ICDS – 9

Borrowing Cost

By- CA Premlata Daga

B.Com, CA, LCS, DISA (ICAI)
Scope of ICDS 9:

1) This Income Computation and Disclosure Standard deals with treatment of borrowing
costs.
2) This Income Computation and Disclosure Standard does not deal with the actual or
imputed cost of owners' equity and preference share capital.
Definition:

"Borrowing costs" are interest and other costs incurred by a person in connection with the
borrowing of funds and include:
(i) Commitment charges on borrowings;
(ii) Amortized amount of discounts or premiums relating to borrowings;
(iii) Amortized amount of ancillary costs incurred in connection with the arrangement of
borrowings;
(iv) Finance charges in respect of assets acquired under finance leases or under other similar
arrangements.”
Quick Question:

Will this standard apply to:

a) Interest on overdue payment to suppliers ?
b) If the entity has taken stock as loan and when the assesse has returned the same along with
interest?
Supreme Court Judgement before ICDS:

The Supreme Court in the case of Taparia Tools Ltd v JCIT [2015]372 ITR 605(SC) has taken a

view that one time upfront discounted interest payment on debentures, shown as deferred revenue

expenditure in books of account to be written off over a period of five years, was allowable as a

deduction in entirety in the initial year of payment itself, since the liability was incurred in that

year.
Quick Question

Will this standard apply to exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs?

This ICDS do not include exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs. ICDS VI deals with effects of changes
in foreign exchange rates, and would therefore apply even to fluctuations in foreign exchange rates
in respect of such interest.
Definition:

"Qualifying asset" means:

(i) land, building, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
(iii) inventories that require a period of twelve months or more to bring them to a saleable
condition
 IMPORTANT DIFFERENCE IN AS AND ICDS

Unlike AS 16 and Ind AS 23, where an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale alone is a qualifying asset,

Under ICDS IX, all tangible assets and intangible assets referred to in the definition, irrespective of

the period of time to get ready for their intended use, are qualifying assets. It is only in the case of

inventories that ICDS IX requires a qualifying period of at least twelve months, in order to fall

within the definition of a qualifying asset.

Quick Question

Is inventory of a Real Estate Developer a qualifying asset ?

RECOGNITION:

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalized as part of the cost of that asset. The amount of borrowing costs
eligible for capitalization shall be determined in accordance with this Income Computation and
Disclosure Standard. Other borrowing costs shall be recognized in accordance with the provisions
of the Act.

For the purposes of this Income Computation and Disclosure Standard, "capitalization" in the
context of inventory referred to in item (iii) of clause (b) of sub-paragraph (1) of paragraph 2
means addition of borrowing cost to the cost of inventory.
 CONFLICT OF ICDS AND AT THE ACT

While section 36(1)(iii) provides that interest paid in respect of capital borrowed for the purposes of the
business or profession is an allowable deduction, the proviso to this clause prohibits deduction only in respect
of capital borrowed for acquisition of an asset till the date the asset is first put to use. The term “asset” used in
this proviso, has to be construed as “capital asset”, given similar usage of the term in section 43(1), as well as
section 43A. The proviso therefore applies only to capital assets acquired, and not to stock-in-trade. This has
been confirmed by the Bombay High Court in the case of CIT v Lokhandwala Construction Industries (2003)
260 ITR 579 (Bom). Therefore, the provisions of the ICDS are in conflict with section 36(1)(iii). In such an
event, in accordance with the ICDS, the provisions of section 36(1)(iii), being a part of the Act, would prevail
over the provisions of the ICDS requiring capitalization of interest on borrowings for the purpose of acquiring
stock-in-trade which takes more than 12 months to be ready for sale.
 BORROWING COSTS ELIGIBLE FOR CAPITALISATION

The extent to which funds are borrowed specifically for the purposes of acquisition, construction or
production of a qualifying asset, the amount of borrowing costs to be capitalized on that asset shall be the
actual borrowing costs incurred during the period on the funds so borrowed.

In respect of borrowing other than those referred to in Para 5, if any, the amount of borrowing costs to be
capitalized shall be computed in accordance with the following formula

Formula: A X B/C

Where,
A = borrowing costs incurred during the previous year except on specific borrowings
B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day
and the last day of the previous year;

(ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day, half of the
cost of qualifying asset;

(iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of previous
year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day
of the previous year and on the date of put to use or completion, as the case may be, excluding the extent to
which the qualifying assets are directly funded out of specific borrowings;

C = the average of the amount of total assets as appearing in the balance sheet of a person on the first day and
the last day of the previous year, other than assets to the extent they are directly funded out of specific
borrowings;
 COMMENCEMENT OF CAPITALISATION

The capitalization of borrowing costs shall commence:

(a) in a case referred to in paragraph 5 (Specific borrowings) , from the date on which funds were borrowed;
(b) in a case referred to in paragraph 6 (General Borrowigs), from the date on which funds were utilized.”
 CESSATION OF CAPITALISATION

1) In case of a qualifying asset when such asset is first put to use;

2) In case of inventory when substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

When the construction of a qualifying asset is completed in parts and a completed part is capable of being
used while construction continues for the other parts, capitalization of borrowing costs in relation to a part
shall cease once it meets the above mentioned criteria.