Summary: Income Computation and Disclosure Standards (ICDS) were introduced by the Central Government under Section 145(2) of the Income-tax Act, 1961. The purpose of ICDS is to standardize accounting policies for tax purposes, thereby minimizing discrepancies and reducing litigation. ICDS is only applicable for the computation of taxable income and does not dictate the maintenance of books of accounts. It is mandatory for taxpayers earning income under the categories of ‘Profit and Gains from Business or Profession’ or ‘Income from Other Sources’ to follow ICDS, provided they use the mercantile system of accounting. The ICDS includes ten standards covering various aspects such as accounting policies, valuation of inventories, construction contracts, revenue recognition, and more. Differences between ICDS and the existing Accounting Standards (AS) necessitate the preparation of reconciliation statements to adjust taxable income. This ensures that the profits reported under AS align with those under ICDS, which may involve adjustments for inventory valuation, revenue recognition methods, and treatment of foreign exchange differences, among others. This reconciliation is crucial for accurate tax compliance and reporting.
ICDS stands for Income Computation and Disclosure Standards. It is issued by the Central Government in the exercise of the powers conferred by Section 145(2) of the Income-tax Act, 1961 to bring uniformity in the accounting policies and provisions of the Income-tax Act and to reduce litigations.
List of ICDS and its reconciliations with Accounting Standards
ICDS stands for Income Computation and Disclosure Standards. It is issued by the Central Government in the exercise of the powers conferred by Section 145(2) of the Income-tax Act, 1961 to bring uniformity in the accounting policies and provisions of the Income-tax Act and to reduce litigations. The following are the notified ICDS:
1. ICDS I: Accounting Policies
2. ICDS II: Valuation of inventories
3. ICDS III: Construction contracts
4. ICDS IV: Revenue Recognition
5. ICDS V: Tangible fixed assets
6. ICDS VI: The effects of change in Foreign exchange rates
7. ICDS VII: Government Grants
8. ICDS VIII: Securities
9. ICDS IX: Borrowing costs
10. ICDS X: Provisions, Contingent Liabilities, and Contingent Assets
ICDS is applicable only for the computation of taxable income and not for the maintenance of books of account.
Every assessee earning income taxable under the head ‘Profit and gains from business or profession’ or ‘Income from other sources’ or both is required to compute taxable income in accordance with notified ICDS. However, the ICDS shall be followed only if the assessee is maintaining accounts as per the ‘Mercantile system’ of accounting.
ICDS are used for the purpose of computation of income only and an assessee is not required to maintain books of accounts as per these standards. Thus, to make adjustments as per ICDS, the assessee is required to prepare the reconciliation statement, which contains key differences between AS and ICDS and can be used to transition from book profits as per AS to profits and gains as per ICDS, which is enumerated below:
Reconciliation of AS and ICDS-II
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in the following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit before tax as per AS financials | xxx |
| Add: Amount to be added back in the P&L account | |
| 1. Difference in value of inventories, where the assessee is a partnership firm or AOP or BOI under dissolution (if NRV of inventory is more than its cost) | xxx |
| Net profit/loss before tax as per ICDS | xxx |
Reconciliation of AS and ICDS-III
Reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit before tax as per AS Financials | xxx |
| Add: Amount to be added back in P&L account (if deduction is claimed in books of account) | |
| 1. Expected losses recognised if total contract cost is likely to exceed total contract revenue | xxx |
| 2. Costs recognised as per AS 7 if such revenue was other than Percentage of completion method | xxx |
| 3. Costs recognised as per AS 7 if the percentage of completion was more than 25%, if outcome of the contract can’t be estimated reliably | xxx |
| 4. Revenue as per ICDS when percentage of completion was more than 25%, if outcome of the contract can’t be estimated reliably | xxx |
| 5. Revenue as per ICDS when percentage of completion was not following in books of accounts | xxx |
| Less: Amount to be deducted from P&L account | |
| 1. Proportionate loss as per POCM if total contract costs is likely to exceed total contract revenue | (xxx) |
| 2. Revenue recognised as per AS 7 if such revenue was other than Percentage of completion method | (xxx) |
| 3. Revenue recognised as per AS 7 if the percentage of completion was more than 25%, if outcome of the contract can’t be estimated reliably | (xxx) |
| 4. Costs as per ICDS when percentage of completion was more than 25%, if outcome of the contract can’t be estimated reliably | (xxx) |
| 5. Cost as per ICDS when percentage of completion was not following in books of accounts | (xxx) |
| Net Profit/loss before tax as per ICDS | xxx |
Reconciliation of AS and ICDS-IV
Reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit before tax as per AS financials | xxx |
| Add: Income taxable (if not credit to P&L account)/Expenses not allowable | |
| 1. Expenses deducted from dividend in accordance with accounting principles | xxx |
| 2. Deemed Dividend as specified under Section 2(22)(a) to Section 2(22)(e) | xxx |
| 3. Amount of revenue not recognized in current year as assessee followed service completion method for his books of account | xxx |
| 4. Interest on income-tax refund accrued in earlier year but received in current year* | xxx |
| 5. Interest on compensation or enhanced compensation taxable in accordance with Section 145A(1)* | xxx |
| Less: Income not taxable (if already credited to P&L account)/Expenses allowable | |
| 1. Expenses allowed to be deducted from dividend income under Section 57 | (xxx) |
| 2. Excess revenue recognized in current year as assessee followed service completion method for his books of account | (xxx) |
| 3. Interest on income-tax refund accrued in current year but received in subsequent year* | (xxx) |
| 4. Interest on compensation or enhanced compensation included in taxable income on accrual basis* | (xxx) |
| Net profit/loss before tax as per ICDS | xxx |
* Generally, industry’s practice is to book such interest only when it is received. So, this item may not be a reconciling item in some of the cases.
Reconciliation of AS and ICDS-V
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit before tax as per AS or Ind AS Financials | xxx |
| Add: Amount to be added back in P&L account (if deduction is claimed in books of account) | |
| 1. Amount of Stand-by equipments and servicing equipments (which are expensed off) | xxx |
| 2. Amount of expensed off machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular | xxx |
| 3. Amount of interest expense for the period recognised in statement of profit and loss due to deferral in payment of fixed assets beyond normal credit terms (refer example) | xxx |
| 4. Provision for impairment of asset | xxx |
| 5. Loss due to change in rate of exchange of currency (subject to Section 43A) | xxx |
| 6. Loss on sale of fixed assets | xxx |
| 7. Depreciation as per books of accounts | xxx |
| 8. Amount of abnormal cost of wasted material, labour, or other resources incurred in self-constructing an asset which are excluded from cost of asset | xxx |
| 9. Revaluation loss, if any | xxx |
| 10. Interest portion on the provision for decommissioning, restoration and other liabilities | xxx |
| 11. Previous inspection costs expensed off in P&L, if any [Only if inspection costs should be capitalised as per AS] | xxx |
| 12. Amount of replaced component de-recognized in AS financials | xxx |
| Less: Amount to be deducted from P&L account | |
| 1. Reversal of provision for impairment of asset | (xxx) |
| 2. Gain due to change in rate of exchange of currency, if credited in statement of profit and loss (subject to Section 43A) | (xxx) |
| 3. Gain from sale of fixed assets | (xxx) |
| 4. Depreciation as per Income-tax Act | (xxx) |
| 5. Amount incurred on account of dismantling and removing the item and restoring the site, when incurred | (xxx) |
| 6. Revaluation gain, if any | (xxx) |
| Net profit/Loss before tax as per ICDS V | xxx |
For reconciliation of block of asset
To calculate depreciation on a block of asset, the assessee is required to calculate the WDV of such block of asset as per provisions of Income-tax Act, which shall be calculated in the following manner:
| Particular | Block of asset |
| Opening gross block as per AS Financials | xxx |
| Add: Amount to be added in block of asset (if these are not capitalized in books of account prepared as per AS-10 or Ind AS 16) | |
| 1. Amount of Stand-by equipment and servicing equipment | xxx |
| 2. Spare parts which can be used only in connection with an item of tangible fixed asset whose use is expected to be irregular | xxx |
| 3. Amount of total interest component due to deferral in payment of fixed assets beyond normal credit terms | xxx |
| 4. Loss due to change in rate of exchange of currency (calculated as per Section 43A) | xxx |
| 5. Amount of abnormal cost of wasted material, labour, or other resources incurred in self-constructing an asset excluded from the cost of the asset | xxx |
| 6. Revaluation loss, if any | xxx |
| 7. WDV of asset retired from active use in books of account | xxx |
| 8. Amount of replaced component de-recognized in AS financials | xxx |
| Less: Amount to be deducted from block of asset | |
| 1. Gain due to change in rate of exchange of currency, if credited in statement of profit and loss (calculated as per Section 43A) | (xxx) |
| 2. Sale proceeds of assets (to the extent of WDV of net block) | (xxx) |
| 3. Revaluation gain, if any | (xxx) |
| 4. Present value of decommissioning, restoration and other liabilities capitalised as per AS. | (xxx) |
| 5. Previous inspections costs to be expensed off in P&L, if any [Only if inspection costs capitalised as per AS] | (xxx) |
| Closing block of asset | xxx |
Reconciliation of AS and ICDS-VI
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit as per AS financials | xxx |
| Add: Items to be added | |
| 1. Exchange loss arising on foreign currency monetary items that relates to acquisition of depreciable and non-depreciable assets | xxx |
| 2. Amortization of ‘Foreign Currency Monetary Item Translation Difference Account’ (FCMITDA) | xxx |
| 3. Exchange loss on restatement of non-monetary items | xxx |
| 4. Converted business income as per ICDS | xxx |
| 5. Converted income subject to TDS as per ICDS | xxx |
| 6. Marked-to-market loss on forward exchange contracts for trading or speculation purpose | xxx |
| 7. Written-off premium on forward exchange contract for trading or speculation or hedging purpose as per ICDS | xxx |
| 8. Change in fair value of or exchange difference arising from forward exchange contract for hedging purpose | xxx |
| Less: Items to be deducted | |
| 1. Exchange gain arising on foreign currency monetary items that relates to acquisition of depreciable and non-depreciable assets | (xxx) |
| 2. Amortization of FCMITDA | (xxx) |
| 3. Exchange gain on restatement of non-monetary items | (xxx) |
| 4. Converted business income as per AS | (xxx) |
| 5. Converted interest on securities as per AS | (xxx) |
| 6. Converted other income as per AS | (xxx) |
| 7. Converted income subject to TDS as per AS | (xxx) |
| 8. Marked-to-market gain on forward exchange contracts for trading or speculation purpose | (xxx) |
| 9. Written-off discount on forward exchange contract for trading or speculation or hedging purpose as per ICDS | (xxx) |
| 10. Change in fair value of exchange difference arising from forward exchange contract for hedging purpose | (xxx) |
| Profit as per Income-tax Act | xxx |
For reconciliation of block of asset
To calculate depreciation on a block of asset, the assessee is required to calculate the WDV of such block of asset as per provisions of Income-tax Act, which shall be calculated in the following manner:
| Particulars | Block of asset |
| Opening gross block as per AS financials | xxx |
| Add: Amount to be added in block of asset (if not capitalized in accounting books as per AS-11) | |
| 1. Loss due to change in rate of exchange of currency (calculated as per Section 43A) | xxx |
| 2. Exchange gain arising from long-term foreign currency monetary items as they relate to acquisition of depreciable asset, if capitalized under AS | xxx |
| Less: Amount to be deducted from block of asset (if not reduced in accounting books as per AS-11) | |
| 1. Gain due to change in rate of exchange of currency (calculated as per Section 43A) | (xxx) |
| 2. Exchange loss arising from long-term foreign currency monetary items as they relate to acquisition of depreciable asset, if capitalized under AS | (xxx) |
| Closing block of asset | xxx |
Reconciliation of AS and ICDS-VII
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit before tax as per AS Financials | xxx |
| Add: Income taxable (but not credited to P&L account) | |
| 1. Government grant received but not recognised as income due to principles of AS 12 (conditions of grants not yet fulfilled) | xxx |
| 2. Depreciation as per books of accounts | xxx |
| 3. Refund of grant pertaining to depreciable asset, if it has been claimed as expense following ‘Income Approach’ allowed by AS | xxx |
| Less: Income not taxable (if credited to P&L account) | |
| 1. Government grant taxed in earlier year on receipt basis but it is recognised as income in current year (conditions of grants fulfilled in current year) | (xxx) |
| 2. Grant pertaining to depreciable asset recognized as income following ‘Income Approach’ allowed by AS | (xxx) |
| 3. Depreciation as per Income-tax Act, 1961 | (xxx) |
| 4. Expense to be recognized for grant refund against non-depreciable asset, if such grant was initially recognized under capital reserve | (xxx) |
| Net profit/Loss before tax as per ICDS | xxx |
For reconciliation of block of asset
To calculate depreciation on a block of asset, the assessee is required to calculate the WDV of such block of asset as per provisions of Income-tax Act, which shall be calculated in the following manner:
| Particulars | Amount |
| Additions in gross block as per AS Financials | xxx |
| Add: Amount to be added back in block of asset (if these are not capitalized in books of account prepared as per Accounting Standard-10) | xxx |
| 1. Refund of grant pertaining to depreciable asset, if it has been claimed as expense following ‘Income Approach’ allowed by AS | |
| Less: Amount to be deducted | (xxx) |
| 1. Government grant received for depreciable asset but not recognized in books of account due to principles of AS 12 (conditions of grants not yet fulfilled) | |
| 2. Government grant received for depreciable asset but recognised as income due to ‘Income Approach’ allowed under AS 12 | (xxx) |
| Additions in block of asset for Income-tax | xxx |
Reconciliation of AS and ICDS-VIII
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in the following manner to so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Net profit/loss as per AS financials | xxx |
| Add: Expenses disallowed/Income taxable | |
| 1. Mark to market loss arising from restatement of closing listed securities (security wise) as per AS | xxx |
| 2. Mark to market gain (reversal of previously recognized loss) arising from restatement of closing listed securities (category wise) as per ICDS | xxx |
| 3. Reinstatement loss arising from restatement of closing unlisted securities as per AS | xxx |
| 4. Profit arising from sale of securities computed in accordance with ICDS | xxx |
| 5. Loss arising from sale of securities computed in accordance with AS | xxx |
| 6. Loss on exchange of securities in accordance with AS principles | xxx |
| 7. Gain on exchange of securities in accordance with ICDS principles | xxx |
| Less: Expenses allowable/Deductible | |
| 1. Mark to market loss arising from restatement of closing listed securities (category wise) as per ICDS | (xxx) |
| 2. Mark to market gain (reversal of previously recognized loss) arising from restatement of closing listed securities (security wise) as per AS | (xxx) |
| 3. Reinstatement gain arising from restatement of closing unlisted securities as per AS | (xxx) |
| 4. Profit arising from sale of securities computed in accordance with AS | (xxx) |
| 5. Loss arising from sale of securities computed in accordance with ICDS | (xxx) |
| 6. Loss on exchange of securities in accordance with ICDS principles | (xxx) |
| 7. Gain on exchange of securities in accordance with AS principles | (xxx) |
| Net profit/loss before tax as per ICDS | xxx |
For reconciliation of securities value
| Particulars | Value as per AS | ICDS | AS vis a vis ICDS |
| Securities acquired in cash | At cost | At cost | No Change |
| Securities acquired by issue of security | At fair value of security issued | At fair value of security acquired | Change |
| Securities acquired by way of exchange | At fair value of securities given up | At fair value of securities acquired | Change |
| Securities acquired by issue of any other asset | Fair value of asset issued or Fair value of security acquired, whichever value is more clearly evident | Fair value of security acquired | Change |
| Listed Securities | Listed securities are individually (not category wise) valued at cost or NRV whichever is less | Listed securities are category wise valued (not individually) valued at cost or NRV whichever is less | Change |
| Unlisted securities | Cost or NRV, whichever is less | Cost only. | Change |
Reconciliation of AS and ICDS-IX
For reconciliation of profit
Profit of business, as per books of account, shall be adjusted in following manner to so as to comply with the provisions of this ICDS:
| Particulars | Amount |
| Profit/(loss) before tax as per AS financials | xxx |
| Add: Expenses to be added back in P&L account (if deduction is claimed in books of account) | |
| 1. Borrowings costs incurred between date an asset was available for use and date asset was put to use | xxx |
| 2. Borrowing costs incurred during the suspended period | xxx |
| 3. Foreign exchange differences if adjusted for interest cost to be capitalised as per AS. | xxx |
| Less: Amount to be reduced | |
| 1. Foreign exchange differences if adjusted for interest cost to be capitalised as per AS accounting principles. | (xxx) |
| Net profit/(loss) before tax as per ICDS | xxx |
For reconciliation of block of asset
To calculate depreciation on a block of asset, the assessee is required to calculate the WDV of such block of asset as per provisions of Income-tax Act, which shall be calculated in the following manner:
| Particulars | Block of asset |
| Cost of asset acquired during the financial year (as per AS accounting books) | xxx |
| Add: Amount to be added | |
| 1. Borrowing costs incurred during the suspended period | xxx |
| 2. Borrowings costs incurred between date an asset was available for use and date asset was put to use. | xxx |
| 3. Foreign exchange gain reduced from cost of asset on accrual basis (as per AS). | xxx |
| 4. Foreign exchange loss to be capitalized on payment basis (Section 43A). | xxx |
| Less: Amount to be reduced | |
| 1. Foreign exchange gain to be reduced from cost of asset on payment basis (as per Sec. 43A) | (xxx) |
| 2. Foreign exchange loss capitalized on accrual basis (as per AS) | (xxx) |
| Closing block of asset | xxx |
Reconciliation of AS and ICDS-X
| Particulars | Amount |
| Profit before tax as per AS financials | xxx |
| Add: Expenses disallowed/Income taxable | |
| (a) Provision made in books where there is no reasonable certainty of outflow of economic benefits for settling the related liability | xxx |
| (b) Provision and interest on provision which are recognised till the time actual expense is incurred | xxx |
| Less: Expenses allowable | |
| (a) Actual expense incurred for which provision was created | (xxx) |
| Net profit/loss before tax as per ICDS | xxx |
[As amended by Finance Act, 2024]
