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    ManualsIncome Tax
    What is the taxability of opening balance as on 1st day of April 2016 of Foreign Currency Translatio...
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    Since section 43A is applicable for a foreign currency liability in respect of an asset acquired fro...
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    ManualsIncome Tax
    What is the taxability of opening balance as on 1st day of April 2016 of Foreign Currency Translatio...
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    Taxability of foreign currency translation reserve: opening FCTR to be included in income unless previously recognised, requiring professional judgment.
    The opening balance of the Foreign Currency Translation Reserve (FCTR) as on 1 April 2016 relating to exchange differences on monetary items for non integral foreign operations shall be recognised in the relevant previous year as income to the extent not previously included in income computation; the correctness of this recognition is debatable and requires appropriate professional judgment because conversion does not create real income and ICDS treatment may not apply to earlier years.
    ManualsIncome Tax
    Since section 43A is applicable for a foreign currency liability in respect of an asset acquired fro...
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    Foreign currency liabilities treatment: exchange differences on monetary items hit profit or loss; non monetary differences not taxable or deductible.
    Section 43A does not apply to foreign currency liabilities for purchase of assets in India; such liabilities are governed by ICDS VI. Per ICDS VI para 5(i), exchange differences on monetary items are recognised in the profit and loss account, whereas exchange differences on non monetary items are neither taxable nor deductible.
    ManualsIncome Tax
    How to recognise the exchange difference In respect of transactions that are settled beyond the end ...
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    Exchange difference recognition requires periodic recognition until final settlement, treated as income or expense for monetary items.
    Exchange differences on monetary transactions settled after the end of the previous year must be recognised in each intervening period up to final settlement, with exchange gain or loss on settlement treated as income or expense, except for items relating to nonintegral foreign operations.
    ManualsIncome Tax
    How are foreign exchange differences to be recognized.
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    Foreign exchange differences: monetary item gains and losses recognised as income or expense, non-monetary conversion differences excluded.
    Exchange differences on monetary items (cash and assets or liabilities receivable or payable in fixed or determinate amounts of money) arising on settlement or on the last day of the financial year must be recognised as income or expense of that year. Exchange differences on non-monetary items arising on conversion at the last day of the year are not to be recorded as income or expense for that year.
    ManualsIncome Tax
    What is the manner in which foreign currency transactions are to be recorded.
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    Foreign currency transaction recording: use transaction-date exchange rate or a stable weekly/monthly average when fluctuations are insignificant.
    Under ICDS VI, a foreign currency transaction must be initially recorded in the reporting currency using the exchange rate on the transaction date; if rates do not fluctuate significantly from actuals, a weekly or monthly average rate may be used instead.
    ManualsIncome Tax
    What is the treatment of expenditure incurred on test runs.
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    Capitalization of test-run and commissioning expenditure: pre-commercial costs capitalized, post-commercial costs treated as revenue excluding general overheads.
    Expenditure on start-up and commissioning, including test runs and experimental production, must be capitalized as part of the cost of the tangible fixed asset until commercial production begins; expenditure after commercial production is revenue expenditure. Administration and general overheads not relating to a specific tangible fixed asset are excluded from asset cost and treated as revenue expenditure.
    ManualsIncome Tax
    What is the value at which fixed assets are to be recorded as per ICDS V relating to tangible fixed ...
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    Valuation of tangible fixed assets requires recording at actual cost including nonrecoverable taxes and directly attributable expenditures.
    Valuation of tangible fixed assets under ICDS V requires recording assets at actual cost, comprising purchase price, duties and taxes that are not recoverable, and other directly attributable expenditure necessary to bring the asset to its intended use; recoverable taxes are excluded.
    ManualsIncome Tax
    If the taxpayer sells a security on the 30th day of April 2017. The interest payment dates are Decem...
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    Accrual basis interest recognition: interest taxed on accrual must be included when computing capital gain from subsequent sale.
    Where interest has been accounted as income on an accrual basis before the sale of a security, the amount already taxed as interest income on accrual basis shall be taken into account for computation of income arising from such sale.
    ManualsIncome Tax
    Does ICDS-IV apply to interest received by an assessee on compensation or on enhanced compensation.
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    Interest on compensation taxed as Income from Other Sources when received; accounting standard ICDS does not displace the statute.
    Interest received on compensation or enhanced compensation is taxable in the year of receipt and must be reported under Income from Other Sources, regardless of whether the assessee uses mercantile or cash accounting; where ICDS IV conflicts with the Act the statute prevails.
    ManualsIncome Tax
    Whether ICDS is applicable to revenues which are liable to tax on gross basis like interest, royalty...
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    ICDS applicability to gross-basis incomes confirms ICDS governs computation of taxable interest, royalty and fees for technical services.
    ICDS IV (Revenue Recognition) applies to incomes taxed on a gross basis, including interest, royalty and fees for technical services payable to non-residents, and such receipts must be computed and recognized under ICDS principles for determining the amount chargeable to tax.
    ManualsIncome Tax
    The condition of reasonable certainty of ultimate collection is not laid down for taxation of intere...
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    Accrual-based revenue recognition: interest and royalty must be recognised despite collection uncertainty; statutory provisions prevail.
    Interest is recognised on a time basis and royalty according to contractual terms; later non recovery may be claimed as a deduction under the amended deduction provisions, and applicable statutory provisions prevail over ICDS IV.
    ManualsIncome Tax
    How revenue from leases and hire purchase transactions will be recognised.
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    Revenue recognition for leases: lease treated as income not sale; lessor taxed on rent and entitled to depreciation.
    ICDS IV recognises revenue when risk and rewards transfer, so leases are not sales: lease rent is taxable income and the lessor may claim depreciation. Under hire purchase, both parties cannot claim depreciation on the same asset; substance-over-form principles indicate the owner giving the asset on hire should recognise sale while the hirer is entitled to depreciation.
    ManualsIncome Tax
    Since there is no specific scope exclusion for real estate developers and Build -Operate- Transfer (...
    Show AI Summary
    Revenue recognition under ICDS IV applies to real estate developers and BOT operators absent a specific exclusion.
    In the absence of any specific ICDS notified for real estate developers, BOT projects and leases, the relevant provisions of the Income tax Act and applicable ICDS (including ICDS III and ICDS IV) apply to revenue recognition, income computation and disclosure for those transactions.
    ManualsIncome Tax
    Whether the costs incurred for securing the contract would have to be claimed in the year of incurre...
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    Work-in-progress treatment: costs to secure construction contracts must be capitalised and not deducted until related work is performed.
    Precontract costs to secure construction contracts must be treated as an asset and characterised as work-in-progress, representing amounts due from customers, and therefore should not be claimed as a deduction in the year of incurrence but carried forward and recognised when the related construction or installation work is performed.
    ManualsIncome Tax
    What is the treatment of incidental income that arises from construction contract.
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    Incidental income in construction contracts: deduct from contract costs; investment returns taxed separately under income provisions.
    Incidental incomes arising from construction contracts are not part of contract revenue and must be reduced from contract costs; examples include sale of surplus materials and disposal of plant and equipment. Income in the nature of interest, dividends and capital gains is excluded from incidental income and is taxed separately under applicable law.
    ManualsIncome Tax
    Does proviso to section 36(1)(iii) apply on construction contract i.e. interest paid on capital borr...
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    Proviso to section 36(1)(iii) inapplicable to construction contracts; interest on contract borrowings is deductible for execution purposes.
    Proviso to section 36(1)(iii) does not apply to borrowings by contractors for executing construction contracts because such borrowings are not for acquisition of an asset; therefore interest on capital borrowed attributable to a construction contract is not barred by the proviso and is allowable as a deduction under ICDS III.
    ManualsIncome Tax
    whether the recognition of retention money, receipt of which is contingent on the satisfaction of ce...
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    Retention money recognition: recognise as revenue only when reasonable certainty of ultimate collection exists under ICDS construction rules.
    Retention money within a construction contract is part of contract revenue and should be recognised as revenue on billing only when there is reasonable certainty of its ultimate collection, based on the contract's performance criteria and para 9 of ICDS on construction contracts.
    ManualsIncome Tax
    What is the manner of recognizing contract revenue during the early stages of a contract.
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    Contract revenue recognition: recognize only costs incurred when outcome is not reliably estimable; early-stage limit applies.
    When the outcome of a construction contract cannot be estimated reliably, revenue is recognized only to the extent of costs incurred, subject to an early-stage completion limit specified in the Income Computation and Disclosure Standard on Construction Contracts.
    ManualsIncome Tax
    What is the manner of recognition of revenue and expenses from construction contracts under ICDS III...
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    Percentage of completion method recognizes construction contract revenue, expenses and profit by proportion of work completed.
    Recognition of revenue and expenses for construction contracts under ICDS III is governed by the percentage of completion method, whereby revenue, costs and profit are recognized by reference to the stage of completion of contract activity on the reporting date and reported in proportion to work completed.
    ManualsIncome Tax
    How to deal with a case where contract revenue is not recorded in the books of account, but offered ...
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    Bad debt deduction available without book write off when previously taxed income becomes irrecoverable under the statutory proviso.
    If contract revenue was offered to tax under ICDS but not recorded in the books and later becomes irrecoverable, it cannot be written off in the absence of a book entry; instead, deduction may be claimed under the statutory proviso allowing bad debt deduction without book write off where the amount was taken into account in computing income in the previous year in which it became irrecoverable or an earlier year.

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      Income Tax

      What is the manner of recording the borrowing costs.

      1 September, 2017

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      Manual - ICDS IX : Borrowing Costs

      Borrowing costs directly attributable to acquisition, construction, production of tangible and intangible assets are required to be  capitalized as part of that asset cost. With respect to inventory, the borrowing costs should be added to inventory cost, only if such inventory takes twelve months or more for being brought to saleable condition. In respect of funds borrowed specifically for a qualifying asset, the actual borrowing costs during the period are required to be capitalized to that asset. In respect of general borrowings, a specific formula for capitalizing borrowing costs is provided based on the ratio of qualifying assets to total assets.

       

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