Delhi HC resets game-changer tax standards
In my July 2015 column ‘ICDS – Quest of harmony’, I had held a view that the Income Computation & Disclosure Standards (ICDS) having an overarching impact cannot override established jurisprudence on income recognition and deductibility of expenditure, besides it was imposing an onerous obligation for compliance particularly when India Inc was gearing for an IFRS transition in 2016 and 2017 and ease of doing business tops governments agenda. The roll-out of ICDS from April 1, 2016, was an attempt to align accounting and tax standards with limited stakeholder consultation and differing views expressed by accounting body, Institute of Chartered Accountants of India (ICAI) and likes of Bombay Chartered Accountants’ Society, Chamber of Tax Consultants, etc. The Chamber filed a writ petition in the Delhi High Court challenging ICDS on various counts necessitating the court to answer questions ranging from excessive delegation of legislative powers to the Central Board of Direct Taxes (CBDT) to standards intervening with established judicial precedents.
The court last week in a reasoned judgment has struck down four out of 10 notified standards, besides pruning down most of the other standards and declaring the CBDT circulars implementing the standards as ultra vires the income tax (I-T) law.
The historical evolution of ICDS since the CBDT constituted committee in 2010, amending the I-T Act in July 2014, rushing circulars in 2015, postponement in implementation by a year to 2016 has been all about patchy implementation, besides being conceived with a motive to prepone taxability of income and in some situations tax notional income. Though multiple drafts were issued for stake holder consultations, the final 10 notified ICDS were far from achieving any uniformity in the tax treatment for computation purposes. On the contrary, there were diametrically opposite views expressed by ICAI and CBDT’s FAQs by the two bodies.
The court examining the constitutional scope of delegated legislature concluded that ICDS being enacted as a delegated legislature cannot override governing principles of I-T law and judicial precedents. Accordingly, the court opined that to maintain constitutional validity, the scope of tax standards that are contrary to provisions of the law or legal precedents cannot be notified. This judgment maintain the confidence that the original lawmaking powers are vested only with the Parliament and the delegated power to executive reincarnates tax controversies by way of landmark rulings, which provide clarity on vexed issues and the same cannot be overruled.
A significant relief for taxpayers comes by way of reinforcement of principles of ‘prudence’ dealing with significant accounting principles and a basic taxation principle. Revenue’s contention that ‘prudence’ doesn’t have to be followed consistently and can take a case-by-case approach forced to strike down first and sixth Standards as being ultra vires.
Other changes in Standard 3 are premised on basic accounting principles include recognition of retention money for construction contracts on principles of accrual rather than ‘proportionate stage of completion method’. Striking off Standard 4 should come as a relief to exporters where taxability of export incentive was being preponed to the year of claim if there was ‘reasonable certainty’ instead of year of receipt. The most significant impact was as a result of Standard 6, which negated established principles of allowing marked-to-market losses on foreign currency derivatives held for trading purposes, which the court rightly struck down as ultra vires.
Following the same principles, the court struck down Standard 7 which forced taxpayers to recognise government grants on a cash basis, deviating from accrual principles. Besides, a portion of Standard 8 has been struck down for following ‘bucket approach’ of valuation of securities held as stock in trade, as it runs contrary to accounting standard for valuing business securities. Several paras of Standards have been tweaked to bring them in line with the binding judicial precedents. Standard 2 is repealed for overruling apex court’s judgment on inventory valuation at the time of partnership dissolution with continuance of business.
The HC verdict is a sigh of relief for taxpayers and tax practitioners, significantly diluting the impact of an ill-conceived administrative rule when the government’s focus is in improving the ‘ease of doing business’. The ruling has come a bit late with tax filings for March 31, 2017, almost completed. The government should in all earnest accept the Delhi HC verdict, withdraw the penal consequences of non-compliance and consider withdrawing the ICDS regulations itself. With IFRS roll-out, established jurisprudence and the IT statute dealing with specific situations of harmonising accounting and tax principles, such as computation of minimum alternate tax, etc., ICDS has lost its relevance, intent and utility.
The writer is Managing Partner, BMR Legal. The views are personal.