Income Computation and Disclosure Standards (ICDS): formula sheet

Key formulas

Method of accounting

Business / other sources income = computed on cash OR mercantile system, regularly employed (s. 276(1))

Subject to notified ICDS. Consistency matters: the method must be regularly followed.

Power to notify ICDS

Central Government may notify ICDS for any class of assessees or any class of income (s. 276(2))

ICDS apply only where notified, and only for these two heads.

Grounds for assessment under section 271

(a) accounts incorrect or incomplete; (b) method not regularly followed; (c) income not computed as per notified standards (s. 276(3))

Any one ground is enough. Learn them as A-B-C.

Inventory valuation (s. 277(1)(i))

Inventory = lower of actual cost or net realisable value, as per ICDS

Cost includes tax, duty, cess or fee actually paid or incurred to bring goods to location and condition (s. 277(1)(ii)).

Securities as inventory

Unlisted, or listed but not regularly quoted: actual cost initially recognised. Other securities: lower of cost or NRV (s. 277(1)(iii),(iv))

Comparison of cost and NRV is category-wise (s. 277(3)).

Contracts (s. 57)

Construction contracts and service contracts: percentage of completion method; services of not more than 90 days: project completion; indeterminate acts over a period: straight line

Contract revenue includes retention money; contract costs are not reduced by incidental interest, dividends or capital gains.

Fundamental assumptions (ICDS I)

Going concern + Consistency + Accrual

Assumed to be followed. Non-compliance must be disclosed.

Change in accounting policy (ICDS I)

Change only if required by law/ICDS OR gives a more appropriate presentation

Material effect must be disclosed. Impact is disclosed where it can be ascertained.

Specific borrowing (ICDS IX)

Amount capitalised = Actual borrowing cost incurred on the loan for the period of capitalisation

Do NOT deduct income earned on temporary investment of the unused loan.

General borrowing (ICDS IX)

Amount capitalised = (A × B) ÷ C

A = average of cost of the qualifying asset on the first and last day of the previous year. B = actual cost of general borrowings during the year (excluding specific borrowings). C = average of total assets in the balance sheet on the first and last day of the previous year.

Qualifying asset test

Listed tangible and intangible assets: qualify, no time test. Inventories: 12 months or more to reach saleable condition

The 12-month test applies only to inventories.

Commencement

Expenditure being incurred + Borrowing costs being incurred + Activities to prepare the asset begun

All three conditions must be met before capitalisation starts.

Cessation

Capitalisation stops on the date the asset is first put to use

Borrowing cost after that date is a revenue expense.

Inventory valuation rule

Value = lower of (actual cost, NRV)

Section 277(1)(i). Applies to inventory generally, as computed per the notified ICDS.

Net realisable value

NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs

Compare with cost for each item or category as the standard requires.

Cost of inventory

Cost = Purchase price + Conversion costs + Other costs to bring goods to present location and condition + Taxes, duties, cess or fees paid or incurred

Section 277(1)(ii) and (4). Include the tax even if a credit or right arises from paying it.

Unlisted or irregularly quoted securities

Value = actual cost initially recognised

Section 277(1)(iii). Applies to securities held as inventory that are not listed, or are listed but not quoted with regularity. No lower-of-cost-or-NRV test.

Other securities

Value = lower of (cost, NRV), compared category-wise

Section 277(1)(iv) and 277(3).

Depreciation on a block

Depreciation = Prescribed % × WDV of the block

Section 33(1) and (3)(a). Covers buildings, machinery, plant, furniture and specified intangibles acquired on or after 1 April 1998 (not goodwill), used wholly and exclusively for business.

Half-rate rule

If acquired in the tax year and used for less than 180 days: normal depreciation = 50% of prescribed rate

Section 33(4). It restricts normal depreciation only, not additional depreciation.

Additional depreciation

20% of actual cost of new machinery or plant (10% if used for less than 180 days, and 10% in the next tax year)

Section 33(8) and (9). Only for manufacture, production, or power generation, transmission or distribution, and subject to the listed exclusions.

Stage of completion (cost method)

Stage of completion % = Costs incurred to date ÷ Total estimated contract cost × 100

Use costs that reflect work done. Costs for future work, such as advance payments to suppliers, are excluded from the numerator.

Revenue recognised in the year

Revenue for year = (Stage of completion % × Total contract revenue) − Revenue recognised in earlier years

Total contract revenue includes retention money (section 57(3)(a)).

Profit for the year

Profit = Revenue for the year − Contract costs for the year

Do not reduce costs by incidental interest, dividend or capital gains (section 57(3)(b)).

Service contract exceptions

Duration ≤ 90 days: project completion method. Indeterminate acts over a specified period: straight line method. Otherwise: percentage of completion.

From section 57(2).

Grant for depreciable asset

Revised actual cost or WDV = Cost or WDV − Grant

Depreciation is then computed on the reduced value.

Section 43 charge

Exchange gain or loss on foreign currency transactions = income or loss, computed as per ICDS

Subject to section 42. Covers monetary and non-monetary items, translation of foreign operations, forward contracts and translation reserves.

Variation in liability (section 42)

A = B – C

A = variation in liability. B = payment in rupees at the time it is made. C = corresponding liability in rupees at the time of acquiring the asset.

B for section 42

B = payment made (a) towards cost of the asset, or (b) towards repayment of money borrowed, with interest in foreign currency, specifically for acquiring the asset

Any part of the liability met directly or indirectly by another person or authority is excluded.

Effect on cost

Revised actual cost = Original cost ± A

A positive A (rupee payment is higher) increases cost; a negative A reduces it. Applies to actual cost under section 39, capital expenditure under section 32(i) or 45(1)(a)(i), or cost of acquisition for section 72.

Forward contract with authorised dealer (section 42(4))

Use the rate specified in the contract for the part of the sum available to discharge the liability

The contract must be with an authorised dealer under FEMA, 1999, for a specified sum on or after a stipulated future date at a stated rate.

Business income after ICDS adjustment

Taxable business income = Book profit + ICDS-based additions − ICDS-based deductions

Add back any book deduction that ICDS does not allow. Deduct any item ICDS allows but books did not charge. Other normal tax adjustments are made separately.

Inventory valuation rule (section 277(1)(i))

Value of inventory = lower of actual cost and net realisable value

Compare item by item for goods. For securities, the comparison is category-wise (section 277(3)).

Cost of inventory (section 277(1)(ii))

Cost includes tax, duty, cess or fee actually paid or incurred to bring goods to their location and condition

This applies whatever the name of the levy. Section 277(4) says it includes such payment irrespective of any right arising from it.

Unlisted or thinly traded securities held as inventory

Value = actual cost initially recognised

No write-down to net realisable value under section 277(1)(iii).

Other securities held as inventory

Value = lower of actual cost and net realisable value, category-wise

Section 277(1)(iv) and (3).

Effect of closing stock error on profit

Higher closing stock → higher profit; lower closing stock → lower profit

Use this to decide whether to add or deduct when ICDS value differs from book value.

Quick revision

• Section 276(1): income from business or other sources follows the cash or mercantile system regularly employed.
• Section 276(2): the Central Government notifies ICDS for any class of assessee or income.
• Section 276(3): the Assessing Officer can assess under section 271 if accounts are doubtful, the method is not regularly followed, or ICDS are not applied.
• Inventory is valued at lower of actual cost or net realisable value under section 277(1)(i).
• Taxes, duties, cess and fees paid to bring goods to their location and condition are included in valuation.
• Unlisted or irregularly quoted securities held as inventory are valued at actual cost initially recognised.
• Other securities are valued at lower of cost or NRV, compared category-wise.
• Section 57: construction and service contracts use percentage of completion, subject to exceptions.
• Service contracts of not more than ninety days use project completion; indeterminate acts over a period use straight line.
• Contract revenue includes retention money, and contract costs are not reduced by interest, dividends or capital gains.
• Section 43 covers forex gains and losses on monetary and non-monetary items, forward contracts, translation and reserves.

Common mistakes

• Applying ICDS to salary, house property or capital gains. Fix: Remember that section 276(1) covers only business or profession and other sources.
• Saying an assessee may freely switch between cash and mercantile every year. Fix: The method must be regularly employed. Irregular following is a ground under section 276(3)(b).
• Deducting income from temporary investment of the loan from the interest capitalised. Fix: Under ICDS IX, capitalise the actual interest. Treat the investment income as income from other sources.
• Stopping capitalisation when the asset is ready for use, or pausing it during delays. Fix: Stop on the date the asset is first put to use. Do not suspend for breaks in activity.
• Excluding duty or tax from cost because credit is available. Fix: Section 277(4) includes such payment irrespective of any right arising. Add it to cost for this section.
• Applying lower of cost and NRV to securities that are unlisted or not quoted regularly. Fix: Securities held as inventory that are not listed, or are listed but not quoted with regularity, are valued at actual cost initially recognised (section 277(1)(iii)).
• Excluding retention money from contract revenue Fix: Section 57(3)(a) says contract revenue includes retention money. Include it in full.
• Reducing contract cost by interest or dividend earned on advances Fix: Section 57(3)(b) bars this. Show such income separately under its own head.
• Taking an exchange loss on an imported machine straight to the profit and loss account. Fix: Remember section 42 applies first. For imported business assets the variation on payment is added to or deducted from the cost of the asset.
• Using the year-end rate in the section 42 calculation. Fix: Section 42 compares the rate at the time of payment with the rate at the time of acquisition. The year-end rate is not used.

Exam tips

• Quote section 276(1), (2) and (3) by sub-section; examiners reward exact references.
• Learn the three section 276(3) grounds as alternatives and apply them to the case facts.
• In MCQs, watch for traps such as 'all heads of income' or 'issued by ICAI'.
• When asked to differentiate ICDS and accounting standards, give purpose, issuing authority, scope of heads and the effect of conflict.
• Link the framework to section 277 and section 57 when a question mixes inventory or contracts.
• In MCQs, the usual traps are the 12-month rule, not netting investment income, and cessation on first put to use. Check these three first.
• For comparison questions with AS 16, write the difference point by point: qualifying asset test, investment income, cessation and suspension.
• Show A, B and C separately in the general borrowing formula. Even if the final number is wrong, you keep method marks.