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The Chamber of Tax Consultants & Anr. Versus Union of India & Ors.

2017 (11) TMI 465 - DELHI HIGH COURT

Validity and applicability of 'income computation and disclosure standards' (“ICDS”) issued by CBDT - scope of validation laws whereby the Parliament seeks to rectify the defects pointed by the judiciary - Excessive delegation of legislative powers - Held that:- it is only a competent legislature that can make a validation law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive. In other words, .....

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hat can be exercised, in the context of the Act, only by the Parliament and not by the executive. If Section 145 (2) of the Act as amended is not so read down it would be ultra vires the Act and Article 141 read with Article 144 and 265 of the Constitution. - The ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents applicable to the provisions of the Act as they stand. As noted hereinbefore, the challenge in the present case is to a few cl .....

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0 of 2017 issued by the CBDT are also held to be ultra vires the Act and struck down as such. - W.P.(C) 5595/2017 & CM APL 23467/2017 - Dated:- 8-11-2017 - S. MURALIDHAR & PRATHIBA M. SINGH JJ. Petitioners Through: Mr. S. Ganesh, Senior Advocate with Mr. Prakash Kumar, Mr. Vipul Joshi, Mr. R.P. Garg, Mr. Ajay Singh, Mr. Dharan Gandhi and Ms. Rashmi Singh, Advocates. Respondents Through: Mr. Brajesh Kumar, Advocate for R-1. Mr. Sanjay Jain, Additional Solicitor General with Mr. Ruchir Bhatia, .....

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on 145 (2) of the Income Tax Act, 1961 ( Act ), the Central Government notified ten 'income computation and disclosure standards' ( ICDS ), as specified in the Annexure to the said notification to be followed by all Assessees following the mercantile system of accounting, for the purposes of computation of income chargeable to income tax under the head Profits and gains of business or profession or income from other sources . [The expression 'Assessee' excluded an individual or a .....

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the Constitution of India. Another specific prayer is for the quashing of the Notification dated 29th September 2016 and Circular No. 10 of 2017 dated 23rd March 2017. The Petitioners 3. Petitioner No. 1 is stated to be a society established and registered under the Societies Registration Act, 1860 as well as Bombay Public Trusts Act, 1950. It is stated to have more than 3600 members which include Advocates, Chartered Accountants, Tax Practitioners, Company Secretaries and corporates. Petitioner .....

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r non - government authority, committees, commissions and study teams, or at conferences or similar gatherings (iv) (l) to seek representation and appear before the other tax law enforcement authorities, tribunals and courts in matters of public interest and in cases of importance to professionals and Assessees in general, including taking up and pursuing public interest litigations. 4. Petitioner No. 2, Mr. C.S. Mathur, is stated to be a qualified Chartered Accountant (CA) practising in the are .....

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der passed on that date that the pendency of the present petition would not preclude the Union of India and CBDT from holding consultations with Petitioner No. 1 and other professional bodies and consider the representations already stated to have been made by them on the issue. 7. Initially, the deadline for filing of income tax returns for the Assessment Year ( AY ) 2017-18 was to expire on 30th September 2017. This was extended up to 31st October 2017. 8. Pursuant to the notice issued in the .....

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the impugned ICDS is based is that the income computed for the purposes of income tax under the above two heads need not be (as is often not) the income as reflected in the books of accounts maintained by such Assessee. Although the computation of such taxable income would normally be based on the books of accounts of the Assessee, and dependant on the method of accounting followed by the Assessee subject to the adjustments for allowances and deductions under the Act, an Assessing Officer (AO) .....

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first examine the changes to Section 145 of the Act. 10. Section 145 of the Act was substituted by the Finance Act, 1995 (FA) with effect from 1st April 1997. In terms of the said amendments, an Assessee had to follow either the mercantile or cash system of accounting. The Central Government was empowered to notify in the Official Gazette, from time to time, the accounting standards (AS) to be followed by any class of Assessees or in respect of any class of income. The amended Section 145 of th .....

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followed by any class of Assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the Assessee, or where the method of accounting provided in sub-section (I) or accounting standards as notified under sub-section (2)) have not been regularly followed by the Assessee, the Assessing Officer may make an assessment in the manner provided in section 144. The steps towards notifying the ICDS 11. By a notif .....

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ished under an act of Parliament to regulate the profession of CAs. 12. The CBDT, in December 2010, constituted the Accounting Standards Committee ( AS Committee ) comprising of Indian Revenue Services (IRS) officers from the Income Tax Department and professionals like CAs, with the following objects: (i) to study the harmonization of ASs issued by the ICAI with the direct tax laws in India, and suggest ASs which need to be adopted under Section 145 (2) of the Act along with the relevant modifi .....

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nded that the said standards be notified under the Act only for the purposes of computation of taxable income. The Committee was of the view that a taxpayer would not be required to maintain books of account on the basis of the AS notified under the Act . By a Press Release dated 26th October 2012, the CBDT issued the Final report of the Committee and sought for comments from general public and stakeholders by 26th November 2012. 14. Petitioner No. 1 made a detailed representation to the CBDT po .....

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ad Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the Assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of Assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about .....

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ic by 8th February 2015. Thereafter, on 31st March 2015 the CBDT notified the ten ICDS which were required to be followed by all the Assessees following mercantile system of accounting, for the purposes of computation of income chargeable under the head Profits and Gains of business or profession and income from other sources for the AY 2016-17 and the subsequent years, i.e., applicable with effect from 1st April 2015. The preamble to each of the ten ICDS clearly mentioned that the ICDS is not f .....

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to that extent. 17. According to the Petitioners, a conjoint reading of the ten ICDS suggested that for their implementation, parallel sets of books of accounts/ records were required to be maintained. 18. The CBDT appeared to have issued a comprehensive guidance/clarification by a Press Release dated 26th November 2015 stating that the stakeholders and general public may bring out, by 15th December 2015, the issues/points which in their opinion would require further clarification/guidance. In r .....

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larification, guidance or dispensation. 19. By a Press Release dated 6th July 2016, CBDT deferred the applicability of ICDS to 1st April 2016. This, according to the Petitioners, was to incorporate the recommendations of the Income Tax Simplification Committee (ITSC) in the notified ICDS for clarification in respect of the representations received from the stakeholders and general public. The second reason was to make revisions in the Tax Audit Report for ensuring compliance with the provisions .....

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ards. 21. By a separate notification No. 88 of 2016 dated 29th September 2016, the CBDT in exercise of the powers conferred by Section 44AB read with Section 295 thereof, further substituted the existing sub-clause (d) to Clause 13 in the Form No. 3CD, in Part B of the Tax Audit Report, with sub-clauses (d) and (e), so as to reflect the adjustments required to be made to the profit or loss, as the case may be, for complying with the provisions of the ICDS notified under Section 145 (2) of the Ac .....

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of 2016 dated 29th September 2016 and the circular dated 10th March 2017 have been challenged in this petition. Submissions on behalf of the Petitioners 23. Mr. S. Ganesh, learned Senior counsel appearing for the Petitioners, submits as under: (i) The effect of the ICDS was to modify the basis of taxation. For taxation purposes, profits are now required to be computed as per commercial accounting principles but to the extent now modified by the provisions of the ICDS. (ii) In the guise of deleg .....

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ament by making amendments to the provisions of the Act. (iii) A delegate cannot override the Act either by exceeding its authority or by making provisions inconsistent with the Act. The ICDS are not based on any policy or principle discernible from the Act and in particular Section 145 thereof. In the circumstances, such delegation to the Central Government and further sub-delegation by the Central Government to the CBDT would amount to abdication of legislative powers and excessive delegation .....

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arge can be imposed by any bye-law, rule or regulation or notification unless the statute under which the subordinate legislation is made, specifically authorizes such imposition. (v) The impugned notification notifying ICDS is contrary to the settled law since its implementation would nullify the judgments of the Supreme Court and the High Courts. Reference was made to the various judgments which would now stand virtually inapplicable on account of the ICDS. It was clarified by the CBDT itself .....

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2 SCC 283. (vi) Whereas the AS issued by the ICAI were applicable to all corporate and non-corporate entities following the mercantile system of accounting, ICDS was applicable only to taxpayers following mercantile system of accounting (i.e. to all assessees except individuals and HUFs whose accounts are not required to be audited under Section 44B of the Act). There was no reasonable basis on which such differentiation or classification can be made for the applicability of the ICDS since the .....

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create confusion, interpretation issues, multiplicity of records and additional compliance burden which would outweigh the gains of ICDS and constitute an unreasonable restriction on the freedom to conduct business. Thus, the impugned notifications were violative of Article 19 (1) (g) of the Constitution. Submissions on behalf of the Respondents 24. Mr. Sanjay Jain, learned Additional Solicitor General of India, appearing for Respondent No. 2, replied to the above submissions and also submitted .....

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ntain books in terms of the notified AS. Eventually, the final report was submitted in October 2013 and in 2014 the amended Section 145 was brought about. 25. According to Mr. Jain, at every stage of issuance of 10 ICDS by notification dated 30th March 2015 there was a detailed consultation with the stakeholders. The commencement date was shifted from 1st April 2015 to 1st April 2016. Mr. Jain does not dispute that ICDS is applicable only to the Assessees following the mercantile system. Mr. Jai .....

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Suppl (3) SCC 323 and submitted that a distinction had to be drawn between taxing statutes and other statutes. He also referred to R.K. Garg v. Union of India (1982) 1 SCR 947, where it was observed that every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore, it cannot provide for all possible situations or anticipate all possible abuses. Reliance was placed on the decision in Union of .....

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as the selection of persons on whom the tax is to be laid, the rates at which it is to be charged in respect of different clauses of goods and the like. 27. One central plank of the submission of Mr. Jain was the decision in J.K. Industries v. Union of India (2008) 297 ITR 176 (SC) where a similar challenge to the notification of AS 22 was negatived by the Supreme Court. Mr. Jain also relied on the decision in Commissioner of Income Tax v. Poddar Cement P. Limited (1997) 226 ITR 625 (SC) where t .....

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ght about are only aimed at bringing uniformity and clarity in the computation of income. 28. Reliance was placed on the decision in Saraswati Sugar Mills v. Commissioner of Central Excise 2011 (270) ELT 465 and National Agricultural Cooperative Marketing Federation of India Limited v. Union of India (2003) 260 ITR 548 to urge that where the law has itself been changed, the question of legislature overruling the judiciary did not arise. Mr. Jain pointed out that the ICAI which is the apex body r .....

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e to be struck down? (iii) Whether the impugned amendments to Section 145 of the Act and the consequential ICDS and Circular violate Articles 14, 19 (1) (g), 141, 144 and 265 of the Constitution? Question (i): Delegation of essential legislative functions 30. The substitution of Section 145 with an amended version by the FA 1995, with effect from 1st April 1997, was intended to restrict the options available to an Assessee following a system of accounting other than mercantile or cash. The legis .....

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hat the same to be followed by the companies. In May 2010, it was decided to converge the Indian AS with IFRS (IND-AS). 32. The position as far as corporates are concerned is that there are two methods of accounting to be followed: one under GSR 739 (E) notified by the MCA on 7th December 2006 in terms of Section 211 of the Companies Act, 1956. The other is for computation of taxable income which is as a result of the convergence of the Indian AS with the IFRS. Admittedly, both have different me .....

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1 ASs issued by ICAI and the AS be identified as ICDS for the purposes of providing a comprehensive framework for computing taxable income. After the final report of the Committee was submitted in October 2013, an amendment to Section 145 of the Act was brought about in 2014. Ten ICDS were notified by Notification No. SO 892 (E) dated 31st March 2015 and was made applicable from the Financial Year 2015-16 (AY 201617). It is stated that prior thereto, detailed consultations were held with the sta .....

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the Income-tax Act, 1961. The Circular acknowledges that it had been brought to the notice of the CBDT that some of the ICDS may require amendment/ clarification for proper implementation. The matter was then referred to the Committee which, after duly consulting the stakeholders recommended a two-fold approach for the implementation of ICDS. One was to amend the ICDS itself. The other was to issue clarifications by way of FAQs. Thus Circular No. 10/2017 was in the form of FAQs. 35. It is uncle .....

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nounced in the absence of authoritative guidance on these issues under the Act for computing income under the head Profits and gains of business or profession or income from other sources. Since certainty is now provided by notifying ICDS under Section 145 (2), the provisions of ICDS shall be applicable to the transactional issues dealt therein in relation to assessment year 2017-18 and subsequent assessment years. (emphasis supplied) 36. From the above clarification, it is unmistakable that the .....

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ed in the Act. If such power is permitted to be exercised by the central government then clearly it would be an instance of unfettered power in the hands of the executive which is unguided and uncanalised. 38. Article 265 of the Constitution of India states that no tax shall be levied or collected except under the authority of law. The power under Section 145 (2) of the Act cannot permit changing the basic principles of accounting that have been recognized in the various provisions of the Act un .....

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would be a permissible exercise of the delegated power of notifying ASs. However, where the notified AS or as in this case the ICDS, seeks to alter the system of accounting, or according accounting or taxing treatment to a particular transaction, then it will require the legislature to step in to amend the Act to incorporate such change. This may be unique to a fiscal statute like the Act. However, in the guise of a delegated power, the Central Government cannot do what is otherwise legally impe .....

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y a rate on buildings or lands or both situate within the municipal borough. The rules under the Act applied the rates on the basis of the percentage on the capital value of lands and buildings. 41.2 Earlier in Patel Gordhandas Hargovindas v. Municipal Commissioner, Ahmedabad (1964) 2 SCR 608, the Supreme Court had interpreted the word rate to mean a tax for local purposes imposed by local authorities. The basis of such tax was the annual letting value of the lands or building ascertained by tak .....

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es so imposed were validated notwithstanding the above judgment of the Supreme Court in Patel Gordhandas Hargovindas (supra). Section 3 of the Validation Act stated that they were not to be called in question merely on the ground that the assessment of the tax for rate on the basis of the capital value of the building or land, or on the basis of a percentage of such capital value. 41.4 Negativing the challenge to the Validation Act, the Supreme Court in Shri Prithvi Cotton Mills Limited v. Broac .....

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value. 41.5 In the process of coming to the above conclusion, the Supreme Court went on the legal position governing validation laws whereby the Parliament seeks to rectify the defects pointed by the judiciary. In para 4, it was held as under: 4. Before we examine Section 3 to find out whether it is effective in its purpose or not we may say a few words about validating statutes in general. When a legislature sets out to validate a tax declared by a court to be illegally collected under an inef .....

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se of judicial power which the legislature does not possess or exercise. A court's decision must always bind unless the conditions on which it is based are so fundamentally altered that the decision could not have been given in the altered circumstances. Ordinarily, a court holds a tax to be invalidly imposed because the power to tax is wanting or the statute or the rules or both are invalid or do not sufficiently create the jurisdiction. Validation of a tax so declared illegal may be done o .....

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which the tax was collected and by legislative fiat, makes the new meaning binding upon courts. The legislature may follow any one method or all of them and while it does so it may neutralise the effect of the earlier decision of the court which becomes ineffective after the change of the law. Whichever method is adopted it must be within the competence of the legislature and legal and adequate to attain the object of validation. If the legislature has the power over the subject-matter and comp .....

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he above legal proposition is well settled and has been followed in a number of subsequent decisions. Therefore it is only a competent legislature that can make a validation law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive. In other words, where there is a binding judicial precedent, by virtue of Articles 141 and 144 of the Constitution, it is not open to the executive to override it unl .....

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down it would be ultra vires the Act and Article 141 read with Article 144 and 265 of the Constitution. Question (ii): Excessive delegation of legislative powers 44. The next, but related, aspect is the excessive delegation of legislative powers. The Court finds merit in the contention of the Petitioners that ICDS notified under Section 145 (2) of the Act has the effect of modifying the basis for computation of taxable income as recognised by the Act and as interpreted by the Supreme Court. 45. .....

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een challenged are discussed hereafter in seriatim. 47. ICDS I talks of accounting policies. It is settled law that accounting standards cannot override the basis on which the taxable income is computed. 47.1 In Tuticorin Alkali Chemicals and Fertilizers Limited v. Commissioner of Income Tax (1997) 227 ITR 172 after noticing that Section 14 of the Act lays down, for the purpose of computation of taxable income, six heads of income viz., (a) Salaries, (b) Interest on securities, (c) Income from h .....

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d to examine the issue of permitting the Assessee to set off its income against interest payable on capital. In this context it observed as under: It has been argued that the source from which the company has earned interest is borrowed capital. The company has to pay interest to its creditors on the same borrowed capital. Having regard to the identity of the fund on which interest is earned and interest is payable, the company should be allowed to set off its income against interest payment pay .....

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s accountancy methods for the purposes of its internal affairs I am not persuaded that Cross J. And the Court of Appeal were wrong in finding them unacceptable for tax purposes. 47.4 The Court also noted that in Challapalli Sugars Limited v. Commissioner of Income Tax (1975) 98 ITR 167, the Supreme Court had acknowledged that the ICAI was a recognized authority on accounting principles and executive instructions had to be viewed from that perspective. The Supreme Court in Tuticorin Alkali Chemic .....

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tancy practice. Accounting practice cannot override Section 56 or any other provision of the Act. As was pointed out by Lord Russel in the case of B.S.C. Footwear Ltd (1970) 77 ITR 856, (CA), the income-tax law does not march step by step in the footprints of the accounting profession. 47.5 On the facts of the case before it, the Supreme Court concluded as under: Whether a particular receipt is of the nature of income and falls within the charge of Section 4 of the income-tax Act is a question o .....

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compensation. 48. It is, therefore, the settled legal position that the AS has hardly any role to play in the principles governing determination of income, which has been well settled by the provisions of the Act as well as by judicial precedents. As pointed out by the Petitioners, the ASs have existed more than 35 years. However, the basic taxation principles remain the same and would remain binding even in the application of the ICDS. 49. In order to demonstrate that any change in accounting .....

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ent for tax purposes. 50. Mr. Jain referred to the Speech of the President of the ICAI to infer that the ICDS had been approved by the ICAI. The said speech is dated 31st July 2016, i.e., even before the said notification dated 29th September 2016 was issued. In any event that speech does not indicate that the ICAI has accepted the ICDS. It only refers to the request made by the ICAI for deferring its applicability. On the contrary, the Petitioners have handed over a chart to show that in respec .....

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61 ('the Act') and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. 52. Thus, it is clear that the ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents applicable to the provisions of the Act as they stand. As noted hereinbefore, the challenge in the present case is to a few clauses of the various ICDSs notified on 29th September, 2016 by the Central Board of Direct Taxes ( CBDT ) .....

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Construction Co. Pvt. Ltd. (2005) 275 ITR 30 (Guj). 54. The stand of the Respondents is that the concept of prudence has not been done away with but has been followed on a case to case basis and cannot be dealt with generally. The justification provided is that income and losses generally have to be meted a similar treatment and preferential treatment for losses has to be given only in specific situations. Some illustrative examples have been set out to demonstrate that the concept of prudence&# .....

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l equity of treating the contract profit and contract loss on the same principle. • Retaining the concept of reasonable certainty of realizing the revenue in ICDS IV on revenue recognition. • The losses on account of forward cover transactions in the nature of hedging (except to the extent the same pertain to highly probable or firm commitment contracts) is continued in ICDS VI. • Valuation of inventory under ICDS VIII retain the concept of cost or market price whichever is lower. .....

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andards ( NAC ) under Section 211 (3C) of the Companies Act, 1956. While dealing with the objective of AS-22, the SC explained: In its origin, an accounting standard is the policy document. In matters of recognition of various items of income, expenditure, assets and liabilities, the aim is to achieve standards/norms which would help to reflect a true and fair view of the accounts of a company......................................... Accounting Standard are established rules relating to the reco .....

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o companies and certain other associations. Under section 211(3A) Accounting Standards framed by the National Advisory Committee on Accounting Standards constituted under S. 210A are now made mandatory. Every company has to comply with the said standards.....Similarly, under Section 211(1) the company accounts have to reflect a true and fair view of the state of affairs. Therefore, the object behind insistence on compliance with the AS and true and fair accrual is the presentation of accounts in .....

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he appropriate rules. Therefore, in our view, the impugned rule is valid as it has a nexus with the statutory functions entrusted to the Central Government which is the rule-making authority under the Act........ (emphasis supplied) 55.3 Finally, in deciding whether AS-22 were contrary to Sections 209 and 211 of the Companies Act, 1956, read with Parts I and II of Schedule VI thereto, the Supreme Court in J.K. Industries (supra) held that the impugned rules did not seek to modify the essential f .....

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t context, we hold that the impugned rule adopting AS-22 is intra vires as the said rule is incidental and/or supplementary to the specific powers given to the Central Government to make rules, particularly when such power is given to fill-in details. The word supplementary means something added to what is there in the Act, to fillin details for which the Act itself does not provide......In the present case, in our view, the impugned rule constitutes a legitimate aid to construction of the provi .....

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nterpretation arises, by decisions of the Court. Therefore, unlike the Companies Act 1956, there is no aspect of computation of taxable income that is not governed either by the Act or the Rules or some binding judicial pronouncement. For e.g., even the prudence principle is acknowledged in at least two decisions referred to: CIT v. Triveni Engineering & Industries Ltd (supra) and CIT v. Advance Construction Co. Pvt. Ltd. (supra). Importantly, there was no parallel provision in the Companies .....

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merit in the contention of the Petitioners that ICDS I does away with the concept of 'prudence' which is present in AS1 notified under Section 145 (2) of the Act. A negative provision has in fact been made in the ICDS by stating that prudence is not to be followed unless it is specified. In its counter-affidavit, in para 6.1 (v) it is accepted by the CBDT that the concept of prudence has been done away with and has been replaced by specific aspects of prudence at the relevant places in .....

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has in Circular No. 10 of 2017, in answer to Question 13 stated that interest accrues on time basis and royalty accrues on the basis of contractual term and subsequent non-recovery can be claimed as deduction under Section 36 (1) (vii). Therefore, it is not correct for the CBDT to contend that the concept of reasonable certainty of realizing the revenue has been retained in ICDS IV. 59. The further averment is that the concept of prudence has been retained in ICDS X by allowing provision for fur .....

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re expected losses in the case of construction contracts are allowed immediately in the year in which they are incurred, irrespective of the method of accounting followed by the Assessee. ICDS III allows expected losses only on proportionate basis as per the percentage completion method. Therefore, it is not in accordance with the concept of prudence. Expected losses have been allowed as deduction in CIT v. Triveni Engg. & Industries Limited and CIT v. Advance Construction Co. Pvt. Ltd (supr .....

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in para 6.9 of its Technical Guide clarified as under: 6.9 Chapter IV-D of the Income Tax Act houses Section 37 which deals with expenditure which is general in nature and not covered within sections 30 to 36. Section 37 covers expenditure laid out or expended wholly and exclusively for the purposes of the business. The phrase laid down connotes setting aside or storage for future. The expression laid out in Section 37 thus encompasses not only actual outflow of expenses but amounts parked in t .....

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he business of firm is not discontinued and is taken over by other partners, the stock-in-trade of the firm can be valued at cost or market value, whichever is lower. In arriving at the above conclusion, the Supreme Court distinguished the earlier decision in A.L.A. Firm (1989) 189 ITR 285 (SC) on the ground that in the case of dissolution of a partnership firm, if the business is discontinued then stock-in-trade has to be valued at market price only. However, if, on dissolution of a firm, the b .....

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ter affidavit of the CBDT states in para vi (a) that the Supreme Court in Shakti Trading Co. (supra) was swayed by the fact that the business was continuing and that there was no settlement of accounts. This is in fact contrary to the facts in Shakti Trading Co. (supra). The said decision has been re-affirmed in CIT v. Kwality Steel Suppliers Complex (2017) 395 ITR 1 (SC). 66. It is contended on behalf of the Respondents that Section 45 (4) of the Partnership Act has itself pointed out the conce .....

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CDS has been notified. Section 145A of the Act provides that inventory of goods shall be valued in accordance with the method of accounting regularly employed by the Assessee. Therefore, where the Assessee regularly follows a certain method for valuation of goods then that will govern irrespective of the ICDS notified under Section 145 (2) of the Act. 68. The upshot of the above discussion is that ICDS II is also an attempt to overreach the binding judicial precedents by the device of notificati .....

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ined in the following decisions: (i) CIT v. Simplex Concrete Piles India (P) Ltd (1988) 179 ITR 8 (ii) CIT v. P & C Constructions (P) Ltd (2009) 318 ITR 113 (iii) Amarshiv Construction (P) Ltd v. DCIT (2014) 367 ITR 659 and (iv) DIT v. Ballast Nedam International (2013) 355 ITR 300 which followed the decision in Anup Engineering Limited v. CIT (2000) 247 ITR 114. 71. All the above decisions hold that the retention money does not accrue to an Assessee until and unless the defect liability per .....

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ll accrue to the person for computing revenue based on the percentage of completion method. 73. The stand of the Respondent seems to be that since retention money is treated as part of the revenue, it should also be considered as part of the income. The Respondent argues that it intends to bring uniformity between the accounting treatment and the tax treatment of retention money. The Respondent relies upon Rotork Controls Pvt. Ltd. v. CIT (2009) 314 ITR 62 which states that a provision for prese .....

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pend upon the contractual terms between the contractor and the person awarding the contract. The treatment to retention money under Paragraph 10 (a) in ICDS-III will have to be determined on a case to case basis by applying settled principles of accrual of income. By deploying ICDS-III in a manner that seeks to bring to tax the retention money the receipt of which is uncertain/conditional, at the earliest possible stage, the Respondents would be acting contrary to the settled position in law as .....

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ction of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed. 76. Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315 wherein it was held that if an Assessee receives any amo .....

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tivities of a person from: (i) the sale of goods; (ii) the rendering of services; (iii) the use by others of the person's resources yielding interest, royalties or dividends. 78. The challenge by the Petitioners is to the paragraphs 5, 6 & 8(1) of the ICDS-IV. The said clauses are reproduced herein below: 5. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recog .....

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losure Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. However, when services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognised on a straight line basis over the specific period. 8. (1) Subject to sub paragraph (2), interest shall accrue on the time basi .....

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ion. In Excel Industries (supra), the Supreme Court held that it is only in the year in which the claim is accepted by the Government that a right to receive the payment accrues in favour of the Assessee and the corresponding obligation to pay arises in the hands of the Government. Only in such year the income from export incentive can be said to have accrued and can be recognized as income. Therefore, para 5 of ICDS-IV is not inconsistent with the law explained by the Supreme Court. 81. The sta .....

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ght to receive accrues in favour of the Assessee no income can be said to have accrued. 82. AS-9 permits the completed contract method in specified circumstances. Para 7.1 of the AS-9 issued by the ICAI permits a person to follow proportionate completion method or completed service contract method without any qualification. Paras (i) and (ii) of AS-9 describes the functioning of the prescribed methods. Whether there is only a single act in performance of service contract or more than one act, a .....

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well Pvt. Ltd. (2011) 245 CTR 397 (Del) and Paras Buildtech India Pvt. Ltd. V. CIT (2016) 382 ITR 630 (Del). However, para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method and therefore, it is contrary to the above decisions. 84. In ICDS-IV accrual of interest is dealt with as under:- 8. (1) Subject to sub paragraph (2), interest shall accrue on the time basis determined by the amount outstanding and the rate applicable. (2) Interest on refund of any tax, duty .....

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of 2017 that such income has to be applied on accrual basis and deduction, if any, can be claimed only under Section 36 (1)(vii) of the Act. The Respondent further submits that this provision is in line with the recent amendments brought about by Finance Act, 2015 wherein a proviso was added to the following effect: Section 36(1)- The deductions provided for in the following clauses shall be allowed in respect of matters dealt with therein, in computing the income referred to in section 28 - (i .....

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previous year on the basis of income computation and disclosure standards notified under sub-section (2) of Section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purpose of this clause. 86. In its counter-affidavit the Respondent has clearly explained th .....

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ue. In fact, a provision which is for the benefit of the Assesses is being projected to be a provision which is against the interests of the Assessee. The ICDS does not in any way wish to alter the well laid down principles of real income by the Hon ble Supreme Court, but is actually ensuring that there is a trace available of the income which is foregone on this concept. Therefore, if there is an interest income which is not likely to be realised is written off by the assessee in the same very .....

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reme Court. 87. Since there is no challenge to Section 36(1) (vii), para 8 (1) ICDS-IV cannot be held to be ultra vires the Act. This is to create a mechanism of tracking unrecognized interest amounts for future taxability, if so accrued. In fact the practice of moving debts which the bank or NBFC considers irrecoverable to a suspense account is a practice which makes the organisations lose track of the same. The justification by the Respondent clearly demonstrates that this is a matter of a lar .....

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ate treatment for the branch, as distinct from that applicable to the entity as a whole is stated to be wholly incorrect. 89. In Godhra Electric Supply Company Limited v. CIT (1997) 225 ITR 746 (SC), the Supreme Court held that hypothetical income cannot be taxed. This was in the context of the same treatment for monetary assets and liabilities of the Indian entity as well as the foreign operations which leads to adjustment of notional income/loss to the total income. In Sutlej Cotton Mills Limi .....

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se of foreign currency derivatives held for trading or speculation purposes are not to be allowed. This is not in consonance with the ratio laid down by the Supreme Court in Sutlej Cotton Mills Limited v. CIT (supra), insofar as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes. 91. In Circular No. 10 of 2017 an answer to Question No. 16 the CBDT has clarified that Foreign Currency Translation Reserve Account balance as on 1st .....

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ts cannot be postponed beyond the date of accrual receipt. In other words, income has to be recognized on receipt basis which may not have accrued. 93. It is explained by the Petitioners that many a times, conditions are attached to the receipt of government grant, non-fulfilment of which may lead to return of such amount. In such instance, it cannot be said that there is any accrual of income although the money has been received in advance. ICDS VII however requires that amount has to be taxed .....

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ities other than scheduled banks and public financial institutions and Part B deals with scheduled banks and public financial institutions. Under Part B, ICDS VIII has prescribed that recognition of securities should be in accordance with the RBI guidelines. To that extent, it is consistent with the RBI norms. However, for those entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed. This is different from the ICDS. In e .....

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securities. This change is therefore not possible to be effectuated without a corresponding amendment to the Act. To that extent Part A of ICDS VIII is ultra vires the Act. Issue (iii): Constitutional validity of the ICDS, Circular 97. In exercise of its power to issue notifications under Section 119 of the Act, the CBDT is meant to clarify the law, not change it. At the highest it can additionally notify the change in rates of depreciation etc. Some of the impugned ICDS, to the extent discussed .....

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render the ICDS as an instance of excessive delegation of essential legislative functions. The books of account prepared on the basis of a valid accounting method can be rejected by an AO for not complying with the ICDS. This virtually permits an AO to disregard binding judicial precedents. 99. The cases cited at the bar on behalf the Respondents deal with the permissible limits of legislative power. In Harishankar Bagla v. State AIR 1954 SC 465 the Supreme Court upheld the validity of a particu .....

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r of the central government. As explained by the Madras High Court in CIT v. Standard Triumph Motor Co. Limited (1979) 119 ITR 573 (Mad) Section 145 (1) is only an enabling provision to effectuate the statute. When the rules framed under an Act have to conform to the Act [See Bimal Chandra v. State (1971) 81 ITR 105 (SC), Director of Inspection v. Pooranmall (1974) 96 ITR 390 (SC), CIT v. Taj Mahal Hotel (1971) 82 ITR 44 (SC)] a mere notification under Section 119 of the Act cannot go beyond the .....

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to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial proceedings or provisions of the Act. Summary of findings 102. The findings in this judgment may be summarised thus: (i) Section 145 (2), as amended, has to be read down to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act. The power to enact a validation law is an essential legislative power that can be e .....

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n to the case on hand. (iv) ICDS I which does away with the concept of 'prudence' is contrary to the Act and binding judicial precedents and is therefore unsustainable in law. (v) ICDS II pertaining to valuation of inventories and eliminates the distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution is contrary to the decision of the Supreme Court in Shakti Trading Co. (supra). It fails to acknowledge that the valuation of .....

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e receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the facts, the Respondents would be acting contrary to the settled position in law as explained in the decisions referred to in para 68 and to that extent para 10 (a) of ICDS III would be rendered ultra vires. (vii) Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of .....

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tion method as well as the contract completion method have been recognized as valid method of accounting under the mercantile system of accounting by the Supreme Court in CIT v. Bilhari Investment Pvt. Ltd. (supra) and this Court in CIT v. Manish Buildwell Pvt. Ltd and Paras Buildtech India Pvt. Ltd. v. CIT (supra). Therefore, to the extent that para 6 of ICDS-IV permits only one of the methods, i.e., proportionate completion method, it is contrary to the above decisions, held to be ultra vires .....

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