[FAQs] ICDS & Maintenance of Books of Account under Tax Audit | A.Y. 2022-23

The preamble of the ICDS provides that the ICDSs are applicable for computation of income chargeable under the head ‘ profit and gains of business or profession’ or ‘Income from other sources’ and not for maintenance of books of accounts.

Further, the CBDT¹ has clarified that the books of account are to be maintained in accordance with the accounting policies applicable to the assessee. Thus, it can be concluded that the reporting in Form 3CD shall be in accordance with the books of account maintained by the assessee. Any adjustment made to profit or loss under the ICDS shall be reported in Clause 13 of Form 3CD.

In exercise of the powers conferred by Section 145(2) of the Income-tax Act, 1961, the Central Government has notified² the Income Computation and Disclosure Standards (also referred to as ICDS). ICDSs have been issued to bring uniformity in the accounting policies governing the computation of income for taxability under the Income-tax Act and to reduce litigations.

Every assessee earning income taxable under the head ‘ profit and gains from business or profession’ or ‘Income from other sources’ or both is required to compute taxable income in accordance with notified ICDS. However, the ICDS shall be followed only if the assessee maintains accounts per the ‘Mercantile system’ of accounting.

There is no threshold limit on the amount of turnover or taxable income for the applicability of ICDS. Thus, every assessee earning business income or residuary income shall be required to follow ICDS for the computation of income. The applicability of ICDS shall be subject to certain exceptions.

The CBDT has clarified that the general provisions of ICDS shall apply to all persons, including banks, NBFCs, insurance companies, etc., unless there are sector-specific provisions contained in the ICDS or the Act. For example, ICDS-VIII (Securities) contains specific provisions for banks and certain financial institutions, and Schedule I of the Act contains specific provisions for the insurance business.

Exception 1: Exemption to Individual or HUF not liable for tax audit

An Individual or HUF, who is not required to get his books of account audited for the previous year under section 44AB, shall not be required to comply with the requirements of ICDS.

A person opting for a presumptive taxation scheme is not required to maintain the books of account and get them audited. In this regard, the CBDT has clarified³ that the relevant provisions of ICDS shall apply to the persons (other than Individuals or HUF) opting for a presumptive taxation scheme. For instance, for computing the presumptive income of a partnership firm under section 44AD of the Act, the provisions of ICDS on construction contracts or revenue recognition shall apply for determining the receipts or turnover, as the case may be.

Exception 2: Exemption for MAT Computation

The CBDT has clarified that the provisions of ICDS are applicable for the computation of income under the regular provisions of the Act. As MAT is computed on ‘book profit’ that is net profit as shown in the Profit and Loss Account prepared under the Companies Act subject to certain specified adjustments, the provisions of ICDS shall not apply to the computation of MAT. However, where the assessee is liable to pay AMT under the provisions of Section 115JC, the provisions of ICDS shall be applicable for the computation of AMT as AMT is computed on adjusted total income, which is derived by making specified adjustments to total income computed as per the regular provisions of the Act.

Section 44AA provides for maintenance of books of account by an assessee under the Income-tax Act. The table below demonstrates the requirement for maintaining books of accounts by different taxpayers:

* Meaning of Specified Profession:

• • Legal
  • Medical
  • Engineering
  • Architectural
  • Technical Consultancy
  • Interior decoration
  • Film Artist⁴
  • Authorised Representative⁵
  • Accountancy Profession
  • Company secretary⁶
  • Information Technology⁷

** Where business or profession has been set up during the previous year, the threshold limit of income or gross receipts of the current year shall be checked. In other words, in the case of a new business or profession, if income or turnover or receipt of the current year, as the case may be, are not likely to exceed the threshold limit, the assessee shall not be required to maintain the books of account.

The following documents should be maintained by the taxpayers to comply with the requirement of maintenance of books of accounts:

Clause 11 of Form 3CD requires a list of books maintained and the address at which such books of accounts are kept. If such books of accounts are kept at multiple locations, then the auditor is required to mention the address of all the locations along with the details of books of accounts maintained at each location. In the case of a company assessee, the auditor should verify whether Form AOC-5 has been filed with the Registrar of Companies under the Companies Act to maintain books of accounts at a place other than the registered office.

The auditor’s duties regarding ‘books of account maintained’ is not limited to merely giving a list of books of account against clause 11(b). He is required to examine the books of account maintained. Based on such examination, he is required to state in Form No. 3CB whether books of account kept are ‘proper books of account’.