Income Tax Department has issued Income Computation & Disclosure Scheme (ICDS) under Sec 145 of IT Act w.e.f 2015-16. Sec 145 provides for accounting standards to be followed by tax payer for computing his business income for the year, pay tax and file return accordingly. These ICDS are purely independent of Accounting Standards (AS) issued by ICAI and accepted under Sec 129 & 133 of Companies Act. In other words, companies are required to compute their income in TWO WAYS one for paying dividends and one for paying income tax from the same records & results. Similarly, companies have to provide depreciation under schedule II of Companies Act in one manner & method while compute depreciation under Sec 32 of IT Act in totally different manner. In short, company is required to maintain TWO records of same financial year and there is always a need of reconciliation between the two in case of verification.
Since ITDS are like accounting standards for all tax payers having business income and tax audit u/s 44AB, Accounting Standards of ICAI may be recognized in Sec 145 of IT Act to replace n compensate the objectives of ICDS.
Similarly, depreciation provided under Companies Act should be recognized under IT Act Sec 32 also for companies & firms having business income.
This will not only reduce redundant computation but also make tax returns compatible with books of accounts of tax payers maintained under mercantile system of accounting. Compliance of accounting standards will bring in uniformity even for non-corporate tax payers as tax can only be deferred not avoided in business & profession. Moreover, in case of companies, provisions of MAT can be removed. Advance Tax, Interest & Penalty provisions will get streamlined and more stringent since there will be low scope of variance between book profit & taxable profit. Assessment work will become easy and assessee will have lesser opportunity of going in appeals also.