Ind As –

Impact on Income Tax

By C.A. Anil Chachra | 14-06-2023

Agenda

 Over view of Income Tax Act [‘ITA’]- Concept of Income

 Over view of Ind AS
 Interplay between Ind As vs. Corporate Tax
 Principles of Taxation
 Ind As adjustments- MAT implications
 Income tax impact on
 Leases
 Financial Instruments
 Inventories
 Provisions
 Business Restructuring

CA Anil Chachra 2
Over view of Income Tax

Section 2[24] of ‘ITA’ prescribed about the income and which is inclusive definition it includes
(i) profits and gains
(ii) …..
(iii) …..

Section 4 & 5 of ‘ITA’ is charging section for levy of income tax

Section 145 –method of accounting- either cash or mercantile subject to Income Computation
and disclosure standards [ICDS]

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Financial Statements-Ind AS

Ind AS financial statements include

Statement of Profit and Statement of change in

Balance Sheet
Loss Equity

Net OCI-

• Statement of Other Comprehensive Income

Net Profit /loss for the
year • Items to be reclassified in to Profit & Loss account
in subsequent years

• Items not to be reclassified in to Profit & Loss

account in subsequent years

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Interplay between Ind AS and Income Tax

Accounting under Ind AS

Impact under normal provisions

Impact under MAT
of the Act

Treatment covered under Treatment not covered under As per Guidance u/s 115JB and
ICDS/Act ICDS/ Act FAQ

Specific adjustment as
Follow treatment as per ICDS By using Judicial Precedents prescribed

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Interplay between Ind AS and Income Tax

ICDS -Key features List of ICDS

• Applicable to all tax payers following ICDS 1 Accounting policies
accrual basis of accounting ICDS II Valuation of inventories
• Non-Compliance could lead to best
ICDS III Construction contracts
judgement assessment
• In case of conflict, Act to prevail over ICDS IV Revenue Recognition
ICDS ICDS V Tangible Fixed Assets
• No impact on MAT computation
ICDS VI Effect of changes in foreign exchange
• Separate books of accounts not rates
mandatory
ICDS VII Government Grant
• Treatment of items not specifically dealt
ICDS VIII Securities
by ICDS to be governed as per
provisions of the Act ICDS IX Borrowings
ICDS X Provisions, contingent liabilities and
contingent assets

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Interplay between Ind AS and Income Tax

Profits as computed following Ind AS to be the starting point for computing taxable income and
further adjusted in the light of principles as per tax laws [stated below]

Key Principles for computing taxable income

 Business income is computed in accordance with the method of accounting regularly employed by the
taxpayer – could be either cash or mercantile / accrual [Section 145(1)- subject to ICDS compliance]
 Business income as per method of accounting adopted to be adjusted by the specific deductions /
allowances / disallowances specified in the Act
 Real income is taxable and not hypothetical income [discussed in separate slide]
 Unrealized gains / losses not recognized for tax computation [discussed in separate slide]

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Interplay between Ind AS and Income Tax

Key Principles for computing taxable income

 Concept of time value of money not recognized

 Notional expenses not allowable. However, provisions are allowed if created on a scientific basis [discussed in
separate slide]

 Adjustments to be made to accounting profits as per notified Income Computation and Disclosure Standards

CA Anil Chachra 8
Principles of Taxation

Income

Right to receive - Income can be taxed only if assessee has a right to receive the income. There must be a debt
owed to him by somebody [E.D. Sassoon 26 ITR 27] [SC}

Real Income -Income tax can be levied on real income. If income does not result at all, there cannot be a tax, even
though in book-keeping, an entry is made about a 'hypothetical income', which does not materialize. Where,
however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of
income, even though an entry to that effect might, in certain circumstances, have been made in the books of
account.“ [CIT vs. Shoorji Vallabhdas 46 ITR 144]

Only the Real income will be taxed and not the notional income as per books of account

CA Anil Chachra 9
Principles of Taxation

Deductions Whether the assessee is entitled to a particular deduction or not will depend on the provision of law
& not on existence or absence of entries in the books of account be decisive or conclusive [Kedarnath Jute Mfg.
Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)]

Deductions /Allowances The question whether a receipt of money is taxable or not or whether certain
deductions from that receipt are permissible in law or not has to be decided according to the principles of law
and not in accordance with accountancy practice; Accounting practice cannot override the provisions of the Act
[Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC)]

Notional expenses cannot be allowed under Income Tax

CA Anil Chachra 10
Ind AS Adjustment under MAT
Annual adjustment –[Section 115JB- 2A] OCI items that will permanently recorded in reserves [which will never
be classified to the statement of P&L] to be adjusted in book profits as under:
Item Point of time of inclusion
• Changes in revaluation surplus of assets Realization /disposal
• Gains and losses from investments in equity
instruments designated at fair value through OCI
• Any other item including re-measurements of Every year, as the gain or loss arises
defined benefit plans

Transition adjustments [Section 115JB-2C]

Items- recorded in OCI Treatment
• Revaluation Reserves To be included in book profits at the time of
• Gain / losses –investment in equity disposal /realization- Refer subsequent slides
designated at FVOCI for example

• Any other items-re-measurements of Equally over a period of 5 years starting from

defined benefit plan the year of first time adoption of Ind AS

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Ind AS Adjustment under MAT
Transition Amount –amounts ‘adjusted in other equity’ [excluding capital reserve and securities premium
reserves] [Section 115JB[2C]

Items
• Assets at fair value as deemed cost
• Investment in subsidiaries, JV and associates
at fair value as deemed cost
• Cumulative translation differences for all
foreign operations at the time of disposal
• Any other items like re-measurements of
defined benefit plans
Treatment
• Adjustment to the retained earning to be
ignored
• Gains and losses on disposal of the assets to
be computed ignoring the retained earning
adjustment
• Aggregate adjustment to be made in the year
of retirement/disposal
• Equally over a period of 5 years starting from
the year of first time adoption of Ind AS

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Ind AS Adjustment under MAT

Amount adjusted in other equity

Reliance Industrial Investment Holding Ltd. Vs. Dy. CIT [2023] 149 taxmann.com 113 (Mumbai - Trib.) ]

“At the time of transition from AS to Ind AS , Liability like [Cumulative Convertible Debentures ] is shown
under equity the same will not be included in the transition amount under section 115JB [2C] of the Act.”

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Ind AS Adjustment under MAT
Starting point for computation of MAT
Division II of schedule III of Companies Amount
Act, 2013 MAT to be computed on
• Profit/ loss before tax • XXX the profit of the year
[before OCI]-
• Tax Expense • XXX considering the
• Profit / (Loss for the period) • XXX adjustments as per
115JB
• Other comprehensive income (OCI) • XXX
items that will
• - Not be classified to P&L
• -Reclassified to P&L
• Total Comprehensive income for the • XXX
period

CA Anil Chachra 14
Tax impact calculations-reliance on books of accounts

 Determination of ‘accumulated profits’ for the purpose of deemed dividends [Section 2(22)]

 Forms basis of book profits for MAT taxation

 Transfer pricing - determination of ALP, comparability, etc

 Limits on interest deduction paid or payable to AE

 Impact on disallowance under section 14A

 Ascertaining fair market value for the purpose of taxability under section 56(2)(x)/section 50CA

 Properties/ Liabilities are transferred at book values in case of demerger [Non Ind AS Companies]

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Ind AS and Tax Impact

Ind AS and its tax impact

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Leases- 1/2

Ind AS 116- Leases impact

A lessee applies a single lease accounting model under which it recognises all major leases on balance sheet
At the commencement date, a lessee shall recognise a right of use assets and a lease liability

Asset = ‘Right-of-use’ of underlying asset

Balance
sheet
Liability = Obligation to make lease
payments

Profit and Lease expense = Depreciation + Interest

Loss

CA Anil Chachra 17
Leases- 2/2
Tax Impact vs. Ind AS 116

Both are notional expenses and will get

Interest and Depreciation disallowed- [As per the judgements refer
previous slides]

Actual Rent Allowed

Section 32- Allows depreciation on the assets owned, wholly or partly by the assessee and used for the
purpose of the business or profession

CA Anil Chachra 18
Financial Instruments - 1/9

Financial Instruments Ind As 109, 107 & 32

Any Contract that

gives rise to

A Financial
A Financial
Liability or
Asset of one
equity of another
entity
entity

CA Anil Chachra 19
Financial Instruments- 2/9

Financial Instruments Ind As 109, 107 & 32

Financial instrument or its component parts should be classified by issuer upon initial recognition as a FL or
equity instrument according to substance of contractual arrangement rather than legal form

Liability or equity

Contractual obligation to deliver Residual interest in the assets of

cash or another asset or exchange enterprises after deducting
financial assets /liabilities under liabilities
potential unfavorable conditions

Liability Equity

CA Anil Chachra 20
Financial Instruments- Amortised Cost- 3/9

The amortised cost a financial asset or financial liability is the amount at which the financial asset or financial
liability is measured at initial recognition minus principal repayments, plus or minus the cumulative
amortisation using the effective interest method of any difference between that initial amount and the
maturity amount, and for financial assets, adjusted for any loss allowance.

Amount cumulative
Amortised = - Principal +/
initially amortisation
cost repayments -
recognised using EIR

Use effective interest rate method

Section 36(1)(iii) of the Act- The amount of the interest paid in respect of capital borrowed for the purpose
of the business or profession

The amortised cost using the effective interest method will be the notional amount only the actual interest
paid is allowed

CA Anil Chachra 21
Financial Instruments- Amortised Cost- 4/9
• Example

• Entity A purchases a debt instrument with five years remaining to maturity for its fair value of INR 1,000
(including transaction costs). The instrument has a principal amount of INR1,250 and carries fixed interest of
4.7% that is paid annually (INR 1,250*4.7%=INR 59 per year). The contract also specifies that the borrower has
an option to prepay the instrument and that no penalty will be charged for prepayment . At inception, the
entity expects the borrower not to prepay. Calculate the effective interest rate ?

• Effective interest rate would be @ 10%

Year Amortised cost at the beginning Interest income-10% Cash flows Amortised cost at the end
(a) (b) (c) (d= a+b-c)
20x1 1000 100 59 1,041
20x2 1,041 104 59 1,086
20x3 1,086 109 59 1,136
20x4 1,136 113 59 1,190
20x5 1,190 119 1250+59 -

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Financial Instruments-Liability- 5/9

Instrument Ind AS Tax /MAT

Term Loans Classified at amortised cost Actual interest allowed as per section 36(1)(iii)
Trade Payables Interest expenses recognized Notional interest expenses-disallowed
based on effective interest rate
Non Convertible resulting in to amortization of Transaction Cost- Deductibility of fees and other transaction cost
debentures transaction cost will be dealt with the basic principles of taxation (accrual basis and
judicial precedents)

MAT- No adjustment to be made in MAT calculation including

notional interest

Preferences shares- May be treated as Compound
Convertible Instrument
Interest to be recognized as per
EIR
Preference Shares- Classified as liability
Redeemable
Disallowed- any interest / dividend to be disallowed
MAT- Dividend/ Interest to be added back.[FAQ8-CBDT]
Disallowed- any interest / dividend to be disallowed
MAT- Dividend/ Interest to be added back.[FAQ8]

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 Financial Instruments-Assets- 6/9

Instrument Ind AS Tax impact

• Equity shares FVTPL, FVOCI- Irrevocable choice Current Investments/ Stock in trade- FVTPL
• FV loss[MTM] is allowed [ICDS VIII] under the head
• Preference shares Amortised cost or FVTPL
business income-
• Non Convertible Amortised cost, FVTPL, FVOCI Non Current Investments [FVOCI or amortised cost]
Debentures • FV through OCI to be ignored while computing income
• Actual gain / loss taxable as LTCG/ STCG on transfer of
• Convertible FVTPL
assets depending on period of holding- Section 45
Debentures
• Mutual Funds FVTPL MAT
• No adjustment is required for MTM gain/loss -FAQ1
• Any amount debited/ credited towards FV through OCI
under the items that will not be re-classified to P&L [Except
for gains/ loss on equity-FVOCI] to be added/ reduced-
[Section 115JB- 2A-Second Proviso]
• Impact on gains/ losses from investments in equity
instruments to be considered for MAT in the year of
disposal/ retiring etc.

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Financial Instruments-Expected Credit Loss [ECL]- 7/9

Other than Banks

Schedule Banks
ECL- Disallowed- Write
off u/s 36 [1][vii] subject Deductions allowed-
to section 36[2] will be u/s 36[1][viia]
allowed

To be added back in book profit in

MAT 115JB[2][i]- Explanation 1

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Financial Instruments-Example- 8/9

Equity Shares- FVOCI At the time of Transition

Date Cost Fair Value

Date Particulars Fair Value
1 April 2016 10 12
1 April 2016 Investment- Dr. 2
31 March 2017 10 15
To RE 2
31 March 2018 10 17
Rs. 2 is ignored for MAT computation
31 March 2019 10 20

At the last day of comparative period

The treatment in books and MAT is
given for Date Particulars Fair Value
#Convergence Year 1 April 2017 Investment- Dr. 3
#Comparative period
To OCI 3
#Year of Sale
Rs. 3 is ignored for MAT computation

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Financial Instruments-Example - 9/9

Equity Shares- FVOCI At the time of Convergence Year

Date Cost Fair Value

Date Particulars Fair Value
1 April 2016 10 12
1 April 2018 Investment- Dr. 2
31 March 2017 10 15
To OCI 2
31 March 2018 10 17
Rs. 2 is ignored for MAT computation
31 March 2019 10 20
At the time of sale

The treatment in books and MAT is Date Particulars Value

given for 1 April 2019 Bank- Dr. 20
#Convergence Year
#Comparative period To Investment 17
#Year of Sale To OCI 3
Rs. 10 is taken for MAT computation

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Inventories-1/1

• Ind AS requires that where the purchase of inventories on deferred settlement terms effectively contains a
financing element, the same is to be recognized as interest expense over the period of financing.
• For example, difference between the purchase price for normal credit terms and the amount paid on deferred
settlement terms, is to be recognized as interest expense

• Example

• A company purchases an item of inventory for Rs. 10,000 payable in two years time. Purchase price for normal
credit terms is Rs. 9,000
• Ind AS ICDS Issue

• Purchases 9,000
• Interest 500 • ICDS / tax laws does not
• Creditors 9,500 stipulate splitting of the • Allowability of interest under
purchase price to recognize section 36(1)(iii) ??
• Interest 500 interest component
• Creditors 500

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Provisions-1/1
• Ind AS requires that companies are required to discount provisions to their present value where the effect
of time value of money is material. The increase in the provisions due to passage of time will be recognised
as a finance cost- resulting in higher interest cost.
• For example, difference between the purchase price for normal credit terms and the amount paid on
deferred settlement terms, is to be recognized as interest expense

• Example

• Ind AS ICDS Issue

• Expenses 9,000 • Provision recognised on scientific

• ICDS / tax laws provides that basis should be allowed
• Provisions 9,000
the amount of provision
should not be discounted to its • Allowability of interest under
• Interest 500
present value. section 36(1)(iii) ??
• Provisions 500

• On Probable concept On reasonable certainty concept

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Business Restructuring-Demerger

Section 2[19AA]- Allows all assets and liabilities by demerged company of its undertaking to the resulting
company to be at book value except in case of Ind AS companies.

In case of Ind AS companies allows the resulting company to records the value of the property and the
liabilities of the undertakings at value different from the value appearing in the books of account.

MAT Adjustment 115JB [2B]

• Fair value to be ignored while calculating the book profit of the resulting company

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Email- chachra.chachra@gmail.com

Mobile- 9810017296
 Thank You!
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