Comparison of ICDS with AS ICDS V VS AS 10

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1 Comparison of ICDS with AS ICDS V VS AS 10 Comparative Analysis of Income Computation & Disclosure Standard V relating to Tangible fixed assets with Accounting Standard 1 ICDS V Accounting Standards 10 Tangible Fixed Assets Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income-tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. Scope 1. This Income Computation and Disclosure Standard deals with the treatment of tangible fixed assets. Definitions 2. (1)The following terms are used in this Income Computation and Disclosure Standard with the meanings specified: (a) Tangible fixed asset is an asset being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. 10. Accounting for Fixed Assets Scope of Accounting Standards (given in Preface to Statements of Accounting Standards) If a particular AS is found to be not in conformity with Law, the provisions of the said Law will Prevail. 1. Financial Statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as Land, Buildings, Plant and Machinery, Vehicles, Furniture and Fittings, Goodwill, Patents, Trade Marks and Designs. Definitions 6. The following terms are used in this Standard with the meanings specified: 6.1 Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. 1

2 G. Sekar, B.Com,FCA ICDS V Accounting Standards 10 (b) Fair value of an asset is the amount for which that asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. 2. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act. Identification of Tangible Fixed Assets 3. The definition in paragraph 2 (1) (a) provides criteria for determining whether an item is to be classified as a tangible fixed asset. Concept of Materiality to treat an item as expense is recognised by AS, is not allowed under ICDS. 4. Stand-by equipment and servicing equipment are to be capitalised. Machinery spares shall be charged to the revenue as and when consumed. When such spares can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, they shall be capitalised. 6.2 Fair market value is the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm s length who are fully informed and are not under any compulsion to transact. No Such Provision 8. Identification of Fixed Assets 8.1 The definition in paragraph 6.1 gives criteria for determining whether items are to be classified as fixed assets. Judgement is required in applying the criteria to specific circumstances or specific types of enterprises. It may be appropriate to aggregate individually insignificant items, and to apply the criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have been included as fixed asset, because the amount of the expenditure is not material. 8.2 Stand-by equipment and servicing equipment are normally capitalised. Machinery spares are usually charged to the profit and loss statement as and when consumed. However, if such spares can be used only in connection with an item of fixed asset and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal item. 2

3 ICDS vs Accounting Standards ICDS V Accounting Standards 10 Components of Actual Cost 5. The actual cost of an acquired tangible fixed asset shall comprise its purchase price, import duties and other taxes (excluding those subsequently recoverable), and any directly attributable expenditure on making the asset ready for its intended use. Any trade discounts and rebates shall be deducted in arriving at the actual cost. 9. Components of Cost 9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are: (i) Site preparation; (ii) Initial delivery and handling costs; (iii) Installation cost, such as special foundations for plant; & (iv) Professional fees, for example fees of architects and engineers. 6. The cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of (i) price adjustment, changes in duties or similar factors; or The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors. (ii) exchange fluctuation as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates. ICDS specifically excludes Other Taxes which are subsequently recoverable from the cost of an acquired tangible fixed asset. 3

4 G. Sekar, B.Com,FCA ICDS V Accounting Standards Administration and other general overhead expenses are to be excluded from the cost of tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the tangible fixed asset. 8. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, shall be treated as revenue expenditure. Self- constructed Tangible Fixed Assets 9. In arriving at the actual cost of selfconstructed tangible fixed assets, the same principles shall apply as those described in paragraphs 5 to 8. Cost of construction that relate directly to the specific tangible fixed asset and costs that are attributable to the construction activity in general and can be allocated to the specific tangible fixed asset shall be included in actual cost. Any internal profits shall be eliminated in arriving at such costs. 9.2 Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset. 9.3 The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalised and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period. 10. Self-constructed Fixed Assets 10.1 In arriving at the gross book value of selfconstructed fixed assets, the same principles apply as those described in paragraphs 9.1 to 9.4. Included in the gross book value are costs of construction that relate directly to the specific asset and costs that are attributable to the construction activity in general and can be allocated to the specific asset. Any internal profits are eliminated in arriving at such costs. 4

5 ICDS vs Accounting Standards ICDS V Accounting Standards 10 Non- monetary Consideration 10. When a tangible fixed asset is acquired in exchange for another asset, the value of the tangible fixed asset so acquired shall be its actual cost. 11. Non-monetary Consideration 11.1 When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. It may be appropriate to consider also the fair market value of the asset acquired if this is more clearly evident. In case of asset acquired on account of exchange of another asset, the actual cost is recognised as per ICDS. Whereas AS allows to determine the cost base on Fair Market Value of the Asset given up or acquired whichever is more appropriate. Alternatively, AS also suggest to record under, Net Book Value of Asset Given up. 11. When a tangible fixed asset is acquired in exchange for shares or other securities, the value of the tangible fixed asset so acquired shall be its actual cost. An alternative accounting treatment that is sometimes used for an exchange of assets, particularly when the assets exchanged are similar, is to record the asset acquired at the net book value of the asset given up; in each case an adjustment is made for any balancing receipt or payment of cash or other consideration When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident. In case of asset acquired in exchange for shares or other Securities, the actual cost is recognised as per ICDS. Whereas AS allows to determine the cost base on Fair Market Value of the Securities given up or asset acquired which ever is more appropriate. 5

6 G. Sekar, B.Com,FCA ICDS V Accounting Standards 10 Improvements and Repairs 12. An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost. Treatment for an Expenditure, which does not meet the above condition (expenditure that does not increases the future benefits) is not specified in ICDS. 12. Improvements and Repairs 12.1 Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity. But as per Accounting Standard, such expenditure shall be treated as Expenditure and recognised in Profit and Loss Statement. Even then, for Income Tax purposes, allowability of such expenditure should be explored as per the provisions of Income Tax Act, The cost of an addition or extension to an existing tangible fixed asset which is of a capital nature and which becomes an integral part of the existing tangible fixed asset is to be added to its actual cost. Any addition or extension, which has a separate identity and is capable of being used after the existing tangible fixed asset is disposed of, shall be treated as separate asset The cost of an addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is usually added to its gross book value. Any addition or extension, which has a separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately. Valuation of Tangible Fixed Assets in 15. Valuation of Fixed Assets in Special Cases Special Cases 15.2 Where an enterprise owns fixed assets 14. Where a person owns tangible fixed assets jointly with others (otherwise than as a partner in jointly with others, the proportion in the a firm), the extent of its share in such assets, and 6

7 ICDS vs Accounting Standards ICDS V Accounting Standards 10 actual cost, accumulated depreciation and written down value is grouped together with similar fully owned tangible fixed assets. Details of such jointly owned tangible fixed assets shall be indicated separately in the tangible fixed assets register. the proportion in the original cost, accumulated depreciation and written down value are stated in the balance sheet. Alternatively, the pro rata cost of such jointly owned assets is grouped together with similar fully owned assets. Details of such jointly owned assets are indicated separately in the fixed assets register. In case of Jointly owned assets, ICDS specifies to group the same together with similar full owned Tangible Fixed Assets. Alternatively, AS allows such assets to be stated in the Balance Sheet. Alternative treatment available in AS is not available in ICDS. Also, ICDS stipulates the details of Jointly owned tangible fixed Assets shall be indicated separately in the Tangible Fixed Assets Register. When the application of ICDS is merely for computation of Income and not for maintaining books of accounts, a requirement from ICDS is self contradictory to its provisions. 15. Where several assets are purchased for a consolidated price, the consideration shall be apportioned to the various assets on a fair basis Where several assets are purchased for a consolidated price, the consideration is apportioned to the various assets on a fair basis as determined by competent valuers. 7

8 G. Sekar, B.Com,FCA ICDS V Accounting Standards 10 As per ICDS, consideration shall be apportioned on a fair basis. But AS stipulates such fair basis shall be determined by Competent Valuers. Transitional provisions 16. The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st day of March, 2015 but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising actual cost of the said assets for the previous year commencing on the 1st day of April, 2015 and subsequent previous years. No Such Provision Depreciation 17. Depreciation on a tangible fixed asset shall be computed in accordance with the provisions of the Act. Depreciation on Fixed Assets shall be computed as per provisions of AS 6. As Section 32 of the Income Tax Act, specifically covers Depreciation and there are concept of Additional Depreciation, provisions of AS 6 shall not be applicable. 8

9 ICDS vs Accounting Standards ICDS V Accounting Standards 10 Transfers 18. Income arising on transfer of a tangible fixed asset shall be computed in accordance with the provisions of the Act. While treatment for Fixed Assets retired from Active use and are held for disposal is specifically provided in Accounting Standards, ICDS does not stipulate any treatment for such situation. Also ICDS covers the Income on account of Transfer which shall be treated in accordance with the Provisions of Income Tax Act. Retirements &Disposals 14.2 Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realisable value and are shown separately in the financial statements. Any expected loss is recognised immediately in the profit and loss statement In Historical Cost Financial Statements, gains or losses arising on disposal are generally recognized in the Profit & Loss Statement. When gains or losses arising on disposal are recognised in P&L Account as per Accounting Standards, the same would be chargeable to Capital Gains as per Income Tax Act. Disclosures 19. Following disclosure shall be made in respect of tangible fixed assets: (a) Description of asset/block of assets. (b) Rate of Depreciation. (c) Actual cost or written down value, as the case may be. (d) Additions/deductions during the year with dates; in the case of any addition of an asset, date put to use; including adjustments on account of Further disclosures that are sometimes made in financial statements include: (i) Gross and Net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements; (ii) expenditure incurred on account of fixed assets in the course of construction or acquisition; and 9

10 G. Sekar, B.Com,FCA ICDS V Accounting Standards 10 (i) Central Value Added Tax credit claimed and allowed under the Central Excise Rules, 1944, in respect of assets acquired on or after 1st March, 1994, (ii) Change in rate of exchange of currency, & (iii) Subsidy or grant or reimbursement, by whatever name called. (e) Depreciation Allowable. (f) Written down value at the end of year. (iii) revalued amounts substituted for historical costs of fixed assets, the method adopted to compute the revalued amounts, the nature of any indices used, the year of any appraisal made, and whether an external valuer was involved, in case where fixed assets are stated at revalued amounts. Revaluation of Assets are not covered under ICDS. More Disclosure requirement under ICDS including Change in rate of Exchange of currency and Subsidy or grant received on account of Tangible Fixed Asset. 10

11 Issues unanswered in ICDS ICDS vs Accounting Standards 1. Transition Provision ICDS are applicable from the Assessment Year onwards. In order to determine the actual cost of tangible fixed assets, acquisition or construction of which commenced on or before the 31st day of March, 2015 but not completed by the said date, shall be recognised in accordance with the provisions of this standard. The amount of actual cost, if any, recognised for the said assets for any previous year commencing on or before the 1st day of April, 2015 (but in ICDS it is mentioned as 1 st day of April, 2014) shall be taken into account for recognising actual cost of the said assets for the previous year commencing on the 1st day of April, 2015 and subsequent previous years. It is not clear whether the intention of ICDS is to capture those costs incurred before or it is typographical error in the Standard. 11

12 G. Sekar, B.Com,FCA Comparison of ICDS with AS ICDS VII VS AS 12 Comparative Analysis of Income Computation & Disclosure Standard VII relating to Government Grants with Accounting Standard 12 ICDS VII Accounting Standard 12 Government Grants Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of business or profession or Income from other sources and not for the purpose of maintenance of books of account. In case of conflict between the provisions of the Income Tax Act, 1961 ( the Act ) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. Scope 1. This Income Computation and Disclosure Standard deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. 2. This Income Computation and Disclosure Standard does not deal with: (a) Government assistance other than in the form of Government grants; (b) Government participation in the ownership of the enterprise. 12. Accounting for Government Grants Scope of Accounting Standards (given in Preface to Statements of Accounting Standards) If a particular AS is found to be not in conformity with Law, the provisions of the said Law will Prevail. Introduction 1. This Standard deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc. 2. This Standard does not deal with: (i) Government assistance other than in the form of government grants; (ii) Government participation in the ownership of the enterprise. 12

13 ICDS vs Accounting Standards ICDS VII Accounting Standard 12 Definitions Definitions 3. (1)The following terms are used in the Income Computation and Disclosure Standard with the meanings specified: 3. The following terms are used in this Standard with the meanings specified: (a) Government refers to the Central Government, State Governments, agencies and similar bodies, whether local, national or international. 3.1 Government refers to government, government agencies and similar bodies whether local, national or international. (b) Government grants are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person. 3. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. 3.2 Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise No such Provision Recognition of Government grants 4. (1) Government grants should not be recognized until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. 4. (2) Recognition of Government grant shall not be postponed beyond the date of actual receipt. 13.Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. No such Provision 13

14 G. Sekar, B.Com,FCA ICDS VII Accounting Standard 12 Treatment of Government grants 5. Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to. As per ICDS, Government Grants relating to depreciable fixed assets should be deducted from the actual cost of the asset. Alternatively, Accounting Standards allows such grants can be recognized in the P&L as deferred income on a systematic and rational basis over the useful life of the asset. 6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income. Accounting Standards prescribes, creation of Capital Reserve for grants relating to non depreciable asset, to which no obligations are attached. Creation of Capital Reserve is not permitted under ICDS. 14.Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a nondepreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements. Where the government grants are of the nature of promoters contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central 14

15 ICDS vs Accounting Standards ICDS VII Accounting Standard 12 investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. 7. Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to. No such Provision As per ICDS, those grants which cannot be directly relatable to the asset, should be deducted from the Actual cost of all the assets on a pro rata basis to which grant relates to. Alternatively, the Value of grant can be reduced from the WDV of the block of assets to which grant belongs to. 8. The Government grant that is receivable as 18.Government grants that are receivable as compensation for expenses or losses incurred compensation for expenses or losses incurred in a in a previous financial year or for the previous accounting period or for the purpose of purpose of giving immediate financial support giving immediate financial support to the to the person with no further related costs, enterprise with no further related costs, should be shall be recognized as income of the period recognised and disclosed in the profit and loss in which it is receivable. statement of the period in which they are receivable, as an extraordinary item if 15

16 G. Sekar, B.Com,FCA ICDS VII Accounting Standard 12 As per Accounting Standards, these grant shall be treated as Extraordinary Item as per AS 5, and to be disclosed in the financial Statements. 9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate. 10. The Government grants in the form of nonmonetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. ICDS does not prescribe any treatment for non monetary asset received free of Cost. Refund of Government Grants 11. The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and 9 shall be applied first against any unamortized deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement. appropriate (see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies). No such Provision 17.Government grants in the form of nonmonetary assets, given at a concessional rate, should be accounted for on the basis of their acquisition cost. In case a non-monetary asset is given free of cost, it should be recorded at a nominal value. 21.The amount refundable in respect of a grant related to revenue should be applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount should be charged to profit and loss statement. 12. The amount refundable in respect of a The amount refundable in respect of a grant Government grant related to a fixed asset or related to a specific fixed asset should be assets shall be recorded by increasing the recorded by increasing the book value of the actual cost or written down value of block of asset or by reducing the capital reserve or 16

17 ICDS vs Accounting Standards ICDS VII Accounting Standard 12 assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate. Observation: Treatment for refund of Grant relating to a fixed asset: ICDS Increase the actual cost or WDV; Provide Depreciation prospectively at the Prescribed rate as per Sec.32 the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset Where a grant which is in the nature of promoters contribution becomes refundable, in part or in full, to the government on nonfulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve. AS (a) Increase the actual cost or (b) Reduce refund amount from Capital Reserve or (c) Reduce the refund amount from Deferred Income Balance Provide Depreciation on revised cost over the residual useful life of the asset. Transitional Provisions 13. All the Government grants which meet the recognition criteria of para 4 on or after 1st day of April, 2015 shall be recognised for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous year ending on or before 31st day of March, No such Provision 17

18 G. Sekar, B.Com,FCA ICDS VII Accounting Standard 12 Disclosures 14. Following disclosure shall be made in respect of Government grants: (a) Nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year. Disclosures 23. The Following should be disclosed: (i) the accounting Policy adopted for Government Grants, including the methods of presentation in the Financial Statements; (ii) the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost. (b) Nature and extent of Government grants recognised during the previous year as income. (c) Nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets and reasons thereof. (d) Nature and extent of Government grants not recognised during the previous year as income and reasons thereof. Additional Disclosure requirement as per ICDS which includes, Nature and extent of Government Grants not recognized during the previous year 18

19 Issues unanswered in ICDS ICDS vs Accounting Standards 2. Treatment for Promoters Contributions As per Para 11 of AS-12, grants in the nature of promoter s contribution and grants related to non-depreciable assets, which do not have any conditions attached to them, to be recognized directly in capital reserve which is a part of the shareholders funds. ICDS does not contain any provision relating to creating Reserves. It also does not provide for the treatment of promoter s Contribution as Capital Receipt. In the absence of clarity, and due to conflict between the provisions of ICDS and AS, tax payers will be affected in deciding the right principle to be adopted. 19

20 G. Sekar, B.Com,FCA Related Provisions of Income Tax Act, 1961 GOVERNMENT GRANTS Treatment of Government Grants / Subsidies in Income Tax Section Income Exempt and Conditions / Particulars Subsidy from Tea Board: 1. Assessee should carry on the business of growing and manufacturing tea in India. 10(30) 2. Subsidy should be received from Tea Board under notified schemes for replantation or replacement of tea bushes or rejuvenation on consolidation of areas used for tea cultivation. 3. Certificate from Tea Board should be given as proof. Subsidy from certain Crop Boards: 10(31) 1. Specified Crops are Rubber, Coffee, Cardamom or such other notified commodity. 2. Conditions for Section 10(30) above are applicable with appropriate changes for crop. Grant / Subsidy to Power Sector Companies: 1. Eligible Assessee: Companies engaged in the business of generation or transmission or distribution of power. 10(40) 2. Applicability: Income by way of Grant or otherwise received from an Indian Company, being the Holding Company of the Recipient Company. 3. Condition: The receipt should be for settlement of dues in connection with reconstruction or revival of an existing business of power generation. 4. Transfer of Business: The exemption will be allowed even if the reconstruction or revival of the existing power generation business is done by way of transfer of such business to an Indian Company notified u/s 80 IA(4)(v)(a). Subsidy included as Business Income Power Subsidy: Power Subsidy received by an Assessee is Business Income, since it goes to reduce the electricity bills. [Rajaram Maize Products 251 ITR 427 (SC)] 20

21 ICDS vs Accounting Standards Subsidy included as Business Income Revenue Subsidy: Subsidy given by the Government after the commencement of business and to assist the Assessee in carrying on such business like Refund of Sales Tax, Subsidy on Electricity Charges / Water Charges shall be taxable Profits and Gains from Business or Profession. [Sawhney Steel & Press Works Ltd & Others 228 ITR 253 (SC)] Revenue vs Capital Subsidy: It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or mechanism through which the subsidy is given is irrelevant. If the object of the Subsidy Scheme was to enable the assessee to run the business more profitably, then the receipt is on Revenue Account. If the object of the assistance was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of subsidy was on Capital Account. [Ponni Sugars & Chemicals Ltd 2008 TIOL 174 (SC)] [Kisan Sahkari Chini Mills Ltd 328 ITR 27 (All.) Capital Receipts The Hotel Industry was established based on the Subsidy announced by the State Government to encourage tourism. The Assessee received the subsidy after completion of Hotel Projects and commencement of business. Subsidy received is a Capital Receipt and not chargeable to tax. [CIT vs Udupi Builders Pvt. Ltd 139 ITR 440 (Kar)] Refund of Excise Duty and Grants of Interest Subsidy under the incentive scheme formulated by the Central Government for public interest, namely, to accelerate industrial development, generate employment and create opportunity for self employment in the state of Jammu and Kashmir be treated as a Capital Receipt. [Shree Balaji Alloys Vs CIT (2011) 333 ITR 335 (J&K)] Capital Subsidy: Subsidy granted for providing employment to the weaker section of community is a capital receipt. It is not reimbursement of salary or made for the normal working of the mill or for the benefit of the Assessee, but was paid with a social objective in mind. The amount received by way of such subsidy is capital in nature. [Kanyakumari District Co operative Spinning Mills Ltd (2003) 264 ITR 684 (Mad)] Where originally, while passing orders u/s 264, Commissioner took view that Power Subsidy was a capital receipt not taxable under the Act, it was not open to Commissioner to rectify his own order u/s 154 on the basis of a judgment of Apex Court subsequently passed holding that Subsidy in question was a revenue receipt. [Mepco India Ltd. vs. CIT (SC) 21

22 G. Sekar, B.Com,FCA Determination of Actual Cost in different circumstances [Sec.43(1) Expln] Expln. Mode of acquisition Actual Cost Purchase Price Add: (a) Interest on loan for the period up 8, 9 & 10 Acquisition of Asset: Where Assessee himself acquired the asset to the date of Usage. (b) Freight and Insurance. (c) Loading, Unloading Charges. (d) Installation and Erection Charges. Less: (a) Any amount met by any Authority or any other person by way of Subsidy [See Note] (b) CENVAT Credit. Note: Subsidy/Grant/Amount of reimbursement [Proviso to Expln.10 of Section 43 (1)] In case of Subsidy/ Grant/ Reimbursement are not directly relatable to the asset acquired, then, the amount of deduction = Total Subsidy/ Grant/ Reimbursement Received Value of Concerned Asset Assets Total Value of REPORTING UNDER TAX AUDIT CLAUSE 16 & 18 OF FORM 3CD Reporting Requirement Clause 16 Amounts not credited to the Profit & Loss Account, being (a).. (b) Proforma Credits, Drawbacks, Refund of Duty of Customs or Excise or Service Tax, or Refund of Sales Tax or Value Added Tax, where such Credits, Drawbacks or Refunds are admitted as due by the Authorities concerned. (c).. (d).. (e) Capital Receipt, if any. 22

23 ICDS vs Accounting Standards Reporting Requirement Clause 18 Particulars of Depreciation allowable as per the Income Tax Act, 1961 in respect of each Asset or Block of Assets, as the case may be, in the following form (a).. (b).. (c).. (d) Additions / Deductions during the year with dates, in the case of any addition of an Asset, date put to use, including adjustments on account of (i).. (ii).. (iii) Subsidy or Grant or Reimbursement, by whatever name called. (e).. (f).. 23