Latest Blogs from SBS and Company LLP

    ICDS V Tangible Fixed Assets

    Introduction:

    • Section 145(2) of the Income Tax Act,1961(“the Act”) grants power to Central Government to notify Income Computation Disclosure Standards. 
    • 10 ICDS were notified by Central Government on 31stMarch,2015. However, they are made applicable from the Assessment Year 2017 -18 with a specified deferment period of one year from date of its implementation. 
    • ICDS are NOT for maintenance of books of accounts, they are only for purpose of income
    • Computation &
    • Disclosure (Notification S.O.892(E) dated 31.03.2015)

    Note: In the case of conflict between the provisions of the Act and the ICDS, the provisions of the Act shall prevail to that extent. 

    Applicability:

    ICDS is applicable to assessees

    • Having income under head “Profits and gains of business or profession” or “Income from other sources” AND
    • Following mercantile system of accounting.

    But it is not applicable to assessees

    • Who is Individual or HUF and who are not required to get their books get audited u/s 44AB of the Act.
    • Following cash system of accounting

    ICDS V: Tangible Fixed Assets

    • The main object of this ICDS is an expenditure incurred in connection with a Tangible Fixed Asset is to be capitalised or to be treated as a revenue expenditure. 
    • It covers assets being Land, Building, Plant and Machinery and Furniture held with the intention of being used for the purpose of producing or providing goods/services and not held for sale in the normal course of business. 
    • Intangible Assets are not covered under this ICDS, normal provisions of the Act and accounting principles to be applied for treatment of Intangible assets for determining actual cost. 
    • Assets for the purpose of administrative purposes and rental purposes are NOT explicitly covered under this ICDS, however we can consider that asset used for administrative purposes are held with the intention of being used for the purpose of producing or providing goods

    /services, hence covered under the ICDS.  

    • Whereas asset for rental purposes are covered if income of rent is taxable under head Income from Business or Income from other sources.

    Example:                                               

     

    Residential building- Not covered under ICDS when rental income is taxable under head Income from house property.

    Shopping malls- covered under this ICDS as rental income is taxable under head income from Business.

     

    Identification of Tangible fixed assets:

    • No monetary threshold is prescribed for an asset to be recognised as tangible fixed asset.Unlike AS-10 and Ind AS-16 an item can be recognised as a tangible fixed asset if it is beneficial for an enterprise for a long period.
    • Unlike AS-10 and Ind AS-16 , Stand-by equipment and servicing equipment are to be capitalised and spares are to be capitalised if they are expected to used for a long period.

    Components of Actual cost

    The actual cost of acquisition of tangible Fixed Asset shall comprise of

    • Purchase price
    • Import duties and other taxes (which are not subsequently recoverd) and
    • Any other expense which is directly attributable for making asset ready to use.
    • Borrowing cost which is recognised as per ICDS- IX. 
    • Actual cost in case of certain circumstances like merger, amalgamation, re-acquisition , gift etc need to recognised as per section 43(1) of the Act. 

    Inclusions and Exclusions from Actual cost: 

    S No.

    Particulars

    Inclusion

    Exclusions

    1

    Initial estimate of dismantling cost and cost for removing the item and restoring the site

    This cost need to be included in actual cost.

    -

    2

    Subsidy Received from Central Government

    -

    To the extent of amount received should be reduced from WDV in accordance with ICDS-VII Government grants.

    3

    Payment beyond the normal credit terms for the asset acquired.

    Interest need to be included in the actual cost of such asset.

    -

    4

    Exchange fluctuation in case asset acquired outside India

    Any foreign exchange loss need to be included in actual cost

    Any foreign exchange gain need to be excluded from actual cost.

    5

    Administrative and general overhead

    This  need to be included if such expenditure is directly attributable to asset or bringing it to its working condition

    -

    6

    Expenditure on test runs, experimental production

    This need to be included such asset till the asset has been ready for commercial production or captive consumption.

    -

     

    Non-monetary consideration:

     

     

     

    Self-constructed tangible fixed asset:

    ·         Expenditure directly attributable for construction of such fixed asset need to be capitalised.

    ·         Any inter department or inter branch profits need to be eliminated from cost of such asset.

    Fair value of asset so acquired shall be actual cost of asset acquired

    If asset belonging to one block of asset is exchanged with an asset belonging to another block

     

    If an asset is acquired in exchange of other asset

    Other Important aspects of ICDS-V

     

     

    Improvements and Repairs:

     

    ·         An Expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is added to the actual cost.

    ·         *Current repairs are need be allowed as expenditure and not added to the cost of asset.

    ·         An addition or extension which becomes integral part of asset is added to its actual cost and if it capable of being used even after such asset is disposed off and has separate identity then such addition need be recognised as a separate asset.

     

    *Current repairs mean the repairs that have been incurred to preserve and maintain an already existing asset.

     

    Joint ownership:

    ·         In case asset is owned by two or more persons then its actual cost, depreciation and written down value need to be bifurcated to persons based on proportion of ownership

    Joint cost:

    ·         When several assets are acquired for a consolidated price then cost need to be proportioned to all assets on fair basis.

     

    Transitional provisions: 

    For an asset

    • which is purchased or constructed after 01-04-2016 and
    • the acquisition or construction of which commenced on or before the 31-03-2016 but not completed even after 01-04-2016 should be recognised as per this ICDS.

    Note: In recognition of actual cost of an asset which is acquired before 01-04-2016, actual cost considered in the earlier years is to be taken into account. 

     

    Differences:

    S.no

    Points of comparison

    ICDS-V Tangible Fixed Assets

    AS- 10

    Ind AS-16

    1

    Stand-by equipment and servicing equipment

    Directly to be recognised as asset

    They are recognised only if they meet recognition criteria.

    They are recognised only if they meet recognition criteria.

    2

    initial estimate of the costs of dismantling and

    removing the item

    Doesn’t contain any such requirement

    Need to be recognised as the cost of asset

    Need to be recognised as the cost of asset

    3

    Payment of interest due to payment beyond normal credit terms

    Interest need to be recognised as cost

    Interest shall be capitalised only if it satisfies AS-16

    Interest shall be capitalised only if it satisfies Ind AS-23

    4

    Government grant

    Grant received shall be directly reduced from actual cost of asset in accordance with ICDS VII

    Same as ICDS grant shall be reduced from cost of asset.

    Ind AS -16 doesn’t permits grant to be directly reduced from cost of asset.

    5

    Revaluation of tangible fixed assets and change in method of depreciation

    There is no such provision

    Deals with revaluation and change in method of depreciation in detail

    Deals with revaluation and change in method of depreciation in detail

    6

    Non-monetary consideration

    the fair value of the asset so acquired, shall be its actual cost.

    FMV of the asset given or FMV of asset acquired which is clearly evident

    the fair value of the asset so acquired and if fair value is not measurable then carrying amount of asset given up

    7

    Subsequent expenditure

    Recognised if increases future benefits beyond its previously assessed standard of performance

    Recognised if meets recognition criteria

    Recognised if meets recognition criteria

     

    Example:

    An assessee(company) has Business income of Rs.90,00,000, during the year assessee purchased a machinery worth Rs.15,00,000 and its estimated cost of dismantling in future is Rs.2,00,000.

    Explanation:

    • Cost of asset recognised as per Accounting standards : 17,00,000
    • Depreciation accounted :                   1,13,333(Life is 15 years)
    • Depreciation as per Income tax act @ 15% :                   2,55,000 
    • As per ICDS cost of asset is Rs.15,00,000 and accordingly depreciation is Rs.2,25,000

    Increase in profit is Rs.30,000 

    Tax as per Normal calculations:

    Particulars

    Amount in Rs

    Profits from Business

    90,00,000

    Gross Total Income

    90,00,000

    Tax on Total income @ 25%

    22,50,000

     

    Tax as per ICDS:

    Particulars

    Amount in Rs

    Profit

    90,00,000

    Increase in profit due to ICDS

    30,000

    Gross Total Income

    90,30,000

    Tax on Total income @ 25%

    22,57,500

     

    Dismantling cost is treated as expenditure only when it expended.

    Subscribe SBS AND COMPANY LLP updates via Email!