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[TO BE PUBLISHED IN THE GAZETTE OF INDIA,
EXTRAORDINARY, PART-II, SECTION 3, SUB-SECTION (ii)]
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
(DEPARTMENT OF REVENUE)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 29th^ September, 2016
S.O. 3079 (E) In exercise of the powers conferred by sub-section (2) of section
145 of the Income-tax Act, 1961 (43 of 1961, the Central Government hereby
notifies the income computation and disclosure standards as specified in the
Annexure to this notification to be followed by all assessees (other than an
individual or a Hindu undivided family who is not required to get his accounts
of the previous year audited in accordance with the provisions of section 44AB
of the said Act) following the mercantile system of accounting, for the purposes
of computation of income chargeable to income-tax under the head “Profits and
gains of business or profession” or “Income from other sources”.
2. This notification shall apply to the assessment year 2017 - 18 and
subsequent assessment years.
Annexure
A. Income Computation and Disclosure Standard I relating to accounting
policies
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
Scope
- This Income Computation and Disclosure Standard deals with significant accounting policies.
Fundamental Accounting Assumptions
- The following are fundamental accounting assumptions, namely:—
- Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, profession or vocation. For this purpose,
(i) the treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form; and
(ii) marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard.
- An accounting policy shall not be changed without reasonable cause.
Disclosure of Accounting Policies
- All significant accounting policies adopted by a person shall be disclosed.
- Any change in an accounting policy which has a material effect shall be disclosed. The amount by which any item is affected by such change shall also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect for the current previous year but which is reasonably expected to have a material effect in later previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted and also in the previous year in which such change has material effect for the first time.
- Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item.
- If the fundamental accounting assumptions of Going Concern, Consistency and Accrual are followed, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact shall be disclosed.
Transitional Provisions
- All contract or transaction existing on the 1st^ day of April, 2016 or entered into on or after the 1st day of April, 2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income, expense or loss, if any, recognised in respect of the said contract or transaction for the previous year ending on or before the 31st^ March,2016.
(d) Producers’ inventories of livestock, agriculture and forest products, mineral
oils, ores and gases to the extent that they are measured at net realisable
value;
(e) Machinery spares, which can be used only in connection with a tangible fixed
asset and their use is expected to be irregular, shall be dealt with in
accordance with the Income Computation and Disclosure Standard on
tangible fixed assets.
Definitions
2(1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
(a) “Inventories” are assets:
(i) held for sale in the ordinary course of business;
(ii) in the process of production for such sale;
(iii) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
(b) “Net realisable value” is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
2(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meanings assigned to them in that Act.
Measurement
- Inventories shall be valued at cost, or net realisable value, whichever is lower.
Cost of Inventories
- Cost of inventories shall comprise of all costs of purchase, costs of services, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Costs of Purchase
- The costs of purchase shall consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.
Costs of Services
6. The costs of services shall consist of labour and other costs of personnel directly engaged in
providing the service including supervisory personnel and attributable overheads.
Costs of Conversion
- The costs of conversion of inventories shall include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads that are incurred
- Interest and other borrowing costs shall not be included in the costs of inventories, unless they meet the criteria for recognition of interest as a component of the cost as specified in the Income Computation and Disclosure Standard on borrowing costs.
Exclusions from the Cost of Inventories
- In determining the cost of inventories in accordance with paragraphs 4 to paragraphs 11, the following costs shall be excluded and recognised as expenses of the period in which they are incurred, namely:—
(a) Abnormal amounts of wasted materials, labour, or other production costs;
(b) Storage costs, unless those costs are necessary in the production process prior to a
further production stage;
(c) Administrative overheads that do not contribute to bringing the inventories to
their present location and condition ;
(d) Selling costs.
Cost Formulae
- The Cost of inventories of items
(i) that are not ordinarily interchangeable; and
(ii) goods or services produced and segregated for specific projects
shall be assigned by specific identification of their individual costs.
- ‘Specific identification of cost’ means specific costs are attributed to identified items of inventory.
- Where there are a large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs shall not be made.
First-in First-out and Weighted Average Cost Formula
- Cost of inventories, other than the inventory dealt with in paragraph 13, shall be assigned by using the First-in First-out (FIFO), or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.
- The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average shall be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances.
Techniques for the Measurement of Cost
18(1) Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate the actual cost. Standard costs take into account normal levels of consumption of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of the current conditions.
- The value of the inventory as on the beginning of the previous year shall be
(i) the cost of inventory available, if any, on the day of the commencement of
the business when the business has commenced during the previous year; and
(ii) the value of the inventory as on the close of the immediately preceding
previous year, in any other case.
Change of Method of Valuation of Inventory
- The method of valuation of inventories once adopted by a person in any previous year shall not be changed without reasonable cause.
Valuation of Inventory in Case of Certain Dissolutions
- In case of dissolution of a partnership firm or association of person or body of individuals, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value.
Transitional Provisions
- Interest and other borrowing costs, which do not meet the criteria for recognition of interest as a component of the cost as per para 11, but included in the cost of the opening inventory as on the 1 st^ day of April, 2016, shall be taken into account for determining cost of such inventory for valuation as on the close of the previous year beginning on or after 1st^ day of April, 2016 if such inventory continue to remain part of inventory as on the close of the previous year beginning on or after 1st^ day of April, 2016.
Disclosure
- The following aspects shall be disclosed, namely:—
(a) the accounting policies adopted in measuring inventories including the cost
formulae used. Where Standard Costing has been used as a measurement of
cost, details of such inventories and a confirmation of the fact that standard
cost approximates the actual cost; and
(b) the total carrying amount of inventories and its classification appropriate to a
person.
C. Income Computation and Disclosure Standard III relating to
construction contracts
Preamble
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961(‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
Scope
(d) “Retentions” are amounts of progress billings which are not paid until the
satisfaction of conditions specified in the contract for the payment of such
amounts or until defects have been rectified.
(e) “Progress billings” are amounts billed for work performed on a contract
whether or not they have been paid by the customer.
(f) “Advances” are amounts received by the contractor before the related work is
performed.
2(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning respectively assigned to them in the Act.
- A construction contract may be negotiated for the construction of a single asset. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.
- Construction contracts are formulated in a number of ways which, for the purposes of this Income Computation and Disclosure Standard, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example, in the case of a cost plus contract with an agreed maximum price.
Combining and Segmenting Construction Contracts
- The requirements of this Income Computation and Disclosure Standard shall be applied separately to each construction contract except as provided for in paragraphs 6, 7 and 8
herein. For reflecting the substance of a contract or a group of contracts, where it is necessary, the Income Computation and Disclosure Standard should be applied to the separately identifiable components of a single contract or to a group of contracts together.
- Where a contract covers a number of assets, the construction of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset; (b) each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can be identified.
- A group of contracts, whether with a single customer or with several customers, should be treated as a single construction contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and
(c) the contracts are performed concurrently or in a continuous sequence.
- Where a contract provides for the construction of an additional asset at the option of the customer or is amended to include the construction of an additional asset, the construction of the additional asset should be treated as a separate construction contract when:
(a) the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Income Computation and Disclosure Standard on Borrowing Costs.
These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.
- Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract.
- Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.
When costs incurred in securing a contract are recognised as an expense in the
period in which they are incurred, they are not included in contract costs when
the contract is obtained in a subsequent period.
- Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress.
Recognition of Contract Revenue and Expenses
- Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.
- The recognition of revenue and expenses by reference to the stage of completion of a contract is referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.
- The stage of completion of a contract shall be determined with reference to:
(a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers are not determinative of the stage of completion of a contract.
- When the stage of completion is determined by reference to the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are included in costs incurred upto the reporting date. Contract costs which are excluded are:
