ICDS Applicability (Income Computation and Disclosre Standards)

ICDS Applicability (Income Computation and Disclosre Standards)

As per sec 145 of the income tax act 1961, an assessee having taxable income under the heads PGBP and Income from other sources has to compute his taxable income in accordance with cash system or mercantile system of accounting.

The Income tax computation and disclosure standards are applicable on all persons who derive income from business or profession and from other sources.

• For an assessee maintaining cash system of accounting, no ICDS would apply
• For an assessee maintaining mercantile system of accounting, it depends on if the person is an individual or an HUF or some other person. If a person is an individual or an HUF, no ICDS would apply if the person is not subject to tax audit. If the person is subject to tax audit as per section 44AB, application of ICDS would be mandatory. If a person is not an individual or an HUF and follows mercantile system of accounting, the assessee would have to mandatorily apply ICDS while computing taxable income.

For the purposes of tax audit, the Finance Act 2018 has inserted 2 sections 43AA and 43CB for which the relevant ICDS are ICDS 6 (Foreign Exchange Rate) and ICDS 3(Construction Contracts)/ICDS 4 respectively.

Guidelines for implementing ICDS

1.    Get the financial statement prepared as per the relevant laws  and  accounting standards AS or Indian accounting standards IND AS as applicable.
2.     List out the applicable ICDS relevant to the books of accounts.
3.    Note the differences in the accounting method as per AS/IND AS inbooks and the relevant ICDS.
4.    If the differences exist, disclose the effect in ITR and in the statement of particulars- Form 3CD.
5.     Clause 13 of Form 3CD must be filled if ICDS applicable
6.     Verify related ICDS amount and disclosures in Form 3CD