Difference in ICAI and Income tax Standard : Contstruction Cost

The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. Comparative study of Accounting Standard issued by ICAI, and notified TAS has been given hereunder

Income Computation and Disclosure Standard III relating to construction contracts

Accounting Standards issued by ICAI	Income Computation and Disclosure Standards (ICDS)
CONSTRUCTION CONTRACTS
A. Retention money
AS-7 is silent about treatment of accrual of income in respect of the retention money.		Contract revenue in respect of retention money shall be recognized on basis of percentage of completion method. [Para 10 and 16]
B. Reversal of revenue
AS-7 provides for reversal of revenue on account of uncertainty arising on realisability of contract revenue which was already recognized as income.		Where contract revenue already recognized as income is subsequently written-off in books, it shall be recognized as an expense and not as an adjustment of contract revenue. [Para 11]
C. Borrowing costs relatable to construction costs
Costs that may be attributable to contract activity in general and can be allocated to specific contracts also includes borrowing costs as per Accounting Standard (AS) 16, Borrowing Costs		Allocated borrowing costs in accordance with ICDS shall form part of contract costs [Para 12(d)]
D. Pre-construction interest income, dividend income & capital gains
AS 16 provides that in determining the amount of borrowing costs eligible for capitalization during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred.		These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.[Para 12] Remarks : interest, dividends or capital gains shall be treated and taxed as income in accordance with the applicable provisions of the Act
E. Recognition of losses including probable/expected losses
To be recognized fully and not in proportion to the percentage of completion		Future or anticipated losses shall not be allowed unless such losses are actually incurred.  Further, the losses incurred shall be allowed only in proportion to the stage of completion. [Para No 18,19]
F. Early stages of a contract
Revenue shall not be recognized during early stages of contract. What is "early stages" is not defined in the AS – 7. However, Guidance note on real estate transactions requires that, apart from other mentioned conditions, at least 25% of the total construction and development cost should be incurred before revenue is recognized.		During early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognized only to the extent of cost incurred. The early stages of contract shall not extend beyond 25% of the stage of completion.[Para 20]
G. Recognition of incentive payments
Only when (i) contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded (ii) amount of incentive payment is reliably measurable		ICDS omits the requirement that contract is sufficiently advanced that it is probable that specified performance standards shall be met or exceeded. Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection  As per percentage of completion method. [para 9,16]
H. Recognition of claims
Only when (i) negotiations are sufficiently advanced that it is probable that customer will accept the claim and (ii) amount is reliably measurable		ICDS omits the requirement that negotiations are sufficiently advanced that it is probable that customer will accept the claim. Contract revenue shall be recognised when there is reasonable certainty of its ultimate collection  As per percentage of completion method. [para 9,16]
I. Transitional Provisions
		Revenue and costs associated with construction contract, which commenced on or before 31-03-2015 but not completed by the said date, shall be recognised as revenue and costs in accordance with this standard. The amount of contract revenue, contract costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before 01-04-2014 shall be taken into account for recognizing revenue and costs of the said contract for previous year commencing on 01-04-2015 and subsequent previous years. [para 22]

Income Computation and Disclosure Standards and Judgements

Income Computation and Disclosure Standards (ICDS) and judgement

The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. 

PARTICULARS	Judgment	ICDS
I. Marked to Market, Expected and probable losses	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.)	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)
II. Changes to method of valuation of inventory	a) 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.) b)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)	The method of valuation of inventory shall not be changed without a reasonable cause (ICDS – Valuation of inventory)
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) b)   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.) c)    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)	Inventory on the date of dissolution of partnership firm or AOP or BOI, notwithstanding whether business is discontinued or not, shall be valued at the net realizable value (ICDS – Valuation of inventory)
IV. Taxability of retention money	a)         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) 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 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) d)         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.)	Retention money shall accrue to the taxpayer for computing revenue based on percentage of completion method (POCM) (ICDS – Construction Contracts)
V Anticipated losses in construction contracts	a)   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.) b)   Deduction for foreseeable losses allowed by Delhi High Court in CIT v. Triveni Engg. & Industries Ltd. [2010] 8 taxmann.com 146	Future or anticipated losses shall not be allowed unless such losses are actually incurred (ICDS – Construction Contracts)
VI 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 (ICDS – Revenue Recognition)
VII.  Depreciation in case of finance lease	a) 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.)	In the case of finance leases, depreciation will be allowed to the lessee even though the asset is owned by the lessor (ICDS – Leases).

Difference in AS issued by ICAI and Income Tax: AS 1 - DISCLOSURE OF ACCOUNTING POLICIES

The CBDT has now notified the Income Disclosure and Tax Accounting Standards vide notification no. 32/2015, F. No. 134/48/2010-TPL, dated March 31, 2015. Comparative study of Accounting Standard issued by ICAI, and notified TAS has been given hereunder:

Accounting Standards issued by ICAI	Income Computation and Disclosure Standards
AS 1 - DISCLOSURE OF ACCOUNTING POLICIES
A. Deals with
"the disclosure of significant accounting policies followed in preparing and presenting financial statements" [Para 2 of (AS) 1]	" Income Computation and Disclosure Standards deals with significant accounting policies" [Para 1]
B. Definition of accounting policies
"The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements" [Para 11]	"The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the person [Para 3].
C. Selection of accounting policies
The primary consideration in the selection of account policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the Profit or loss for the period ended on that date [Para 17]	Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation [Para 4]
D. Change in accounting policy
Change in accounting policy should be made only if it is required by statute, accounting standard or if such change will	An accounting policy shall not be changed without any reasonable cause [Para 5] Any  change in an accounting  policy which  has a material effect  shall  be  disclosed.  The  amount  by  which  any  item  is  affected  by  such  change  shall  also  be  disclosed  to  the  extent  ascertainable. Where  such  amount is  not  ascertainable,  wholly  or in  part,  the  fact  shall  be  indicated.  If  a  change  is  made  in  the  accounting  policies  which  has  no  material  effect  for  the  current  previous  year  but which is  reasonably  expected  to  have  a material  effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such  change has material effect for the first time. [Para 7]
E. Substance over form
"The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form." [Para 17]	"The treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form" [Para 4].
F. Prudence
"In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." [Para 17]	Para 4 provides that "marked to market loss" or an "expected loss" shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standards
G. Materiality
"Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements." [Para 17]	Income Computation and Disclosure Standards is silent about the concept of materiality. Since the Act does not recognize the concept of materiality for the purpose of computation of taxable income, the same has not been incorporated in the Income Computation and Disclosure Standards
H. Disclosure of accounting policies
All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. [Paras 25 & 26]	All significant accounting policies adopted by a person shall be disclosed. Disclosure  of accounting policies or  of changes  therein cannot  remedy a wrong  or  inappropriate treatment of the item [Para 6] If  the  fundamental  accounting  assumptions  of  Going  Concern,  Consistency  and  Accrual  are  followed,  specific  disclosure  is  not  required.  If  a  fundamental  accounting  assumption is not followed, the fact shall be disclosed. [Para 9] Comment: It is not clear where these accounting policies shall be disclosed. Whether in income-tax return or audit report or elsewhere?
I. Transitional Provisions
-	All contract or transaction existing on 01-04-2015 or entered into on or after 01-04-2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognized in respect of the said contract or transaction for the previous year ending on or before 31-03-2015 [Para 10].

Difference in ICAI and Income Tax Standard on "VALUATION OF INVENTORY"

Income Computation and Disclosure Standard II relating to valuation of  inventories 

Accounting Standards issued by ICAI	Income Computation and Disclosure Standards
VALUATION OF INVENTORY
AS-2 has not prescribed any method of valuation of inventories in the case of a service provider.	The costs of services in the case of a service provider shall consist of labour and other costs  of  personnel  directly  engaged  in  providing  the  service  including  supervisory personnel and attributable overheads.  [para 6]
B. Techniques for the measurement of the cost of the inventories
AS-2 stipulates that techniques such as the standard cost method or the retail method may be used if the results approximate to the actual cost.	Standard cost method not allowed. FIFO , average Cost Method and Retail Method Allowed [ Para no 16,18]
C. Opening inventories
Though the AS – 2 does not mention specifically about the treatment of opening inventory, yet the following treatment is generally accepted: a) The value of the inventory of a business as on the beginning of a previous year shall be the same as the value of inventory at the end of the immediately preceding previous year. b) It shall be nil if business has commenced during previous year	a) The value of the inventory of a business as on the beginning of a previous year shall be the same as the value of inventory at the end of the immediately preceding previous year. b) If business commenced during the previous year, it shall be cost of inventory available on day of commencement of business
D. Change in method of valuation
AS-2 read with AS-5 provides that the method of valuation of inventories may be changed if it is considered that the change would result in a more appropriate presentation.	The method of valuation of inventory once adopted by a person in any previous year shall not be changed without a reasonable cause.
E. Dissolution of partnership firm
-	Inventory on the date of dissolution of partnership firm or AOP or BOI, notwithstanding whether business is discontinued or not,  shall be valued at the net realizable value.[Para 24]
F. Transitional Provisions
-	Interest and other borrowing costs, which don't meet criteria for its recognition as a component of cost, but included in the cost of opening inventory as on 01-04-2015, shall be taken into account for determining cost of such inventory for valuation as on close of previous year beginning on or after 01-04-2015 if such inventory continue to remain part of inventory as on close of the previous year beginning on or after 01-04-2015 [Para 25].

Black Money Bill of India

INTRODUCTION OF UNDISCLOSED FOREIGN INCOME AND ASSETS (IMPOSITION OF TAX) BILL, 2015

CBDT PRESS RELEASE, DATED 20-3-2015

The Finance Minister, in his budget speech, while acknowledging the limitations under the existing law, had conveyed the considered decision of the Government to enact a comprehensive new law on black money to specifically deal with black money stashed away abroad. He also promised to introduce the new Bill in the current Session of the Parliament.

2. In order to fulfil the commitment made by the Government to the people of India through the Parliament, the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 has been introduced in the Parliament on 20.03.2015. The Bill provides for separate taxation of any undisclosed income in relation to foreign income and assets. Such income will henceforth not be taxed under the Income-tax Act but under the stringent provisions of the proposed new legislation.

3. The salient features of the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015 are as under:-

Scope - The Act will apply to all persons resident in India. Provisions of the Act will apply to both undisclosed foreign income and assets (including financial interest in any entity).

Rate of tax - Undisclosed foreign income or assets shall be taxed at the flat rate of 30 percent. No exemption or deduction or set off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, shall be allowed.

Penalties - Violation of the provisions of the proposed new legislation will entail stringent penalties.

4. The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon, i.e., 90 percent of the undisclosed income or the value of the undisclosed asset. This is in addition to tax payable at 30%.

5. Failure to furnish return in respect of foreign income or assets shall attract a penalty of Rs.10 lakh. The same amount of penalty is prescribed for cases where although the assessee has filed a return of income, but he has not disclosed the foreign income and asset or has furnished inaccurate particulars of the same.

Prosecutions - The Bill proposes enhanced punishment for various types of violations.

6. The punishment for willful attempt to evade tax in relation to a foreign income or an asset located outside India will be rigorous imprisonment from three years to ten years. In addition, it will also entail a fine.

7. Failure to furnish a return in respect of foreign assets and bank accounts or income will be punishable with rigorous imprisonment for a term of six months to seven years. The same term of punishment is prescribed for cases where although the assessee has filed a return of income, but has not disclosed the foreign asset or has furnished inaccurate particulars of the same.

The above provisions will also apply to beneficial owners or beneficiaries of such illegal foreign assets.

8. Abetment or inducement of another person to make a false return or a false account or statement or declaration under the Act will be punishable with rigorous imprisonment from six months to seven years. This provision will also apply to banks and financial institutions aiding in concealment of foreign income or assets of resident Indians or falsification of documents.

Safeguards - The principles of natural justice and due process of law have been embedded in the Act by laying down the requirement of mandatory issue of notices to the person against whom proceedings are being initiated, grant of opportunity of being heard, necessity of taking the evidence produced by him into account, recording of reasons, passing of orders in writing, limitation of time for various actions of the tax authority, etc. Further, the right of appeal has been protected by providing for appeals to the Income-tax Appellate Tribunal, and to the jurisdictional High Court and the Supreme Court on substantial questions of law.

9. To protect persons holding foreign accounts with minor balances which may not have been reported out of oversight or ignorance, it has been provided that failure to report bank accounts with a maximum balance of upto Rs.5 lakh at any time during the year will not entail penalty or prosecution.

10. Other safeguards and internal control mechanisms will be prescribed in the Rules.

One time compliance opportunity - The Bill also provides a one time compliance opportunity for a limited period to persons who have any undisclosed foreign assets which have hitherto not been disclosed for the purposes of Income-tax. Such persons may file a declaration before the specified tax authority within a specified period, followed by payment of tax at the rate of 30 percent and an equal amount by way of penalty. Such persons will not be prosecuted under the stringent provisions of the new Act. It is to be noted that this is not an amnesty scheme as no immunity from penalty is being offered. It is merely an opportunity for persons to come clean and become compliant before the stringent provisions of the new Act come into force.

Amendment of PMLA - The Bill also proposes to amend Prevention of Money Laundering Act (PMLA), 2002 to include offence of tax evasion under the proposed legislation as a scheduled offence under PMLA.

11. Thus, in keeping with the commitment of the government for focussed action on black money front, an unprecedented and multi-pronged attack has been launched to root out the menace of black money. The Government is confident that this new law will act as a strong deterrent and curb the menace of black money stashed abroad by Indians.