ICDS-V-Tangible-fixed-assets

SBS Hyderabad 17th November, 2018 ICDS V- Tangible Fixed Assets By P. Sai Varun 2nd Year Intern M/s SBS and Company LLP [email protected] 040-4018 3366 (119)

Topics to be covered  Introduction of ICDS  Applicability of ICDS  Scope  Identification of tangible assets  Components of Actual cost  Special cases  Inclusions and Exclusions  Self-constructed tangible fixed asset  Non-monetary consideration  Improvements and Repairs  Joint ownership and Joint cost  Transitional provisions  Differences between ICDS V, AS-10 and Ind-AS-16 2 [email protected] www.sbsandco.com +040-4018 3366 (119)

Introduction of ICDS  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.  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. 3 [email protected] www.sbsandco.com +040-4018 3366 (119)

Applicability of ICDS Individuals or HUF Tax audit not Not Applicable applicable Applicable Mercantile system of accounting & Tax audit applicable Applicable Assessee having following Any other income from PGBP assessee or other sources Not applicable Cash system of accounting 4 [email protected] www.sbsandco.com +040-4018 3366 (119)

Scope  The main object of this ICDS is that, an expenditure incurred in connection with a Tangible Fixed Asset is to be capitalised or is to be treated as a revenue expenditure.  ICDS V covers assets being land, building, machinery, plant or furniture held with the intention of being used for the purpose of producing or providing goods or services and not held for sale in the normal course of business.  Since this ICDS deals with tangible fixed assets, intangible assets are not covered under this ICDS for determination of actual cost of asset. 5 [email protected] www.sbsandco.com +040-4018 3366 (119)

Scope  Asset for the purpose of administrative purposes is covered under the ICDS.  Asset for the rental purposes: such rental Income from Covered under income is taxable Business or other this ICDS under sources Not covered under this ICDS Income from House property 6 [email protected] www.sbsandco.com +040-4018 3366 (119)

Identification of tangible assets  No monetary threshold is prescribed for an asset to be recognised as tangible fixed asset. It is recognised if asset is beneficial for an entity which lasts over period of time.  Stand-by equipment and servicing equipment are to be capitalised and spares are to be capitalised if they are expected to be used for a long period. 7 [email protected] www.sbsandco.com +040-4018 3366 (119)

Components of Actual cost  The actual cost of an acquired tangible fixed asset shall comprise of  Purchase price  Import duties and other taxes (which are not subsequently recovered)  Any other expense which is directly attributable for making asset ready to use.  Borrowing cost which is recognised as per ICDS- IX. Note: Any trade discounts need to reduced from actual cost. 8 [email protected] www.sbsandco.com +040-4018 3366 (119)

Special cases  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.  In case of demerger or amalgamation – cost carrying by amalgamating company.  In case of gift – cost to previous owner less depreciation.  In case purchased through cash – not considered for actual cost.  In case earlier used for scientific research – cost less availed deduction u/s 35 of the Act.  Stock converted to asset- FMV on date of conversion.  Previously owned such asset and re-acquired – actual cost when previously purchased less depreciation  Grant or reimbursement from government – reduced from actual cost. For reference Section 43 9 [email protected] www.sbsandco.com +040-4018 3366 (119)

Inclusions and Exclusions  Actual cost doesn’t include initial estimate of dismantling cost and cost for removing the item and restoring the site.  In case payment done for the asset acquired beyond the normal credit terms , then interest paid for such credit is added to asset.  If a subsidy or grant receivable by an assessee from government which is related to acquisition of an asset, then the grant shall be reduced from the written down value of block of assets to which such asset belongs to in accordance with ICDS-VII Government grants. 10 [email protected] www.sbsandco.com +040-4018 3366 (119)

Inclusions and Exclusions  If an asset is acquired from country outside India then exchange fluctuation araised while payment to concerned party is to be increased or decreased from actual cost of the asset in accordance with ICDS-VI Effects of changes in foreign exchange rates.  Administrative and general overhead are need to be included in the cost of asset if such expenditure is directly attributable to asset or bringing it to its working condition.  Expenditure on test runs, experimental production and any other expenditure related to such asset till the asset has been ready for commercial production or captive consumption need to be capitalised.  If asset used in business after it ceases to be used for scientific research, the amount deduction claimed under section 35 (1)(iv) of the Act [i.e. 100% deduction in respect of capital expenditure for scientific research] need to be decreased from Actual cost i.e. Nil . 11 [email protected] www.sbsandco.com +040-4018 3366 (119)

Self-constructed tangible fixed asset  In case of self-constructed tangible fixed asset, all the expenditure directly attributable for construction of such fixed asset need to be capitalised. Note : Any inter department or inter branch profits need to be eliminated from cost of such asset. 12 [email protected] www.sbsandco.com +040-4018 3366 (119)

Non-monetary consideration  If an asset is acquired in exchange of other asset, then fair value of asset so acquired shall be actual cost of asset acquired.  And same has to be followed if asset belonging to one block of asset is exchanged with an asset belonging to another block. 13 [email protected] www.sbsandco.com +040-4018 3366 (119)

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 to be allowed as revenue expenditure and not to 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. 14 [email protected] www.sbsandco.com +040-4018 3366 (119)

Joint ownership and Joint cost  In case asset is owned by two or more persons then its actual cost, depreciation and written down value need to be bifurcated to them based on proportion of ownership.  When several assets are acquired for a consolidated price then cost need to be proportioned to all assets on fair basis. 15 [email protected] www.sbsandco.com +040-4018 3366 (119)

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. 16 [email protected] www.sbsandco.com +040-4018 3366 (119)

Differences S.no Points of comparison ICDS-V Tangible AS- 10 Ind AS-16 Fixed Assets 1 Stand-by equipment and servicing Directly to be They are recognised They are recognised equipment recognised as asset only if they meet only if they meet recognition criteria. recognition criteria. 2 initial estimate of the costs of Doesn’t contain any dismantling and such requirement Need to be Need to be removing the item recognised as the recognised as the Interest need to be cost of asset cost of asset 3 Payment of interest due to recognised as cost payment beyond normal credit Interest shall be Interest shall be terms Grant received shall capitalised only if it capitalised only if it be directly reduced satisfies AS-16 satisfies Ind AS-23 4 Government grant from actual cost of asset in accordance Same as ICDS grant Ind AS -16 doesn’t with ICDS VII shall be reduced permits grant to be from cost of asset. directly reduced from cost of asset. 17 [email protected] www.sbsandco.com +040-4018 3366 (119)

Differences S.no Points of comparison ICDS-V Tangible Fixed Assets AS- 10 Ind AS-16 5 Revaluation of tangible There is no such provision Deals with Deals with fixed assets and change in the fair value of the asset so revaluation and revaluation and method of depreciation acquired, shall be its actual change in method of change in method of cost. depreciation in detail depreciation in 6 Non-monetary detail consideration Recognised if increases future benefits beyond its FMV of the asset the fair value of the 7 Subsequent expenditure previously assessed standard given or FMV of asset asset so acquired of performance acquired which is and if fair value is clearly evident not measurable then carrying amount of asset given up Recognised if meets Recognised if meets recognition criteria recognition criteria 18 [email protected] www.sbsandco.com +040-4018 3366 (119)

Example  An assessee(company) 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 is Rs.17,00,000 And depreciation accounted is Rs.1,13,333(Life is 15 years) And as per Income tax act depreciation @ 15% is Rs.2,55,000 As per ICDS cost of asset is Rs.15,00,000 and accordingly depreciation is Rs.2,25,000 Dismantling cost is treated as expenditure when it actually expended. 19 [email protected] www.sbsandco.com +040-4018 3366 (119)

Example  Increase in profit Rs.30,000 As per normal calculations As per ICDS Particulars Amount in Rs Particulars Amount in Rs Profits from Business 90,00,000 Profit 90,00,000 Gross Total Income 90,00,000 Increase in profit due to 30,000 ICDS Tax on Total income @ 25% 22,50,000 Gross Total Income 90,30,000 Tax on Total income @ 25% 22,57,500 20 [email protected] www.sbsandco.com +040-4018 3366 (119)

At Thank you!!! SBS Hyderabad P. Sai Varun 2nd Year Intern M/s SBS and Company LLP [email protected] +040-40183366(119) Our Presence: Hyderabad, Kurnool, Nellore, TADA, Vizag & Bengaluru: [email protected]; 040-40183366 Disclaimer: Please logon to: http://www.sbsandco.com/disclaimer/ Read our monthly SBS e-Journals www.sbsandco.com/wiki www.sbsandco.com/digest