Purpose and Scope of ICDS

• Income Computation and Disclosure Standards (ICDS) are notified under section 145(2) of the Income-tax Act.
  
• They apply specifically to the computation of income under the heads “Profits and Gains of Business or Profession” and “Income from Other Sources.”
  
• ICDS aims to ensure uniformity and consistency in tax computations.
  
• It is applicable to all taxpayers following the mercantile system of accounting, including companies.
  
• It is mandatory irrespective of the accounting standards followed for financial reporting.
  

Differences from Accounting Standards

• ICDS may differ from Accounting Standards or Ind AS in recognition and measurement rules.
  
• It does not permit mark-to-market losses unless specifically allowed.
  
• Income and expenses may be recognized earlier under ICDS compared to financial accounting.
  
• Provisions allowed under AS or Ind AS may not be deductible under ICDS.
  
• These differences require adjustments while computing taxable income.
  

Impact on Specific Items of Income and Expense

• Revenue from construction and service contracts must follow percentage completion method.
  
• Retention money must be recognized as income under ICDS.
  
• Government grants are recognized based on accrual under ICDS, not actual receipt.
  
• Foreign exchange gains or losses on monetary items are treated differently.
  
• Inventory valuation is strictly governed by ICDS rules, which may deviate from AS or Ind AS.
  

Disclosure and Reconciliation Requirements

• Companies must disclose the effect of ICDS on income computation in Form 3CD (tax audit report).
  
• Reconciliation between profit as per books and taxable income is mandatory.
  
• Separate records or schedules may be needed for ICDS compliance.
  
• Incorrect application or omission of ICDS adjustments may lead to tax disputes.
  
• Proper documentation must be maintained for adjustments arising due to ICDS.
  

Legal and Compliance Considerations

• ICDS overrides accounting standards for tax purposes, not for book accounting.
  
• Supreme Court and High Court rulings on tax treatment do not override ICDS unless notified.
  
• Changes introduced by ICDS are binding unless struck down by legal challenge.
  
• CBDT has issued clarifications to address practical application of ICDS.
  

Tax computation must reflect all ICDS adjustments to avoid disallowance or penalty.