Budget Expectations 2018: Time to Relook at ICDS Provisions

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Last Updated on 1 November, 2022

Union Budget 2018-19 Expectations:

Significant taxation reforms have been introduced or implemented globally in the Financial Year 2017. The United States of America proposed revamping its overall tax system and called it as the ‘US Tax Reform’ and UAE or United Arab Emirates introduced and implemented VAT w.e.f. 01-01-2018. India also witnessed some noteworthy changes in its tax system through GST, Ind AS, Income Computation and Disclosure Standards (ICDS or Standards), etc.

The CBDT has notified 10 ICDS which were made applicable to every business entity (who are liable to tax audit) from the Assessment Year 2017-18. The stated objectives behind issuing new set of standards were bringing uniformity in accounting policies, computation of taxable income and to reduce irregularities in tax-related provisions.

Purpose behind the levy of ICDSs:

The major premise on which the ICDSs are based is that the income computed for the purpose of tax need not be the income as reflected in the books of accounts as maintained.

The adjustments introduced by the ICDS have been a matter of dispute between the taxpayers and revenue department as some of the requirements of ICDS were in direct conflict with Income-tax Act and judicial precedents of the Courts as both are binding on taxpayers as well as Income-tax Department.

Challenges posed by ICDSs:

The Chamber of Tax Consultants had filed a writ petition in the Delhi High Court, distressed with the incompatible treatment under ICDS, challenging the constitutional validity of ICDS. They argued that the notified ICDSs are contrary to the law, as their implementation would effectively nullify the judgments passed by the Supreme Court and various High Courts. It has been noted that some of the requirements of ICDS are even contrary to the provisions of the Income Tax Act. Chamber contended that the Parliament has delegated legislative powers to the Central Government, who further sub-delegated the powers to the CBDT to notify the ICDS. Hence, the introduction of ICDS is an instance of excessive delegation of legislative powers.

Relief against ICDSs:

Delhi High Court affirmed that the ICDS provisions cannot overrule the provisions of the Income-tax Act & Rules, and the judicial precedents interpreting the provisions of the Income Tax Act. The interpretations laid down by various judicial precedents would prevail over the provisions of ICDS.

Delhi High Court struck down several provisions of ICDS. It held that the power to enact a law is to be exercised by the Parliament only, and not by any of its administrative wing. If any notified ICDS sought to alter the system of accounting or tax treatment to a particular transaction, it would require the legislature to step in in order to amend the Act to incorporate such proposed change.

It has been seen in the past that to override the impact of court rulings, which go against the legislative intent, required amendments are made in the Income-tax Act. In the recent times, the most popular instance is the Supreme Court’s ruling in the case of Vodafone International [2012] 17 taxmann.com 202. The Apex Court in its order dated 20-01-2012 held in favour of Vodafone on a capital gain matter, was overruled by a series of amendments in the corresponding provisions of Income-tax Act through the Finance Act, 2012.

Though the decision of the Delhi High Court has provided some relief to the taxpayers, however, it won’t be an enduring benefit to the taxpayers at large. Thus, it is being thought that in the upcoming Budget, Government may drop the ICDS altogether and may propose necessary amendments so that the purpose of ICDS can be incorporated in the Act itself.

Delhi High Court also suggested that only a competent legislative body can make a validation in law to override the judicial precedents. That can be done by actually removing the defect pointed out by such precedent. It has been noted that such powers are not available with the executive. That is to say that where there is a binding judicial precedent by the virtue of articles 141 and 144 of the Constitution, it is not open to the executives to override it unless there is an amendment to the Act itself by the way of validation of law.

Conclusion:

Although ICDSs are in conflict with some of the judicial precedents, however if the treatments suggested by the ICDSs are incorporated in the IT Act, it would certainly help the Department in reducing the repetitive litigations on various matters.

Also Read:

Interim Budget 2019 Expectations

Budget 2019-20 Highlights

Interim Budget 2019: How to pay zero tax for salary upto 10 lakhs

Budget 2019-20 – The Complete Tax Table for Proposed for Resident individuals

Union Budget Facts

Budget Expectations 2018 India

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