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ICDS (Income Computation & Disclosure Standards) were notified on 31st March 2015 and mandatory w.e.f. 01-04-2016. However, in the current Finance Act, the government made various amendment in the provisions of Act to ensure they are in line with the provisions of ICDS. This Article is a short introduction seeking to explain the applicability of ICDS to various assessee's with some case examples. 

Applicable to all assessee's except:

  1. Individuals & HUF not covered by audit u/s 44AB.
  2.  Those following cash system of accounting.
  3. Those who do not have any income from PGBP or other sources.
  4. Individual & HUF opting presumptive taxation scheme
  5. Insurance Companies, Banks or certain financial institutions having sector-specific provisions

Some Important Points to be noted:

  1. Individual & HUF having income from other source and following mercantile method but they do not have any PGBP income- ICDS are not applicable.
  2. If taxpayer opts out of presumptive taxation, he is liable to gets his books audited and then ICDS shall apply in such case.
  3. Also note only Individuals and HUF are exempted. With respect to other category i.e FIRMS, AOP, BOI no specific exclusion given but logically ICDS shall not apply.
  4. ICDS on revenue recognition shall apply to calculate Gross receipt/ turnover in cases of other than individuals and HUF opting presumptive tax scheme involving computation of tax on basis of gross receipt or turnover[1]
  5.  In case or Non-resident covered under DTAA- DTAA provision shall prevail over ICDS. And Where income not determined under presumptive scheme but flat tax rate apply eg. sec 115A., ICDS shall apply as tax is calculated after determining income.
  6. ICDS not applicable for maintenance of books of accounts. A reconciliation to be prepared for the substantial difference between AS and ICDS.
  7. ICDS provisions shall not apply for computing book profit under MAT u/s 115JB.
  8. As AMT is on Adjusted Total income it is already after ICDS so no duplicate impact needed.

Position Before ICDS:

  1. Permitted use of  cash system or mercantile system
  2. CG power to notify IT- AS.
  3. AO to make best judgment assessment if :
    1. Not satisfied about correctness or completeness of accounts; or
    2. Method of Accounting not regularly followed; or
    3. Income not computed as per notified IT- AS

Position After ICDS:

  1. ICDS notified by CG
  2. In case of violation of ICDS, AO can directly make best judgment assessment.

Source of Income V/s Method of Accounting:

  1. Assessee can choose one method of accounting for one source (business one) and another method for other source (business two)[2].
  2. Once choice is made, must be followed consistently. (CBDT Circular no 717 dt. 14th Aug 1995)
  3. In such case ICDS shall apply to only those source of income where mercantile method is followed.

Change in Accounting Method:

  1. Change in Accounting method do not amount to Change in Accounting policy.
  2. Hence ICDS-1 (reasonable cause for such change) not applicable.
  3. Bonafide Change in accounting method allowed if - permissible method and consistently used thereafter. ([1993] 202 ITR 789 (Bombay High court) and [1984]149 ITR 759 (Madras High court))


1. Mr A have Interest income of Rs 2 crore 45 lacks and Interest paid to friends and relative on borrowings Rs 1 crore 75 lacks only as transactions during the entire year which he computes under income from other sources. He follows mercantile system of accounting. Whether ICDS applicable?

Ans: As Individuals and HUF not covered by audit u/s 44AB in previous year is exempted from applicability of ICDS and in the given case Mr A do not have any income from PGBP so sec 44AB do not apply to Mr A. Hence Mr A do not need to follow ICDS as he is specifically exempted.

2. Mr B filed his return u/s 44AD for FY 2016-17. During F. Y 2017-18 he decided not to opt presumptive taxation? Will ICDS apply to Mr B's computation of income for FY 2017-18?

Ans: The word previous year mentioned in ICDS is defined in Income tax act as year immediately preceeding assessment year (i.e. financial year itself). In given case Mr B is not opting presumptive taxation in F.Y. 2017-18 so as per provisions of Act he shall be liable to compulsory audit u/s 44AB and hence exemption is no more available so he needs to follow ICDS during F.Y. 2017-18.

3. M/s ABC, a partnership firm, opts for presumptive taxation scheme for AY 2017-18. Partners of M/s ABC is of opinion that only ICDS 4 is applicable to them, they do not need to follow other ICDS. What is your opinion?

Ans: As M/s ABC opts for presumptive taxation, they shall pay tax at specified rate on gross turnover/ receipts of business or profession. Hence on determination of Gross turnover/ receipt from business or profession is required to be made and tax is to be calculated at specified rate. So ICDS- 4 on revenue recognition is only applicable to M/s ABC.

4. Mr P is a Non resident assessee. He has income from Two Business liable to be taxed in India. Business one is covered by DTAA with other country which provide that such income shall be taxable in such other country and hence exempted from tax in India. And business two is taxable at flat rate under income tax Act. He wants to know how ICDS provision will work on both his business?

Ans: In case of business one which is covered by DTAA- provisions of DTAA will prevail over provisions of ICDS in case of confliction. And in case of Business two which is taxable at flat rate only ICDS on revenue recognition shall apply to assess Gross turnover/ receipts on which flat tax rate is to be applied.

5. Mr Q wants to follow cash system of accounting for his PGBP income and Mercantile system for his income from other source? Can he do so?

Ans: Yes, Computation of income is first done for each source of income and then aggregated under each head of income i.e method of accounting is vis a vis each source of income is a well-settled law. Refer J K Bankers Vs CIT (94 ITR 107 [All]), CIT Vs Smt Vimla D Sonawne ([1994] 212 ITR 489 [Bombay]), CBDT circular no 717 dated 14th August 1995, ICAI Guidance note on Tax audit and Technical guide on ICDS.

[1] As per CBDT circular 10/2017 dt 23 Mar 2017
[2] GN on Tax Audit and Accrual Based accounting by ICAI


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