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CHAPTER – 3: ASSESSMENT OF COMPANIES

INCOME COMPUTATION AND DISCLOSURE STANDARDS - ICDS

1. Features of ICDS:
ICDS are to be followed by all assesses, except Individuals or HUF who are not covered under tax
audit provisions, following Mercantile System of accounting.

The above standards are followed while computing:

a) Income from business; and
b) Income from other sources
and not for the purpose of maintenance of books of accounts.

In case of conflict between the provisions of the Income-tax Act and the notified ICDS, the
provisions of the Act shall prevail to that extent.

Central Government has issued the following ten ICDS:

ICDS No. Name of the ICDS AS Ind AS

ICDS I Accounting Policies AS 1 Ind AS 1
ICDS II Inventories AS 2 Ind AS 2
ICDS III Construction Costs AS 7 Ind AS 115
ICDS IV Revenue Recognition AS 9 Ind AS 115
ICDS V Tangible Fixed Assets AS 10 Ind AS 16
ICDS VI Effects of Changes in
Foreign Exchange Rates AS 11 Ind AS 21
ICDS VII Government Grants AS 12 Ind AS 20
ICDS VIII Securities AS 13 Ind AS 32, 107, 109
ICDS IX Borrowing Costs AS 16 Ind AS 23
ICDS X Provisions, Contingent
Liabilities and Contingent Assets AS 29 Ind AS 37

As per section 2(24)(xviii), the following is treated as income:

Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement by the Central Government or a State Government or any authority or
body or agency in cash or kind to the assessee except any subsidy or grant or reimbursement which
is taken into account for determination of the actual cost of the asset.
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1. XYZ Private Limited is engaged in manufacturing and selling ceramic tiles. The net profit of
the company as per its profit and loss account for the year ended 31st March, 2024 is Rs.150
lakhs after debiting or crediting the following items:

i. One-time license fee of Rs.20 lakh paid to a foreign company for obtaining franchisee on
1st June, 2023.

ii. Rs.29,000 paid to A & Co., a goods transport operator in cash on 31st January 2024 for
distribution of the company’s products to its warehouse.

iii. Rent of Rs.6 lakh received from letting out a part of its office premises. Municipal tax in
respect of the said part of the building amounting to Rs.15,000 remains unpaid due to
court litigation.

iv. Rs.2 lakhs being contribution to a University approved and notified u/s.35(1)(ii).

v. Rs.3 lakh, being loss due to destruction of machinery caused by a fire due to short
circuit. The insurance company did not admit the claim of the company.

vi. Rs.4 lakhs and Rs.1 lakh being amounts waived by a bank out of principal and arrear
interest, respectively, in an one-time settlement. The loan was obtained for meeting
working capital requirement four years back.

vii. Rs.1 lakh, being amount payable to a contractor (who does not have PAN) for repair
work at the company’s factory. Tax of Rs.2,000 was deducted and paid in time.

viii. Depreciation on tangible assets Rs.1,00,000.

Additional Information:
a) Depreciation on tangible fixed assets as per Income tax Rules Rs.1.75 lakhs

b) The company has obtained a loan of Rs.2 lakh from ABC (P) Ltd in which it holds 16%
voting rights. The accumulated profits of ABC (P) Limited on the date of receipt of loan
was Rs.50,000.

Compute the total income of XYZ (P) Limited for the AY 2024-25 assuming that the company
has not opted for section 115BAA or section 115BAB. Ignore the provisions relating to
Minimum Alternate Tax.

Answer:
Waiver of PRINCIPAL amount is a benefit, hence, taxable u.s.41(1). Since it is credited to P & L
A/c, no further adjustment is required.

Waiver of INTEREST is also a benefit. This amount would have been disallowed earlier u.s.43B.
Hence, the same cannot be taxed again. Therefore, excluded from computation.
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2. XYZ Ltd is engaged in the business of manufacturing fertilizers. Its P&L A/c shows a net profit
₹ 500 lakhs for the year ended 31.03.2024 after debiting & crediting the following items:

i. Depreciation provided in the books as per straight line basis is ₹ 30 lakhs.

ii. Normal depreciation allowable is Rs.28 lakhs. The company has made addition to
machinery during the year to the extent of Rs.100 lakhs in June, 2023.

iii. The company has made cash payments for purchases and expenditure as below:
On 04.06.2023 ₹ 2 lakhs (due to strike by bank staff)
On 05.06.2023 ₹ 4 lakhs (due to cash demanded by supplier)
On 30.09.2023 ₹ 1 lakh (half yearly closing for bank; a bank holiday)

Cash payments made to transport operator for hiring of lorry as follows:

07.05.2023 ₹ 50,000; 08.01.2024 ₹ 75,000; 02.03.2024 ₹ 32,000.

iv. ₹ 7.5 lakhs contribution to a University approved and notified u/s.35(1)(ii).

v. The company has imported 1000 kgs raw materials from a supplier in US @ $75/kg on
29.03.2023. The exchange rate was Rs.75/$ when the imports were made. The
payment to the supplier was made on 20.01.2024 when the exchange rate was Rs.78/$.
The company had not entered into a forward contract to hedge the risk.

vi. Rent paid and professional charges paid to a consultant including GST was Rs.5,61,600
and Rs.2,24,720 respectively. TDS was not deducted on the GST portion for both the
payments.

vii. The company has also purchased goods of ₹ 55 lakhs from M/s.ABC Ltd in which
Directors have substantial interest. The market value of goods is ₹ 54 lakhs.

viii. Donation paid to a political party is ₹ 25 lakhs by way of cheque.

ix. The company has incurred legal expenses for the following:
a) Issue of bonus shares ₹10 lakhs.
b) Alteration of MOA ₹ 2 lakhs (in connection with increased authorized capital).

Additional Information:
GST of ₹ 1.45 lakhs, pertaining to the year ended 31.03.2023, was paid on 10.03.2024.

Compute the total income and tax payable by the company for the AY 2024-25. Assume that
the company has not opted for section 115BAA/section 115BAB.

Answer:
➢ No tds required on GST component if shown separately in the Invoice. CBDT circular.

➢ Exchange loss (3 x $75,000: Rs.2,25,000) on account of purchase of raw material has to be

recognized as revenue expenditure, hence allowed u.s.37(1). Supreme Court decision.
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➢ Legal expenses in connection with issue of bonus shares is a revenue expenditure as there is no
increase in the capital base, hence allowed. Supreme Court decision.

➢ Legal expenses in connection with increase in authorized capital is a capital expenditure,

hence disallowed. Supreme Court decision.

➢ GST pertaining to previous year 2022-23 shall now be allowed in previous year 2023-24 in the
year of payment.

3. The Profit & Loss Account of ST Private Limited for the year ended 31st March, 2024 shows a
profit of ₹ 75 lakhs after debiting the following items:

i. ₹ 7.80 lakhs paid towards course fee and hostel expenses for MBA course of a close
relative of a director. The relative is not in employment with the company.

ii. ₹ 3.50 lakhs, being expenses incurred on installation of a traffic signal, so as to facilitate
its employees coming to office to overcome traffic jam and save office time.

iii. ₹ 3 lakhs spent on gift items distributed to various dealers under the company's sales
incentive scheme.

iv. ₹ 6 lakhs, being expenses incurred on the travelling of the wife of MD, who accompanied
him on tour to Singapore on invitation of Trade and Commerce Chamber, Singapore.

v. ₹ 3 lakhs, being amount paid in March 2024 consequent upon change in currency rate
due to exchange fluctuation in excess of the amount due to the supplier of machinery.
Machinery was put to use in July 2023.

vi. ₹ 18,000 and ₹ 9,000 paid in cash on 25th October, 2023 by two separate vouchers to a
contractor who carried out certain repair work in the office premises.

vii. Interest of ₹ 2 lakhs was paid in March, 2024 to a company on a loan taken from a
company. Tax deducted at source from such interest was deposited in July, 2024.

Additional information:
a. Provision for audit fee of Rs.6 lakhs was made in the books for the year ended 31 st
March, 2023 without tds. Such fee was paid to the auditors in September, 2023 after
deducting tax u.s.194J and the tax so deducted was deposited on 7th November, 2023.

b. During the year, the company purchased 10,000 shares of VK Pvt Ltd at Rs.40 per share.
The f.m.v of such shares on the date of transaction was Rs.60 per share.

Compute total income of ST Private Limited for Assessment Year 2024-25 and tax payable on
such income indicating reasons for treatment of each item. Ignore MAT provisions.