Why it’s time to re-look Income Computation and Disclosure Standards provisions

Published: January 27, 2018 12:37:53 AM

India witnessed some noteworthy changes in its tax system including, inter alia, GST, Income Computation and Disclosure Standards (ICDS or Standards), Ind-AS, etc.

ICDS, ICDS provision, Income Computation and Disclosure Standards provisions, Tax Reform, VAT, GSTIndia witnessed some noteworthy changes in its tax system including, inter alia, GST, Income Computation and Disclosure Standards (ICDS or Standards), Ind-AS, etc.

Naveen Wadhwa

In FY17, significant taxation reforms have been introduced globally. The US proposed revamping of its overall tax system, calling it ‘US Tax Reform’; the UAE implemented VAT with effect from January 1, 2018; and India witnessed some noteworthy changes in its tax system including, inter alia, GST, Income Computation and Disclosure Standards (ICDS or Standards), Ind-AS, etc. The CBDT notified 10 ICDS made applicable to every business entity (who are liable to tax audit) from AY18. The stated objectives behind issuing a new set of standards were bringing uniformity in accounting policies, computation of taxable income and reduce irregularities in tax-related provisions. The major premise on which ICDS are based is that income computed for purposes of tax need not be the income as reflected in books of account maintained by the taxpayer.

The adjustments introduced by ICDS have been the matter of dispute between taxpayers and revenue as some ICDS requirements were in direct conflict with the Income-tax Act and judicial precedents of courts, which are binding on taxpayers and Income Tax Department. Distressed with incompatible treatment under ICDS, the Chamber of Tax Consultants had filed a writ petition in the Delhi HC challenging constitutional validity of ICDS. It argued the notified ICDS are contrary to law, as their implementation would nullify judgments of the Supreme Court and High Courts. Some requirements of ICDS are contrary to the provisions of Income-tax Act. The Chamber contended that Parliament had delegated legislative powers to the Centre, which further sub-delegated powers to CBDT to notify ICDS. The introduction of ICDS is an instance of excessive delegation of legislative powers. The Delhi HC affirmed that ICDS provisions cannot overrule provisions of Income-tax Act, Rules and judicial precedents interpreting the provisions of the Income-tax Act. The interpretations laid down by various judicial precedents would prevail and will not be affected by ICDS. Therefore, the Delhi HC struck down several provisions of ICDS.

The High Court held that the power to enact law is to be exercised by Parliament and not by its administrative wings. In case the notified ICDS sought to alter the system of accounting or tax treatment to a particular transaction, it would require legislature to amend the Act to incorporate such a change. We’ve seen that to override the impact of court rulings, which go against the legislative intent, amendments are made in Income-tax Act. The most popular instance is the Supreme Court’s ruling in the case of Vodafone International. It held in favour of Vodafone on a capital gains matter, which was overruled by a series of amendments in the Income-tax Act through the Finance Act, 2012.

Though the decision of Delhi HC has provided some relief to taxpayers, it will not be an enduring benefit for taxpayers at large. Thus, it is apprehended that, in the upcoming Budget, the government may drop ICDS altogether and propose necessary amendments so that conflicting requirements of ICDS could be incorporated in the Act itself. The Delhi HC has suggested that only a competent legislature can make a validation in law to override judicial precedents and that too by removing the defect pointed out by such precedent. Such a power is not available to the executive. In other words, where there is a binding judicial precedent, by virtue of Articles 141 and 144 of the Constitution, it is not open to the executive to override it unless there is an amendment to the Act by way of a validation law. Though ICDS are in conflict with judicial precedents, yet if the treatment suggested by ICDS are incorporated in Income-tax Act, it would help the department in reducing repetitive litigations on various matters.

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