fair value.

ICDS V on Fixed Asset:

a) Cost incurred to bring the asset to their present location and condition does not include such decommissioning provision hence it will be allowed in the year of actual payment (when it actually incurred) but not capitalized to the cost of asset.

b) Initially asset measured at historical value and if there is any exchange gain or loss related to monetary value (that is liability for acquisition of the said asset including amount borrowed in foreign country) then such gain and loss adjusted in the block of asset. (I.e. Gain deducted from the block and loss added to the block until its settlement) (Read with section 43A).

3. Government grant for Acquisition of Asset:

IND AS 20 Government Grant:

Grant should either be deducted from the value of asset or should be recognized to the income over the period and on the same basis as depreciation of the related asset is recognized.

ICDS VII Government Grant:

Grant that is related to the acquisition of asset is deducted from the value of asset. So alternative option is not available here.

4. Leases:

IND AS Leases:

• In the books of lessor-

Financial Lease:-

Lessor derecognize the asset and recognize profit and loss relating to such asset into profit and loss account. Further lessor recognize investment showing present value of the amount receivable from the lessee. Finance component related such investment in lease is recognized in profit and loss account and lease rentals are deducted from the investment.

Operating lease:-

Lessor recognize the lease rentals to the profit and loss account on straight line basis over the lease period or any other method that corresponds with the benefit derived by the lessee from such asset.

ICDS on Revenue Recognition and Fixed Assets:-

Finance lease:-

When lessor enters into finance lease then interest component recognized in the profit and loss account which is not chargeable to income tax so deducted while calculating the taxable profit. Further depreciation is allowed to lessor unless legal title is transferred by lessor to lessee (As per recent Supreme Court pronouncement also it is clear that only the lessor is eligible to claim depreciation on the leased asset, even though as per the companies act the asset is in the books of the lessee.), Therefore depreciation on lease asset is deducted from the profit of the lessor and periodical rent is chargeable to the tax, so this should be separately added to the book profit.

Particulars	Amount in Rs.	Amount in Rs.
Profit as per Companies act read with IND AS		XXX
Add: – Notional loss on finance lease recognized at the time of initial recognition as well as at the time of lease modification.	XXX
Add: – Actual lease rent received or due during the year as per lease agreement.	XXX
Less: – Finance cost recognized in the P and L related to lease investment.	(XXX)
Less: – Notional gain on finance lease recognized at the time of initial recognition as well as at the time of lease modification.	(XXX)
Less:- Depreciation on lease asset	(XXX)
Taxable Profit		XXX

Operating lease: –

In case of operation lease lessor generally recognize the income over the lease period on straight line basis or in the same way as benefit derived by the lessee of the leased asset. This method of revenue recognition is also corresponds with the revenue recognition concept of ICDS so no need to adjustment in case of operating lease in the books of lessor for calculating taxable profit.

• In the books of lessee-

IND AS

Financial or operating lease: –

In the books of lessee the treatment of finance lease or operating lease is same, lessee recognize lease liability showing present value of all lease payments and creates ROU asset after considering the other expenses such as lease expenses, direct cost for the asset capitalization etc.

Further at the time of lease modification resulting gain or loss as per IND AS is also required to be transferred to the profit and loss account.

And in case of lease re-measurement Asset or liability is also adjusted.

Lessee depreciates the ROU asset over the lease period on systematic basis as determined by standard and charge interest component to the profit and loss account relating the lease liability.

ICDS on Revenue Recognition and Fixed Assets:-

In the income tax only periodic lease payment as determined by lease agreement is allowed as expenses irrespective of the type of the lease whether it is operating or finance lease.

Therefore depreciation and interest charged by the lessee is added back to the profit and also notional loss or gain recognized at the time of lease modification is also added or deducted as the case may be for calculating income tax profit.

Particulars	Amount in Rs.	Amount in Rs.
Profit as per Companies Act read with IND AS		XXX
Add: – Depreciation on ROU Asset charged to profit and loss account.	XXX
Add: – Finance cost related to lease liability charged to profit and loss account.	XXX
Add: – Notional loss on lease modification	XXX
Less: – Actual Lease payment as per terms of the lease agreement	(XXX)
Less: – Notional gain on lease modification charged t profit and loss account.	(XXX)
Taxable profit		XXX

Conclusion – We have discussed the difference in recognition and measurement in income tax act and Indian accounting standard related to certain transactions and also their impact on profit and possible adjustments which require to be made to ascertain taxable profit. In this article all the differences are not covered, this is only the first part of our article we are working on the other issues which required to consider for ascertaining taxable profit and necessary allowances and disallowances  in the income tax act.

For the purpose of simplicity we are going to provide our analysis in parts and divide the discussion in different topics.

We hereby also state that this article is solely based on our study and analysis there may be possibility that other authors or professionals may take different view on these topics.

We are glad to share our analysis with you.

Hope this information is helpful for you.

Thank You.