Time To Relook At ICDS Provisions

In the financial year 2017, significant taxation reforms have been introduced or implemented globally. The United States of America (USA) proposed revamping of its overall tax system calling it as 'US Tax Reform', the United Arab Emirates (UAE) introduced and implemented VAT with effect from January 1, 2018. India has also witnessed some noteworthy changes in its tax system, inter-alia, GST, Income Computation and Disclosure Standards (ICDS), Ind AS etc.

The CBDT (Central Board of Direct Taxes) has notified 10 Income Computation and Disclosure Standards which were made applicable to every business entity (liable to tax audit) from the assessment year 2017-18. The stated objectives behind issuing the new set of standards were bringing uniformity in accounting policies, computation of taxable income and to reduce irregularities in tax-related provisions.

The major premise on which the ICDSs are based is that the income computed for the purposes of tax need not be the income as reflected in the books of account maintained by the taxpayer.

The adjustments introduced by the ICDS have been the matter of disputes as some of the requirements of ICDS were in direct conflict with Income Tax Act and judicial precedents of the courts, which are binding on taxpayers and the Income Tax Department.

Distressed with the incompatible treatment under ICDS, the Chamber of Tax Consultants had filed a writ petition in the Delhi High Court challenging the constitutional validity of ICDS. The Chamber argued that the notified Income Computation and Disclosure Standards are contrary to law, as their implementation would nullify the judgments of the Supreme Court and various high courts. Some of the requirements of ICDS are even contrary to the provisions of Income Tax Act. The Chamber also contended that Parliament had delegated legislative powers to the central government, which further sub-delegated the powers to the CBDT to notify the Income Computation and Disclosure Standards. The introduction of ICDS is an instance of excessive delegation of legislative powers.

The Delhi High Court affirmed that the ICDS provisions cannot overrule the provisions of the Income Tax Act, rules and the judicial precedents interpreting the provisions of the Income Tax Act. The interpretations laid down by various judicial precedents would prevail and will not be affected by the Income Computation and Disclosure Standards. Therefore, the Delhi High Court struck down several provisions of ICDS.

The High Court held that the power to enact law is to be exercised only by Parliament and not by any of its administrative wing. In case the notified ICDS sought to alter the system of accounting or tax treatment to a particular transaction, it would require the legislature to step in to amend the Act to incorporate such a change.

We have seen in the past that to override the impact of court rulings, which go against the legislative intent, amendments are made in the Income Tax Act. The most popular instance is the Supreme Court's ruling in the case of Vodafone International ([2012] 17 taxmann.com 202). The apex court in its order dated January 20, 2012 held in favour of Vodafone on a capital gain matter, which was overruled by a series of amendments in the Income Tax Act through the Finance Act, 2012.

Though the decision of the Delhi High Court has provided some relief to the taxpayers, it will not be an enduring benefit for the taxpayers at large. Thus, it is apprehended that in the upcoming Budget, the government may drop the ICDS altogether and may propose necessary amendments so that conflicting requirements of ICDS could be incorporated in the Act itself.

The Delhi High Court has also suggested that only a competent legislature can make a validation in law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive. In other words, where there is a binding judicial precedent, by virtue of articles 141 and 144 of the Constitution, it is not open to the executive to override it unless there is an amendment to the Act by way of a validation law.

Though ICDSs are in conflict with the judicial precedents, if the treatment suggested by the ICDSs is incorporated in the Income Tax Act, it would certainly help the department in reducing the repetitive litigations on various matters.

(Naveen Wadhwa is Deputy General Manager at Taxmann)

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