1. On the First DeMonetisation Anniversary i.e. November 8, 2017, the most awaited decision in relation to one of the additional compliances under Direct Taxation gave relief to the various assessees as well as the Tax Professionals. This has increased the faith of the assessees as well as the tax professionals and increased credibility in the Judiciary of our country. The judgement of Chamber of Tax Consultants & Anr. v. Union of India & Ors. by Hon’ble Delhi High Court has saved plenty of probable litigations which would have arisen due to conflicting ICDS provisions with various judicial precedents which are already settled laws. The judgement has been welcomed by the assessees and all the stakeholders which is the outcome of the applaudable efforts by the Petitioners.
2. The High Court held that 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. If done so it would be ultra vires the Act and Article 141 read with Article 144 and 265 of the Constitution. Thus, in context of the amendment to Section 145(2) the High Court held that ICDS are not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents.
3. The said judgement has struck off various provisions of ICDS which were in contrary to the case laws or judicial judgements, system of accounting and accounting standards. Reproducing the provisions which have been held ultra vires the Act and been struck off, as they were having overriding effect on various judicial precedents in the following tabular format:
|S. No.||ICDS No. and Name||What ICDS says (Issue under the ICDS)||ICDS Issue in contradiction of the following Case Laws or Accounting System or Accounting Standards||Whether the Issue held Ultra Vires the Act, and Struck off?|
|1||ICDS I – Prudence||ICDS Not following concept of “Prudence” held unsustainable in law.||(i) CIT v. Triveni Engineering & Industries Ltd (2011) 49 DTR 253 (Del) and
(ii) CIT v. Advance Construction Co. Pvt. Ltd. (2005) 275 ITR 30 (Guj).
|Yes, so prudence concept to be followed.|
|2||ICDS II – Valuation of Inventories||Valuation of inventories in case of dissolution of partnership firms or AOP or BOI to be valued at NRV irrespective of continuance of business.||Contrary to the decision of the Supreme Court in the case of Shakti Trading Co.||Yes|
|3||ICDS III – Construction Contracts||As per Para 10(a) of the ICDS the retention money to be taxable, the receipt of which is uncertain/ conditional, at the earliest possible stage, irrespective of the facts.||Contrary to following decisions which held that the retention money does not accrue to an Assessee until and unless the defect liability period is over and the Engineer-in-Charge certifies that no liability is attached to the Assessee:
(i) CIT v. Simplex Concrete Piles India (P) Ltd (1988) 179 ITR 8
(ii) CIT v. P & C Constructions (P) Ltd (2009) 318 ITR 113
(iii) Amarshiv Construction (P) Ltd v. DCIT (2014) 367 ITR 659 ;and
(iv) DIT v. Ballast Nedam International (2013) 355 ITR 300 which followed the decision in Anup Engineering Limited v. CIT (2000) 247 ITR 114.
|4||ICDS III – Construction Contracts and ICDS IX – Borrowing Cost||Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost.||Contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited .||Yes|
|5||ICDS IV – Revenue Recognition||Para 5 of 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.||Contrary to the decision of the Supreme Court in Excel Industries||Yes|
|6||ICDS IV – Revenue Recognition||Para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method and not the contract completion method.||Proportionate completion method as well as the contract completion method held valid under following case laws:
(i) Supreme Court in CIT v. Bilhari Investment Pvt. Ltd.
(ii) CIT v. Manish Buildwell Pvt. Ltd (Delhi HC); and
(iii) Paras Buildtech India Pvt. Ltd. v. CIT.
|7||ICDS IV – Revenue Recognition||Para 8 (1) of ICDS IV which mandated Interest Accrual on Time Basis, is not been shown to be contrary to any judicial precedent. There is also no challenge to Section 36(1) (vii) of the Act.||NA.||No*|
|8||ICDS VI – Effects of changes in Foreign Exchange Rates||Marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed.||Contrary with the ratio laid down by the Supreme Court in Sutlej Cotton Mills Limited v. CIT.||Yes|
|9||ICDS VII – Government Grants||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.||Contracry to the accrual system of accounting.||Yes|
|10||ICDS VIII – Securities||Entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS. As a result, such entities would be required to maintain separate records for income tax purposes every year since the closing value of the securities would have to be valued separately for income tax purposes and for accounting purposes.||Valuation of Securities contrary to the applicable Accounting Standard.||Yes|
* This issue has been held valid by the High Court in the judgement.
The author can be reached at: Mail id: email@example.com or on Mob: +91 99305 11578; +91 90395 78933