Income Computation and Disclosure Standards v. Judicial Precedents
| PARTICULARS | WHAT JUDICIAL PRECEDENTS PROVIDE | WHAT PROPOSED ICDS1 PRESCRIBE |
| I. Marked to Market, Expected and probable losses | a) Loss incurred on account of evaluation of contract on last date of accounting period, (before date of maturity of forward contract) is an allowable deduction - Dy. CIT (International Taxation) v. Bank of Bahrain & Kuwait [2010] 41 SOT 290 (Mum.)(SB) | a) No deduction for marked-to-market or expected and probable losses (ICDS - Effects Of Changes In Foreign Exchange Rates) b) Since such mark-to- market gains or losses are unrealized in nature, the TAS provides that all gains or losses on such contracts shall be recognized on settlement (ICDS - Effects Of Changes In Foreign Exchange Rates) |
| b) The losses incurred by assessee due to revaluation of an un-materialized oil exchange contract were allowable as deductions - Addl. DIT (IT) v. British Bank of Middle East [2011] 44 SOT 109 (Mum.)(URO) | ||
| c) Possible losses from unsettled contracts could not be allowed as deductions - CIT v. Indian Overseas Bank [1984] 19 Taxman 542 (Mad.) | ||
| d) Just because anticipated profits are not assessed to tax, it would not follow as a corollary thereto that anticipated losses cannot be allowed as deductions in computation of business income - ABN Amro Securities India (P.) Ltd. v. ITO [2011] 15 taxmann.com 177 (Mum.) | ||
| e) It was held that any profit arising on account of revaluation of forward contract on the last day of accounting period has to be treated as an income of the assessee - Addl. DIT(IT) v. Development Bank of Singapore [2011] 12 taxmann.com 35 (Mum.)(URO) | ||
| f) Mark-to-market loss on derivatives held as stock-in-trade shall be allowed as business loss - Deputy CIT v. Kotak Mahindra [2013] 35 taxmann.com 225 (Mumbai - Trib.) | ||
| G) Forex loss computed at the end of the financial year on derivatives contract entered for hedging currency related risk had to be allowed as revenue expenditure - Reliance Industries Limited v. CIT (LTU) [2013] 40 taxmann.com 431 (Mumbai - Trib.) | ||
| h) Booking of expected loss, might be warranted in terms of Accounting Standards, but for tax purposes, only expenses incurred or losses suffered could be allowed - EDAC Engineering Ltd. v. Deputy CIT [2013] 30 taxmann.com 355 (Chennai - Trib.) | ||
| II. Changes to method of valuation of inventory | a) Change in accounting policy isn't allowed if there is nothing on record to indicate that the change is intended to be followed regularly in future by the assessee – Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847 (Cal.) | The method of valuation of inventory shall not be changed without a reasonable cause (ICDS – Valuation of inventory) |
| b) An assessee can change the method of accounting unilaterally in respect of a source of income - Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.) | ||
| c) Where it was found that the change adopted by the assessee was for bona fide purpose and was not actuated by consideration to reduce income for income-tax purposes, the revenue had no right to interfere with the change in the method of valuation of inventory - CIT v. Mopeds India Ltd. [1988] 38 Taxman 123 (AP) | ||
| D) Change in method of accounting in view of mandatory requirements of AS-7 is a bonafide reason for change, particularly in view of qualification made in this regard by statutory auditors as well as by Comptroller & Auditor General of India - Mazagon Dock Ltd. v. JCIT [2009] 29 SOT 356 (Mum.) | ||
| e) No addition could be made to income of assessee on account of change in accounting policy as to valuation of closing stock if such change had been made on account of statutory requirements - Uniflex Industries (P.) Ltd. v. ITO [2007] 15 SOT 246 (LUCK.) | ||
| III. Valuation of inventory on dissolution of firm | a) Where firm got dissolved due to death of a partner and business was reconstituted with the remaining partners, and business continued without any interruption, the closing stock was to be valued at the cost or market price, whichever was lower, and not at market value - Sakthi Trading Co. v. CIT [2001] 118 Taxman 301 (SC) | Inventory on the date of dissolution of partnership firm or AOP or BOI shall be valued at the net realizable value (ICDS – Valuation of inventory) |
| b) If business of the firm didn't cease to continue as one unit on dissolution, the closing stock could not be valued at market price disregarding value shown by assessee at an average cost price, which had been consistently followed by assessee in past - Asst. CIT v. Kuldip Chand & Sons [2005] 93 ITD 253 (Amritsar) | ||
| c) Market value has to be adopted where dissolution of firm is accompanied by discontinuance of business and not otherwise - Kwality Steel Suppliers v. CIT [2004] 141 Taxman 177 (Guj.) | ||
| d) Partnership firm stood converted into proprietorship firm after retirement of one out of only two partners of the firm, closing stock to be valued at market price instead of book value shown in books of dissolved firm - Madhu Rani Mehra v. CIT [2011] 10 taxmann.com 126 (Delhi) | ||
| IV. Prior-period expenses | a) Expenses pertaining to earlier year were not allowable as they were not pertaining to year under consideration- Dy. CIT v. Rediff.com India (P.) Ltd. [2011] 12 taxmann.com 22 (Mumbai) | The earlier version of TAS proposed that prior-period expenditure should not be allowable, except where it has crystallized during the year in which it is claimed. However, the current version of ICDS does not provide anything on allowability of prior period expenditure. Hence, it can be presumed that the treatment of prior period expenditure shall be decided as per judicial precedents and the provisions of the Act. |
| b) If liability to pay an amount crystallized only in previous year on receipt of bills, travel claims, etc., the expenditure could not be disallowed as prior-period expenditure merely because same related to earlier years - SRF Ltd. v. Dy. CIT [2009] 34 SOT 1 (Delhi) | ||
| c) If assessee failed to discharge duty of providing for a known expenditure, it could not claim same expenditure in subsequent assessment year - Delhi Tourism & T.D.C. Ltd. v. CIT [2006] 155 Taxman 10 (Delhi) | ||
| D) Expenses of earlier years allowable in current year if crystallized during that year - SMCC Construction India Ltd. v. Asst. CIT [2013] 38 taxmann.com 146 (Delhi) | ||
| e) Prior period adjustment were not allowable as deductions as per provisions of law; claims in regard to same fell under category of false claims, hence, provisions of section 271(1) (c) were attracted - Deraj Agrotech Ltd. v. ITO [2014] 45 taxmann.com 69 (Mumbai - Trib.) | ||
| f) Just because income and expenditure was classified as prior period, they need not be excluded or disallowed if same were crystallized during the relevant previous year - E-City Entertainment (India) (P.) Ltd. v. Addl. CIT [2013] 39 taxmann.com 120 (Mumbai - Trib.) | ||
| V. Taxability of retention money | a) Where retention money and security deposit were repayable to the assessee after completion of the contract to the satisfaction of the contractee, it could not be said that said amount had accrued to assessee and, therefore, could not be taxed in assessee's hand - CIT v. P & C Constructions (P.) Ltd. [2009] 318 ITR 113 (Mad.) | Retention money shall accrue to the taxpayer for computing revenue based on percentage of completion method (POCM) (ICDS – Construction Contracts) |
| b) On date of submission of bills, assessee had no right to receive entire amount on completion of work and retention money did not accrue to it on such date but on later date in accordance with terms of contracts. The AO was not justified in treating entire contract amount as accrued on submission of bills - CIT v. Simplex Concrete Piles India (P.) Ltd. [1989] 45 Taxman 370 (Cal.)] | ||
| C) Retention money could not be said to be accrued to assessee till completion of work - DIT (International Taxation) v. Ballast Nedam International [2013] 33 taxmann.com 139 (Gujarat) | ||
| D) Retention money was to be taxed in assessment year relevant to 'previous year' in which it became payable to assessee as per terms of contract - Amarshiv Construction (P.) Ltd. v. Dy. CIT [2014] 45 taxmann.com 429 (Gujarat) | ||
| E) Retention money to be brought to tax in the year in which contract was successfully completed irrespective of the fact that assessee had adopted mercantile system of accounting - Asst. CIT v. B.G.R. Energy Systems Ltd. [2014] 47 taxmann.com 266 (Hyderabad - Trib.) | ||
| VI. Anticipated losses in construction contracts | a) Where construction project has long gestation period and POCM is adopted for income-tax purpose, losses only proportionate to work completed during year can be allowed and not entire anticipated losses - Shivshahi Punarvasan Prakalp Ltd. v. ITO [2011] 15 taxmann.com 352 (Mum.) | Future or anticipated losses shall not be allowed unless such losses are actually incurred (ICDS – Construction Contracts) |
| b) Deduction for foreseeable losses allowed by Delhi High Court in CIT v. Triveni Engg. & Industries Ltd. [2010] 8 taxmann.com 146 | ||
| c) Contentions of assessee regarding allowability of foreseeable losses were accepted principally - Jacobs Engineering India (P.) Ltd. v. Asst. CIT [2011] 14 taxmann.com 186 (Mum.) | ||
| d) AS-7 allowed assessee to make provision for foreseeable losses and therefore, said losses provided by assessee in its books of account had to be allowed in year under consideration – Asst. CIT v. ITD Cementation India Ltd. [2013] 36 taxmann.com 74 (Mumbai - Trib.) | ||
| VII. Deferment of revenue | The assessee couldn't be said to be following wrong accounting policy if it didn't recognize the interest accrued on loan given to certain companies which eventually became sick - Kerala State Industrial Products Trading Corporation Ltd. v. Asst. CIT [2012] 22 taxmann.com 78 (Cochin) | Recognition of revenue can be deferred if there is an uncertainty in its ultimate collection (TAS – Revenue Recognition) |
| VIII. Depreciation in case of finance lease | a) In case of finance lease, lessee is entitled to depreciation in respect of asset leased out - IndusInd Bank Ltd. v. Addl. CIT [2012] 19 taxmann.com 173 (Mumbai)(SB) | In the case of finance leases, depreciation will be allowed to the lessee even though the asset is owned by the lessor (ICDS – Leases). |
| b) Depreciation is not allowable to bank leasing out assets on finance lease - State Bank of India v. Dy. CIT [2014] 44 taxmann.com 99 (Mumbai - Trib.) | ||
| c) In case of operating lease, it is lessor who can claim depreciation whereas in case of finance lease, lessee is entitled to depreciation in respect of asset leased out - IndusInd Bank Ltd. v. Additional CIT [2012] 19 taxmann.com 173 (Mum.)(SB) |
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1 Word 'Income Computation and Disclosure Standards (ICDS)' has been substituted for 'accounting standards' by the Finance (No. 2) Act, 2014 w.e.f 1-4-2015
- CBDT asks officials to seek exchange of info. by 15-2-2015 in assessment cases getting time-barred on 31-03-2015
- Scrutiny assessment was invalid as case was picked up for scrutiny beyond period prescribed by CBDT's instruction
- AO can't make sec. 14A disallowance before discharging onus that exp. has been incurred on exempt income
- Income on letting out of commercial complex was income from house property if it wasn't a business activity
- I-T authority could issue notice to co-operative bank seeking info of depositors having deposit of 5 lakhs and above
Regards
Prarthana Jalan
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