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1) The concept of prudence has been completely done away with in the ICDS.

**Legal provisions / contentions**This is contrary to the decision such as CIT v. Triveni Engg. & Industries Ltd.

2) Expected losses and 'marked to market' losses are not to be recognized or allowed under ICDS.

**Legal provisions / contentions** The concept of 'prudence' is embedded in section 37 of the Act which allows deduction in respect of expenses laid out or expended for the purpose of business. It encompasses not only actual outflow of expenses but also the amounts parked in the present for future settlement. Thus, the concept of prudence is inherent in business income computation.

**Delhi High Court's Decision**

The court upheld the contention of the petitioners and held that the non-acceptance of the concept of 'prudence' in ICDS-I is per se contrary to the provisions of the Act.


Valuation of inventory must be at market rate when the business of the firm is dissolved or discontinued whether or not there is succession to business by the surviving partners.

**Legal provisions / contentions** The ICDS –II does not take note of the decision of the apex court in the case of Sakthi Trading Co. v. CIT (SC) and the distinction drawn by the court with the decision in the case of A.L.A Firm v. CIT (SC). ICDS seeks to side step the decision rendered in Sakthi Trading Co's case (supra).

**Delhi High Court's Decision** Section 145A begins with a non-obstante clause and is independent of section 145(2) under which the ICDS was notified.

Section 145A provides that the inventory of goods shall be valued in accordance with the method of accounting regularly employed by the assessee. Therefore, when the assessee follows a certain method of valuation, of inventory then that will govern the valuation, irrespective of the ICDS notified under section 145(2) of the Act.


1) As contained in para 10 the retention money would form part of the contract and it is to be assessed based on proportionate completion method.

**Legal provisions / contentions**This is contrary to legal decisions such as CIT v. Simplex Concrete Piles India (P.) Ltd.where it was held that the retention money does not accrue to the assessee unless and until the defect period is over and the amount is not attached with any liability by way of deduction.

Para 10 of ICDS-III does not specify at what stage the retention money would be treated as contract revenue. It is fundamental principal under the income-tax law that an amount has to accrue in order to be chargeable to tax as income.

**Delhi High Court's Decision** Retention money when would it accrue depends upon the facts of each case and the conditions attached to such amounts. The treatment of retention money will have to be decided on case-to-case basis by applying the settled principles of accrual of income.

2) Para 12 of ICDS-III, read with para 5 of ICDS IX dealing with 'borrowing cost' says that the contract cost shall not be reduced by any incidental income.

**Legal provisions / contentions**This is contrary to the decision of the apex court in CIT v. Bokaro Steel Ltd. where it was held that if the assessee receives any amount which is inextricably linked with the process of setting up of plant and machinery, such receipts would go to reduce the cost of its assets.

**Delhi High Court's Decision** The ICDS-III saying that the borrowing cost shall not be reduced by the incidental income is contrary to the law settled by various decisions of the Supreme Court and the High Courts, hence, cannot be sustained.


1) In paras 5, 6 and 8(1) the following are mandated.

(a) the claim of escalation price and export incentives shall be postponed to the extent of uncertainty involved.

**Legal provisions / contentions**The apex court in CIT v. Excel Industries Ltd. [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 dealt with recognition of export incentives. It is to be recognized as income only when the claim is accepted by the Government and a right to receive the payment accrues in favour of the assessee.

**Delhi High Court's Decision** Para 5 of ICDS -IV seeking recognition of income from export incentives is inconsistent with the law explained by the Supreme Court.

2) In respect of service transactions revenue shall be matched with service transaction cost and income be recognized on the proportion of work completed;

**Legal provisions / contentions**As per AS-9 assessees can follow either of two methods of accounting, viz., proportionate completion as well as or completed service contract method. In CIT v. Bilahari Investment (P.) Ltd. it was held that the assessee can either follow proportionate completion method or contract completion method.

**Delhi High Court's Decision** Para 6 of ICDS-IV permits only one method, viz., proportionate completion method which is contrary to the various decisions of the Court. Thus, it is ultra vires the Act and has to be struck down.

3) Interest shall accrue on time basis determined by the amount outstanding and rate applicable.

**Legal provisions / contentions** Accrual of income as per para 8 of ICDS is on 'time basis'. This is challenged on the ground that NPAs of NBFCs would also become taxable, though such interest is not recoverable.

**Delhi High Court's Decision** The Revenue contended that a corresponding amendment has been made to section 36(1)(vii) vide Finance Act, 2015 by which the assessee can claim such interest as a deduction. This has been clarified in Circular No.10 of 2017. The justification of the Revenue demonstrates the backing of the Parliament with enactment of section 36(1)(vii) and, hence, it was held as justified by the court.


It seeks giving effect of changes in foreign exchange rates. The loans have to be valued on the closing date which may give rise to foreign exchange loss or gain irrespective of whether such loan was taken for capital purposes.

**Legal provisions / contentions**The apex court in Sutlej Cotton Mills Ltd. v. CIT has explained that exchange loss or gain in relation to capital item would be capital in nature.

**Delhi High Court's Decision**It was held that the ICDS VI seeking effect of change in foreign exchange to be treated as income would be contrary to the apex court's decision and, hence, would have to be struck down as ultra vires the Act.


Government grants will have to be recognized as income and cannot be postponed beyond the date of actual receipt, regardless of whether the income has accrued or not, it has to be taxed

**Legal provisions / contentions**There could be a situation where some conditions are attached to government grant. Non-fulfillment of such condition may lead to return of such grant.

**Delhi High Court's Decision** It cannot be said that there is accrual of income merely because the amount has been received. ICDS VII, however, requires the amount to be taxed in the year of receipt, which is contrary to and in conflict with accrual system of accounting. Hence, it has to be held as ultra vires and struck down.


Part A of ICDS deals with entities other than scheduled bank and public financial institutions while part B deals with scheduled banks and public financial institutions. Part B seeks valuation of securities in accordance with RBI guidelines. However, as regards Part A, which is not governed by RBI norms, the Accounting Standard prescribed by ICAI is to be followed.

**Legal provisions / contentions** The valuation of securities as per Accounting Standard is different from ICDS and the entities have to maintain separate records for income-tax purposes for every year since the closing value of the securities would be valued separately for income-tax purposes and for accounting purposes.

Further, the securities are classified into four categories under ICDS. The ICDS -II does not provide for valuation of inventory through 'bucket approach'.

**Delhi High Court's Decision** Para 10 says that the actual cost of securities held shall be done category-wise and not for each individual security.

Thus, the Part A of ICDS-VIII is ultra vires the Act.

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Category Income Tax, Other Articles by - CA Rohit kapoor