Can the CBDT use ICDS notified under s.145(2) to override a Supreme Court or High Court decision on how income is computed?
No. The Delhi High Court read s.145(2) down so that the power to notify income computation and disclosure standards cannot be used to override binding judicial precedent or a provision of the Act, and struck down several ICDS provisions that did exactly that — including part of ICDS III on construction contracts and part of ICDS VI on foreign exchange. Parliament's answer was the Finance Act 2018, which put much of the struck-down material into the Act itself.
Decided by the High Court (Delhi High Court - Dr S. Muralidhar and Prathiba M. Singh JJ) on 2017-11-08, reported as [2017] 87 taxmann.com 92 / (2018) 252 Taxman 77 / (2018) 400 ITR 178 / (2017) 299 CTR 137 (Delhi)(HC); W.P. (C) No. 5595 of 2017 with CM Appl. No. 23467 of 2017. It bears on section 145, section 145(1), section 145(2), section 119 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
It is the reason s.43AA, s.43CB, s.36(1)(xviii) and s.40A(13) exist. For the items Parliament wrote into the statute the ultra vires answer is gone from assessment year 2017-18 — the first year in which ICDS applied, and the year to which the 2018 insertions were made retrospective — but it survives for ICDS requirements that still rest only on the notification. Knowing which is which is what decides the reply to an ICDS adjustment in a scrutiny.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The petitioners challenged the ten income computation and disclosure standards notified by the Central Board of Direct Taxes under s.145(2) by Notification Nos. 87 and 88 dated 29 September 2016, together with Circular No. 10 of 2017, on the ground that the standards would in effect nullify decisions of the Supreme Court and the High Courts on the computation of income, and that s.145(2) as amended amounted to excessive delegation.
Section 145(2), as amended, has to be read down so that the Central Government's power to notify standards cannot be used to notify standards that override binding judicial precedents or provisions of the Act; unless so read down it would be ultra vires the Act and Article 141 read with Articles 144 and 265 (para 102(i)). On that footing the Court struck down a number of specific ICDS provisions: ICDS I so far as it does away with the concept of prudence; ICDS II on inventory valuation, which eliminates the distinction between a partnership business continuing after dissolution and one discontinued on dissolution, as contrary to Shakthi Trading Co.; para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, as contrary to Bokaro Steel; para 5 of ICDS IV on export incentives, as contrary to Excel Industries; para 6 of ICDS IV so far as it permits only the proportionate completion method; ICDS VI so far as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes, as contrary to Sutlej Cotton Mills; ICDS VII on government grants so far as it conflicts with the accrual system; and Part A of ICDS VIII so far as it applies to entities not governed by the RBI (para 102(iv) to (xiii)). Two things the entry previously stated too flatly. Paragraph 10(a) of ICDS III on retention money was not struck down outright: the Court held that retention money must be determined case by case on settled principles of accrual, and that para 10(a) is ultra vires only to the extent it is deployed to tax retention money whose receipt is uncertain or conditional irrespective of the facts (para 102(vi)). And para 8(1) of ICDS IV was expressly upheld, no judicial precedent having been shown against it (para 102(x)). Notification Nos. 87 and 88 dated 29 September 2016 and Circular No. 10 of 2017 were struck down only to the extent of the specific ICDS held ultra vires, not wholesale (para 103).
The reasoning is about the limits of delegated legislation. Section 145(1) is only an enabling provision, and s.145(2) contains no guiding principles fixing the scope and ambit of the delegated power (paras 99 and 100). A notification under s.119 is meant to clarify the law, not change it, and cannot bring to tax income the Act does not envisage; a tax cannot be levied by executive action or administrative instruction (paras 97 and 100). If the standards were permitted, under the delegated power in s.145(2), to override a governing principle recognised by the Act, the Rules or judicial precedent, they would be ultra vires the Act and would render the standards an instance of excessive delegation of essential legislative functions - and would, in practice, let an Assessing Officer reject books kept on a valid method and thereby disregard binding precedent (para 98). The power to enact a validation law is an essential legislative power exercisable only by Parliament (para 102(i)). To preserve the constitutionality of s.145(2) the Court read it down rather than striking it (para 101). The revenue's reliance on J.K. Industries Ltd. was distinguished (para 102(iii)), and its authorities on the permissible limits of legislative power were held to concern statutes from which guiding principles were discernible (para 99). Each standard was then tested against the decision it was said to displace.
Section 145 (2), as amended, has to be read down to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court read s.145(2) down so that the power to notify income computation and disclosure standards cannot be used to override binding judicial precedent or a provision of the Act, and struck down several ICDS provisions that did exactly that — including part of ICDS III on construction contracts and part of ICDS VI on foreign exchange. Parliament's answer was the Finance Act 2018, which put much of the struck-down material into the Act itself. This was decided by the High Court (Delhi High Court - Dr S. Muralidhar and Prathiba M. Singh JJ) and bears on section 145, section 145(1), section 145(2), section 119 of the Income Tax Act 1961. It is reported as [2017] 87 taxmann.com 92 / (2018) 252 Taxman 77 / (2018) 400 ITR 178 / (2017) 299 CTR 137 (Delhi)(HC); W.P. (C) No. 5595 of 2017 with CM Appl. No. 23467 of 2017. It is the reason s.43AA, s.43CB, s.36(1)(xviii) and s.40A(13) exist. For the items Parliament wrote into the statute the ultra vires answer is gone from assessment year 2017-18 — the first year in which ICDS applied, and the year to which the 2018 insertions were made retrospective — but it survives for ICDS requirements that still rest only on the notification. Knowing which is which is what decides the reply to an ICDS adjustment in a scrutiny. If it applies to you, the first step is this: Before answering an ICDS-based adjustment, check whether the requirement now has a statutory home — s.43AA, s.43CB, s.36(1)(xviii), s.40A(13) — or still rests only on the notification.
The petitioners challenged the ten income computation and disclosure standards notified by the Central Board of Direct Taxes under s.145(2) by Notification Nos. 87 and 88 dated 29 September 2016, together with Circular No. 10 of 2017, on the ground that the standards would in effect nullify decisions of the Supreme Court and the High Courts on the computation of income, and that s.145(2) as amended amounted to excessive delegation. The matter was decided on 2017-11-08 by the High Court (Delhi High Court - Dr S. Muralidhar and Prathiba M. Singh JJ). On those facts the High Court held as follows. Section 145(2), as amended, has to be read down so that the Central Government's power to notify standards cannot be used to notify standards that override binding judicial precedents or provisions of the Act; unless so read down it would be ultra vires the Act and Article 141 read with Articles 144 and 265 (para 102(i)). On that footing the Court struck down a number of specific ICDS provisions: ICDS I so far as it does away with the concept of prudence; ICDS II on inventory valuation, which eliminates the distinction between a partnership business continuing after dissolution and one discontinued on dissolution, as contrary to Shakthi Trading Co.; para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, as contrary to Bokaro Steel; para 5 of ICDS IV on export incentives, as contrary to Excel Industries; para 6 of ICDS IV so far as it permits only the proportionate completion method; ICDS VI so far as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes, as contrary to Sutlej Cotton Mills; ICDS VII on government grants so far as it conflicts with the accrual system; and Part A of ICDS VIII so far as it applies to entities not governed by the RBI (para 102(iv) to (xiii)). Two things the entry previously stated too flatly. Paragraph 10(a) of ICDS III on retention money was not struck down outright: the Court held that retention money must be determined case by case on settled principles of accrual, and that para 10(a) is ultra vires only to the extent it is deployed to tax retention money whose receipt is uncertain or conditional irrespective of the facts (para 102(vi)). And para 8(1) of ICDS IV was expressly upheld, no judicial precedent having been shown against it (para 102(x)). Notification Nos. 87 and 88 dated 29 September 2016 and Circular No. 10 of 2017 were struck down only to the extent of the specific ICDS held ultra vires, not wholesale (para 103).
The reasoning is about the limits of delegated legislation. Section 145(1) is only an enabling provision, and s.145(2) contains no guiding principles fixing the scope and ambit of the delegated power (paras 99 and 100). A notification under s.119 is meant to clarify the law, not change it, and cannot bring to tax income the Act does not envisage; a tax cannot be levied by executive action or administrative instruction (paras 97 and 100). If the standards were permitted, under the delegated power in s.145(2), to override a governing principle recognised by the Act, the Rules or judicial precedent, they would be ultra vires the Act and would render the standards an instance of excessive delegation of essential legislative functions - and would, in practice, let an Assessing Officer reject books kept on a valid method and thereby disregard binding precedent (para 98). The power to enact a validation law is an essential legislative power exercisable only by Parliament (para 102(i)). To preserve the constitutionality of s.145(2) the Court read it down rather than striking it (para 101). The revenue's reliance on J.K. Industries Ltd. was distinguished (para 102(iii)), and its authorities on the permissible limits of legislative power were held to concern statutes from which guiding principles were discernible (para 99). Each standard was then tested against the decision it was said to displace. In the words reproduced by the source cited on this page: "Section 145 (2), as amended, has to be read down to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act."
It was decided by the High Court on 2017-11-08 and is reported as [2017] 87 taxmann.com 92 / (2018) 252 Taxman 77 / (2018) 400 ITR 178 / (2017) 299 CTR 137 (Delhi)(HC); W.P. (C) No. 5595 of 2017 with CM Appl. No. 23467 of 2017. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 145, section 145(1), section 145(2), section 119, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Section 145(2), as amended, has to be read down so that the Central Government's power to notify standards cannot be used to notify standards that override binding judicial precedents or provisions of the Act; unless so read down it would be ultra vires the Act and Article 141 read with Articles 144 and 265 (para 102(i)). On that footing the Court struck down a number of specific ICDS provisions: ICDS I so far as it does away with the concept of prudence; ICDS II on inventory valuation, which eliminates the distinction between a partnership business continuing after dissolution and one discontinued on dissolution, as contrary to Shakthi Trading Co.; para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, as contrary to Bokaro Steel; para 5 of ICDS IV on export incentives, as contrary to Excel Industries; para 6 of ICDS IV so far as it permits only the proportionate completion method; ICDS VI so far as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes, as contrary to Sutlej Cotton Mills; ICDS VII on government grants so far as it conflicts with the accrual system; and Part A of ICDS VIII so far as it applies to entities not governed by the RBI (para 102(iv) to (xiii)). Two things the entry previously stated too flatly. Paragraph 10(a) of ICDS III on retention money was not struck down outright: the Court held that retention money must be determined case by case on settled principles of accrual, and that para 10(a) is ultra vires only to the extent it is deployed to tax retention money whose receipt is uncertain or conditional irrespective of the facts (para 102(vi)). And para 8(1) of ICDS IV was expressly upheld, no judicial precedent having been shown against it (para 102(x)). Notification Nos. 87 and 88 dated 29 September 2016 and Circular No. 10 of 2017 were struck down only to the extent of the specific ICDS held ultra vires, not wholesale (para 103). It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 145, section 145(1), section 145(2), section 119 of the Income Tax Act 1961, and was decided by Delhi High Court - Dr S. Muralidhar and Prathiba M. Singh JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where it rests only on the notification and cuts across a binding decision, take the reading-down point from this case. Fix the year first: ICDS applied from assessment year 2017-18, and the Finance Act 2018 provisions reach back to that same year, so check the ICDS paragraph relied on both against the list struck down here and against the statutory provision that now covers the same ground. Do not argue that ICDS as a whole is invalid; the notification was not struck down in its entirety and s.145(2) itself was preserved by being read down.
Superseded by amendment. The reading down of s.145(2) stands - nothing overruling or doubting the judgment was located, and the report carries no citator entry recording an appeal - but much of its practical effect has been reversed by statute, and the Act it construes has since been repealed. Section 43CB of the Income-tax Act, 1961, checked against the bare Act, provides that profits from a construction contract or a contract for providing services are to be determined on the percentage of completion method in accordance with the standards notified under s.145(2), and that for that purpose 'the contract revenue shall include retention money' and 'the contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains'. Those two sub-clauses reverse directly what the Court held at paras 102(vi) and 102(vii). The bare Act page also records that the Income-tax Act, 1961 has been repealed, and the corresponding provision under the Income-tax Act, 2025 is s.57, 'Revenue recognition for construction and service contracts'. The list of other 2018 insertions this note previously carried, with a quotation from notes on clauses taken from a commentary site, could not be checked against the bare Act and has been removed rather than repeated. Whether the judgment was carried to the Supreme Court was not traced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read the striking-down list with its qualifiers. Retention money under para 10(a) of ICDS III was not struck down outright - the Court held the question must be decided case by case on settled accrual principles and that para 10(a) is ultra vires only so far as it taxes retention money whose receipt is uncertain or conditional irrespective of the facts. ICDS VI was struck down only so far as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes, which is narrower than 'marked to market loss or gain on foreign currency derivatives'. Part A of ICDS VIII fell only for entities not governed by the RBI. Para 8(1) of ICDS IV was upheld. And the two notifications and the circular were struck down only to the extent of the standards held ultra vires. The petitioners were the Chamber of Tax Consultants and Mr C.S. Mathur. The judgment is reported at [2017] 87 taxmann.com 92 / (2018) 252 Taxman 77 / (2018) 400 ITR 178 / (2017) 299 CTR 137 (Delhi), W.P. (C) No. 5595 of 2017, and the reported field, previously empty, now carries those citations. Circular No. 10 of 2017 is dated 23 March 2017. The judgment does not decide the retention money question itself - it remits it to settled accrual principles applied case by case - and s.43CB has since answered it the other way by statute. It does not say what happened on any appeal, and no later treatment of it was traced. It also leaves untouched the standards and the parts of standards not challenged before it; the only provision expressly upheld is para 8(1) of ICDS IV. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Section 145(2), as amended, has to be read down so that the Central Government's power to notify standards cannot be used to notify standards that override binding judicial precedents or provisions of the Act; unless so read down it would be ultra vires the Act and Article 141 read with Articles 144 and 265 (para 102(i)). On that footing the Court struck down a number of specific ICDS provisions: ICDS I so far as it does away with the concept of prudence; ICDS II on inventory valuation, which eliminates the distinction between a partnership business continuing after dissolution and one discontinued on dissolution, as contrary to Shakthi Trading Co.; para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, as contrary to Bokaro Steel; para 5 of ICDS IV on export incentives, as contrary to Excel Industries; para 6 of ICDS IV so far as it permits only the proportionate completion method; ICDS VI so far as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes, as contrary to Sutlej Cotton Mills; ICDS VII on government grants so far as it conflicts with the accrual system; and Part A of ICDS VIII so far as it applies to entities not governed by the RBI (para 102(iv) to (xiii)). Two things the entry previously stated too flatly. Paragraph 10(a) of ICDS III on retention money was not struck down outright: the Court held that retention money must be determined case by case on settled principles of accrual, and that para 10(a) is ultra vires only to the extent it is deployed to tax retention money whose receipt is uncertain or conditional irrespective of the facts (para 102(vi)). And para 8(1) of ICDS IV was expressly upheld, no judicial precedent having been shown against it (para 102(x)). Notification Nos. 87 and 88 dated 29 September 2016 and Circular No. 10 of 2017 were struck down only to the extent of the specific ICDS held ultra vires, not wholesale (para 103).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Can interest under ss.234A, 234B and 234C be waived?
Can the Assessing Officer estimate income on departmental material the assessee has never been shown?
The AO says I sold below market value and wants to tax the difference. Can he do that?
Can the whole of a bogus purchase be added, rather than a percentage?