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Amendments to make ICDS provisions in consonance with settled tax provisions needed

January 24, 2018 2434 Views
Akhil Kumar Gupta
Chartered Accountant

Introduction

1. Financial year 2016-17 has been a year of significant changes in the tax environment, both for the Governmental authorities/regulators as well as concerned stakeholders. We are going through volatile economic situation. Thanks to global trends ranging from harmonizing tax practices, expected US policy shift to our very own initiative of demonetization, introduction of GST, introduction of Income Computation and Disclosure Standards (ICDS), adoption of Ind-AS, etc.

It will not be surprising to see a well packaged budget listing out priorities appealing to a taxpayer including simplification of taxes, getting away with redundant provisions and, of course, correction of anomalies where they exist for better implementation of existing provisions and to cover the true intent of law.

Through this article, we shall discuss the need for introduction of changes in the Income Tax laws (ITL) along with a need to harmonize then with ICDS and difficulties/challenges associated. The Central Board of Direct Taxes (CBDT) notified 10 ICDS under Section 145(2) of the ITL, covering diverse items like accounting policies, inventories, revenue recognition, tangible fixed assets, etc., on 31 March 2015 which were then amended in September 2016 and were applicable from FY 2016-17 and onwards.

The objectives of introduction of ICDS

2. The objectives behind introduction of ICDS were to bring consistency in computation and reporting of taxable income, reduce litigation and minimize the alternatives provided by the existing Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). Ironically, numerous issues were faced by the taxpayers in applying ICDS, as some of the principles provided in ICDS were in conflict with principles laid down by settled judicial precedents.

Landmark-Ruling by Delhi High Court on 8-11-2017

3. Having regard to concerns raised by stakeholders in the implementation of ICDS, the Central Government (CG)came out with FAQs in the form of circular in March 2017. However, some of the issues remained unanswered/unclear which led to confusion and debates within the taxpayer's community.

In July 2017, The Chamber of Tax Consultants, a voluntary non-profit organization with tax and legal professionals as its members, filed a writ petition before the Delhi High Court challenging the constitutional validity of ICDS, by;1) treating it to be excessive delegation of legislative powers to the CG, and 2) treating them to be in conflict with binding judicial precedents rendered prior to ICDS, thus liable to be struck down.

The Delhi High Court on 8 November 2017, pronounced a landmark ruling upholding the constitutional validity of ICDS and also ruled that the CG, being a delegate of the Legislature, cannot override any statutory provisions or any binding judicial decision. The Court held that the Legislature alone has the power to amend the provisions of the ITL to overcome defects/loopholes in the existing law as pointed out by the judicial precedents. The Court further held that if section 145(2) is not read in such restrictive manner, it would be ultra vires the tax laws, as also the Constitution of India.

Thus, the Delhi High Court ruling is a landmark ruling which challenges the constitutional validity of ICDS and addresses several controversies which had arisen on interpretation thereof. It provides clarity on inter-play between ICDS and binding judicial precedents and is a welcome relief to taxpayers by striking down several contentious provisions of the ICDS, which had raised apprehensions of taxation of unrealized/notional incomes.

The application of the principle laid down by the High Court on the overriding impact of binding judicial precedents over ICDS may throw up some interesting issues. For example, while there may be no difficulty in case of the Supreme Court ruling which is binding on all lower Courts in India, there could be the difficulties in the case of conflicting rulings of the different High Courts or where an issue is covered by a decision of the Income Tax Appellate Tribunal (which is lower in status than the High Court).

Concluding Remarks

4. Considering the ruling pronounced by the Delhi High Court wherein ICDS deviates from settled principles of computing the taxable income and the constitutional validity of ICDS is in question, it seems that ICDS generates a significant element of complexity and more importantly, are inconsistent with the concept of real income. Accordingly, the Government may consider to drop them altogether or relevant amendments should be introduced in the provisions of the Act to make it in line with settled tax positions and practices. Further, as various changes have been introduced in accounting practices (for e.g., introduction of Ind-AS), it may become difficult and confusing for stakeholders to follow different approaches/practices for tax and accounts, and reconciling them with current ICDS. A need is felt in the upcoming budget to make necessary modifications providing clarity on various issues being faced by taxpayers on multiple fronts on applicability of ICDS.

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