Section 145 provides standards for income computation and disclosure standards (ICDS) by certain entities. It aims to provide uniformity in the accounting policies for disclosing income earned, accumulated, or received during a particular year. The standards are more significant for listed companies as their securities are traded on securities exchanges. These standards have been framed under sub-section (1) of section 145. Section 146 makes it obligatory for such entities to follow these standards in their financial statements, which are required to be furnished annually by the entity.
Section 145A provides special accounting norms applicable for computing book profit while arriving at taxable income under the Income-tax Act, 1961. These provisions have been framed under sub-section (2) of section 145. Section 146A requires such entities to prepare a report in relation to these special norms while disclosing their income in the financial statements.
Section 147 provides that the Central Government may by notification, specify any other accounting standards for computing incomes and also prescribe a consistent format of accounts for various classes of assesses.
Section 145A of the Income Tax Act makes it obligatory for companies to prepare a report in respect of special norms while disclosing their income in the financial statements. These special norms are laid down by Central Government under section 147 of the Act. The Government issues notification specifying any other accounting standards for computing incomes and also prescribes a consistent format of accounts that shall be followed for various classes of assesses. This provision was introduced with the enactment of the new Companies Act, 2013 which replaced our existing Companies Act, 1956 on April 1, 2014. Under clause (i) of sub-section (2) of section 143(1), every company in a financial year beginning on or after April 1, 2015, is required to prepare consolidated financial statements when it has been related to party transactions in any form.
Since the Companies Act 2013 came into force, every company registered under this Act for which financial year begins from April 1, 2014, onwards is required to prepare its accounts in accordance with these new accounting standards. This includes companies not covered by Section 133(3) but will be covered under Section 145A and thus require to disclose business special norms while disclosing their income in the financial statements. For example, ITC Ltd., which was earlier governed by Indian Accounting Standards (Ind-AS), converted itself into Ind-AS compliant entity and henceforth is subject to the provisions of section 145A(2).
The accounting standard (AS) is an accounting basis or method of accounting adopted by an entity for the presentation of financial information for use within that country. A specific taxation requirement may also influence accounting standards in some countries. The Indian Accounting Standards (Ind ASs) are issued by the Institute of Chartered Accountants of India (ICAI). Ind AS is required to be followed by all companies, except banks and financial institutions, with a net worth below Rs 100 crore or having turnover below Rs 250 crore need not follow Ind AS. However, they have to disclose certain information as per Ind AS standards. Most publicly traded companies listed on the Bombay Stock Exchange and most public sector undertakings follow Ind-AS.
In case of any conflict between the Income Tax act, 1961 and Income computation and disclosures standards, provisions of the Income-tax Act shall prevail.
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Introduced in 1994, the first Indian accounting standards were issued by the Institute of Chartered Accountants of India (ICAI), which is a private non-profit professional organization for accountants in India. The Institute of Chartered Accountants of India was created through an act of parliament, subsequent to The Chartered Accountants Act, 1949 that established regulation for chartered accountancy in India.
The main objective behind adopting international standards or uniform accounting standards is to help eliminate unnecessary costs involved in complying with multiple sets of information requirements depending on the countries where they are filed. The objective of the Ind AS is to provide decision support to users of financial statements and improve transparency in financial reporting.
The Central Board of Direct Taxes (CBDT) established an Accounting Standards Committee in 2012, which released a proposal of 14 tax accounting standards. CBDT has also amended and distributed a 12 draft ICDS for public review based on the ideas and comments received from stakeholders. The government issued ten of the twelve planned ICDS on March 31, 2015.
ICDS I covers important accounting concepts such going concern, consistency, and accrual, which assist a business give a realistic and fair picture of its financial situation and income.
ICDS II is concerned with inventory valuation. It defines inventories, as well as what constitutes inventory and what is excluded from the cost. It states that inventory should be valued at a lower cost or the Net Realizable Value (NRV).
ICDS III covers the construction contract. It defines the conditions and techniques for recognizing and measuring contract cost and income.
ICDS IV is concerned with the acknowledgment of revenue generated in the course of a person’s normal activities. It can come from the sale of commodities, the delivery of services, or the use of one’s resources by others, all of which generate interest, royalties, or dividends.
ICDS V focuses on tangible fixed assets. It specifies the criteria for classifying an item as a tangible fixed asset and deciding what is included in the asset’s cost. Depreciation on such assets will be calculated in accordance with the Income Tax Act of 1961.
ICDS VI deals with changes in foreign exchange rates. It is concerned with the treatment of foreign currency transactions, the translation of foreign financial statements, and the treatment of forwarding exchange contracts.
ICDS VII deals with government grants. It specifies the requirements that must be met in order for the government grant to be recognized. It also discusses how government grants are treated, as well as how refunds of government grants affect income and depreciation (if a government grant is related to the acquisition of depreciable assets).
ICDS VIII deals with securities. It allows for the recognition of securities that should be recognized at cost at the outset.
ICDS IX covers borrowing costs. It specifies which borrowing costs will be capitalized and when capitalization should begin and end. The entity will stop capitalizing an asset once it has been used for the first time.
ICDS X covers Provisions, Contingent Liabilities, and Contingent Assets. It establishes the criteria under which provisions are made and should not be recognized.
The Income Computation and Disclosure Standards (ICDS) are extremely significant and must be followed by everyone when calculating their income. The primary goal of ICDS is to ensure “certainty of issue” and “decrease in litigation.” Various provisions of the ICDS, on the other hand, may cause unhappiness among assesses, but in the long run, they will aid in the control of the structure of income and losses.
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