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Proviso to section 36(1)(iii) inapplicable to construction contracts; interest on contract borrowings is deductible for execution purposes.
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Contract revenue recognition: recognize only costs incurred when outcome is not reliably estimable; early-stage limit applies.
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Retention money recognition as revenue requires reasonable certainty of ultimate collection under ICDS on construction contracts.
Retention money, as part of overall contract revenue under the ICDS on construction contracts, shall be recognised as revenue only when the contingency tied to performance is satisfied or there is reasonable certainty of its ultimate collection.
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Inventory recording requirement under ICDS II now mandates service providers to maintain inventories and disclose valuation for tax purposes.
Service providers are required to maintain records of inventories under the ICDS II standard on valuation of inventories, extending mandatory inventory recognition, valuation and disclosure obligations to entities providing services for purposes of income computation.
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Valuation of Inventories: ICDS II applies to traders and dealers of primary commodities while excluding producers.
ICDS II governs valuation of inventories for income computation and disclosure. The standard is excluded for a producer of primary goods like livestock, agricultural and forest products, mineral oils, ores and gases, but it applies to persons who trade or deal in those commodities; therefore the producer/dealer distinction determines whether ICDS II applies.
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ICDS II valuation excluded for closely held company shares when ICDS VIII classifies them as securities outside its scope.
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ICDS II applicability to derivatives: derivatives held as inventory fall under ICDS II because securities exclusion applies.
Where an assessee holds derivatives as part of inventory, the valuation and related provisions of ICDS II apply because the definition of securities in ICDS VIII expressly excludes derivatives, so such instruments are governed by the inventory valuation standard rather than the securities disclosure regime.
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Disclosure of accounting policies: ICDS requires taxpayers to disclose net ICDS effect in returns and tax audit report.
ICDS I mandates disclosure of significant accounting policies and requires the net effect on taxable income from application of ICDS to be disclosed in the Return of Income; ICDS disclosures are to be made in the tax audit report in Form 3CD, with no separate disclosure requirement for persons not liable to tax audit.
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Marked-to-market gain recognition: ICDS I's non-recognition rule for MTM loss applies equally to gains.
Recognition of marked-to-market losses or expected loss is disallowed under ICDS I unless permitted by other ICDS provisions; the same conditional rule applies mutatis mutandis to recognition of marked-to-market gains or expected profit, so gains or anticipated income may not be recognised for income computation unless another ICDS expressly authorises recognition.
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Accounting Policies: treat ICDS I as computation policies affecting taxable income computation, not books of account.
ICDS I should be read as prescribing computation policies for taxable income so that accrual, going concern, consistency, substance over form and non recognition of mark to market losses apply to income computation under business or other sources, and the disclosure requirement concerns the policies used in computing income rather than the policies used for maintaining books of account.
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Interpretation of undefined tax terms: ICDS provisions generally govern unless declared ultra vires by a competent authority.
Where a term in the ICDS coincides with terminology in Accounting Standards, the AS interpretation generally applies; where no AS analogue exists, judicial tax-law interpretations ordinarily govern. If a current ICDS provision conflicts with earlier AS or judicial interpretations, the ICDS provision will prevail for tax computation and disclosure unless declared ultra vires by a competent court or authority.
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ICDS applicability: ICDS do not apply to MAT on book profit but apply to AMT on adjusted total income.
ICDS do not apply to MAT because MAT is computed on book profit as per the Profit and Loss Account under company law, with specific statutory adjustments; ICDS are not incorporated into that book profit basis. ICDS apply to AMT because AMT is calculated on adjusted total income derived from total income determined under the regular tax provisions, and ICDS affect that regular computation.
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Income Computation standards: specific tax-rule provisions prevail over general ICDS when the two provisions conflict.
ICDS are subordinate general principles for computing income and do not override specific provisions of the Income-tax Rules; where a specific rule governs a particular circumstance, that rule prevails over any inconsistent ICDS guidance.

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Reopening of assessment - Substance over Form - Failure to disclose material fact - Duty of the AO to make an enquiry to test the correctness of the disclosure made even if the statutory forms signed and certified by the Chartered Accountant

10 July, 2019

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2019 (7) TMI 415 - MADRAS HIGH COURT

2018 (10) TMI 442 - MADRAS HIGH COURT

Reopening of the assessment for the year 2010-2011. - Whether ingredients of Section 147 r.w.s 148 are satisfied?

Facts of the case

In the present case, deduction u/s 10B of Income Tax Act, 1961 was allowed to assessee (100% EOU) on the basis of Form No.56G. In the said Form in Column No.8 it is mentioned as 10th year of claim, but, in Column No.7, the date of commencement of manufacturing is mentioned as 28.03.2000. Thus the Assessing Officer stated that the year under consideration happens to be 11th year. The Assessing Officer also referred to the copy of the Form 56G for the assessment year 2001-2002. Accordingly the Assessing Officer informed the assessee that the assessee has exclusively extended its 10B holiday period to the 11th year and hence become ineligible for deduction under Section 10B.

Submission of the assessee

There was no opening stock as on 1.4.2000. The first invoice was raised only on 31.05.2000 to UNICEF, New Delhi. With regard to the date of commencement of manufacturing activity, the assessee stated that the firm came into existence on 20.03.2000, registered as an EOU on 29.03.2000 and has commenced manufacturing activity only after 01.04.2000.

With regard to the discrepancy pointed out by the Assessing Officer in the notice dated 25.01.2017, the assessee stated that the substance over Form is required to be taken into consideration and mere reporting of the date in the Form 56G does not give a conclusive picture as to the date of starting of manufacturing activity which is only in the month of April or which only in the assessment year 2001-02 which has been clearly claimed as the first year of exemption. Therefore, the assessee requested to drop all the assessment proceedings and reopen the assessment.

Single member bench [2018 (10) TMI 442 - MADRAS HIGH COURT], while entertaining the writ petition, has observed that:

Every non disclosure of material facts will not or cannot be a justifiable reason for reopening sustainable under judicial scrutiny.

On the other hand, such non disclosure of a material fact must be of such nature that, but for such non disclosure, the income, relatable to such material fact, would not have escaped assessment. In other words, it should lead to an irrebuttable conclusion that by the conduct of the assessee, either by providing wrong or incorrect particulars or by not providing the full and correct particulars, he should have made the Assessing Officer not to bring a particular income to tax, which is otherwise liable to be taxed. If this test is applied to the present case, I am of the view that the Revenue has to fail.

Revenue took the matter before the division bench of the High Court [2019 (7) TMI 415 - MADRAS HIGH COURT] wherein it was observed that:-

There can be no escape from this fact and the assessee should accept this mistake.................It may be true that the assessee can now take a stand that substance over form is to be considered but what is important is that the assessee at the first instance had a duty to give proper and correct details. We may say that the assessee failed in doing so. Be that as it may, what is required on the part of the Assessing Officer is not to go mechanically by the details disclosed by the assessee in the statutory form and or for that matter signed and certified by the Chartered Accountant. The Assessing Officer being cast with a statutory duty an enquiry is required to test the correctness of the disclosure made in such statutory forms. This is why the concept of substance over form was always preferred by Courts while dealing with such matters.

The second mistake which the assessee committed, which had invited the problem, was not mentioning the correct date of commencement of commercial production in its reply dated 02.02.2007 and this again was submitted through the very same Chartered Accountant. In the reply, there is a vague statement with regard to the commencement of manufacturing activity and what has been stated is that the assessee commenced manufacturing activity only after 01.04.2000. Thus, we are of the view that the assessee appears to have not been very seriously contesting the matter at the relevant point of time. Wisdom dawned upon the assessee only after the appellant passed the order dated 13.02.2017. It is thereafter the assessee through their Chartered Accountant gave the exact date of production/manufacture as 25.05.2000.

Keeping aside all these issues, we have examined the correctness of the order passed by the learned Single Bench and we note with approval the findings of the learned Single Bench in paragraphs 16 and 17 of the impugned order. The above finding rendered by the learned Single Bench is just and proper.

As pointed out by the learned Single Bench every non-disclosure of material facts will not or cannot be a justifiable reason for reopening an assessment. We reiterate that what was required to be considered is that, substance over form.

Therefore, we are of the considered view that the learned Single Bench was perfectly right in allowing the writ petition which had been done after thorough examination of the facts and the legal position. In our considered view the revenue has not made out any grounds to interfere with the order passed by the learned Single Bench.

 


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2019 (7) TMI 415 - MADRAS HIGH COURT

2018 (10) TMI 442 - MADRAS HIGH COURT

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Acts Income Tax