The Delhi High Court has struck down six of the 10 provision under the Income Computation and Disclosure Standards (ICDS) as they overrode past judicial precedents. It, however, upheld the overall premise of this accounting principle for computing taxable income. The introduction of ICDS had helped India improve nearly 50 places on ‘ease of paying taxes’ parameter in the World Bank’s ‘ease of doing business’ ranking released earlier this month. The Central Board of Direct Taxes (CBDT) introduced ICDS in 2016 as an alternate accounting method for the specific purpose of arriving at taxable income for those who are required to get their accounts audited as per the Income Tax Act, as distinct from the established practice of mercantile or cash accounting followed by corporates.
The CBDT had cited efforts by taxpayers to hide real taxable income under mercantile or cash accounting as the reason for introducing ICDS.
The overall impact of the 10 standards under ICDS was that it in most cases, the accrual of income is being accelerated while expenses are being delayed. “Most of the standards were issued to effectively overcome age-old accounting principles and norms that were being followed,” Abhishek Goenka, leader corporate and international tax, PwC India said. The Chamber of Tax Consultants, a body made of tax professional, had petitioned the Delhi HC challenging the constitutionality of ICDS. The court said ICDS amounted to enacting new accounting laws, which was the sole function of Parliament and couldn’t be exercised by the central government.
For instance, the court struck down the first ICDS provision related to ‘prudence’. According to this principle, a company may compute its profit based on the expectation that revenue from sales made earlier may not accrue to it. The petitioners contended that this concept had been completely done away with by the respondents, which was present in the earlier accounting standards. The court agreed with the argument and struck down the provision.
Similarly, the court annulled the second provision of ICDS related to valuation of inventories which eliminated the distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution.
The court held that it was contrary to the decision of the Supreme Court earlier. “It (ICDS-II) fails to acknowledge that the valuation of inventory at market value upon settlement of accounts of the outgoing partner is distinct from valuation of the inventory in the books of the business which is continuing, the court said of the provision and held it to be ultra vires the Act. The court also invalidated fourth ICDS provision saying: “ICDS-IV requires an assessee to recognise income from export incentive in the year of making the claim if there is ‘reasonable certainty’ of its ultimate collection. This is contrary to the decision of the Supreme Court in Excel Industries, and is, therefore, ultra vires the Act and struck down as such.”
“This ruling upholds the overall validity of ICDS. Yet, and significantly, it strikes down several key standards on the grounds that the standards are contrary to rulings of the Supreme Court and that executive action cannot overturn these rulings. It is only an amendment in law that can make these changes,” Goenka said.
The ruling came a day after the due date for corporate tax filings. For those covered by transfer pricing, the returns are due on November 30, and to that extent, it will also be important to analyse the impact on pending tax returns.