The Delhi High Court struck down parts of the ICDS in 2017. Can I still rely on that for an AY 2017-18 assessment?
Only in part, and for most of what was struck down the answer is no. The Finance Act 2018 inserted s.36(1)(xviii), s.40A(13), s.43AA and s.43CB, and substituted new sections 145A and 145B, in every case with the words "shall be deemed to have been inserted" or "deemed to have been substituted" with effect from the 1st day of April 2017 — that is, retrospectively from AY 2017-18, the very first year in which the ICDS operated. What Parliament could not do by executive notification it did by statute, so the substance of the struck-down ICDS provisions now stands in the Act itself and the 2017 judgment no longer answers the point.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2017-04-01, reported as Finance Act 2018, s.10 (s.36(1)(xviii)), s.11 (s.40A(13)), s.13 (s.43AA), s.15 (s.43CB) and s.47 (substituted ss.145A and 145B), each expressed to be deemed inserted or substituted with effect from the 1st day of April, 2017. It bears on section 36(1)(xviii), section 40A(13), section 43AA, section 43CB, section 145A, section 145B, section 145(2), section 43A of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Deductions & Disallowances matters.
This is the single most dangerous half-truth in this area. An adviser who cites Chamber of Tax Consultants for the proposition that retention money cannot be taxed on a percentage-of-completion basis, or that a marked-to-market loss must be allowed on prudence principles, or that the LIFO-displacing inventory rule is ultra vires, is citing a judgment whose subject matter Parliament re-enacted with retrospective effect from the same assessment year. The provisions and what they now carry are: s.36(1)(xviii), which allows a marked to market loss or other expected loss only if computed in accordance with the ICDS; s.40A(13), which disallows any such loss except as allowable under s.36(1)(xviii); s.43AA, which taxes foreign exchange gain or loss computed in accordance with the ICDS, subject to s.43A; s.43CB, which mandates percentage of completion for construction and service contracts, includes retention money in contract revenue and bars reduction of contract cost by incidental interest, dividends or capital gains; substituted s.145A, which values inventory at lower of actual cost or net realisable value, applies the inclusive method to tax, duty, cess and fee, and deals with securities held as stock; and s.145B, which taxes interest on compensation or enhanced compensation on receipt, escalation claims and export incentives when reasonable certainty of realisation is achieved, and subsidies on receipt. What survives of the 2017 judgment is the reading down of s.145(2) itself and the principle that an ICDS cannot override the Act or a binding precedent — but that principle now bites only where an ICDS goes beyond what the 2018 amendments enacted.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
On 8 November 2017 the Delhi High Court in The Chamber of Tax Consultants v Union of India read down s.145(2) to restrict the power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act, and struck down as ultra vires ICDS I so far as it does away with prudence, ICDS II on valuation of inventories, para 10(a) of ICDS III on retention money, para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, paras 5 and 6 of ICDS IV, ICDS VI so far as it disallows marked to market loss on forward exchange contracts held for trading or speculation, ICDS VII on government grants, and Part A of ICDS VIII on valuation of securities; Notification Nos. 87 and 88 of 29 September 2016 and Circular No. 10 of 2017 were struck down to that extent. The Finance Act 2018 then legislated. By s.10 it inserted s.36(1)(xviii) allowing 'marked to market loss or other expected loss as computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145'. By s.11 it inserted s.40A(13) providing that no deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss except as allowable under s.36(1)(xviii). By s.13 it inserted s.43AA providing that, subject to s.43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss computed in accordance with the ICDS, in respect of all foreign currency transactions including monetary and non-monetary items, translation of financial statements of foreign operations, forward exchange contracts and foreign currency translation reserves. By s.15 it inserted s.43CB after s.43CA, requiring profits from a construction contract or a contract for providing services to be determined on the percentage of completion method in accordance with the ICDS, with a proviso applying the project completion method to a service contract of not more than ninety days' duration and the straight line method to a service contract involving an indeterminate number of acts over a specific period, and providing in sub-section (2) that contract revenue shall include retention money and that contract costs shall not be reduced by incidental income in the nature of interest, dividends or capital gains. By s.47 it substituted new sections 145A and 145B for the old s.145A. Every one of these five sections is expressed to be deemed inserted or substituted with effect from the 1st day of April, 2017.
Not applicable — statutory position. The operative propositions are: (a) the substance of most of what was struck down in Chamber of Tax Consultants was re-enacted by Parliament as provisions of the Act with retrospective effect from 1 April 2017, so that from AY 2017-18 the source of the obligation is the Act and not the notification; (b) retention money is contract revenue by force of s.43CB(2)(i) and incidental interest, dividends or capital gains cannot be set against contract cost by force of s.43CB(2)(ii); (c) a marked to market or other expected loss is deductible only if computed in accordance with the ICDS, s.40A(13) barring it otherwise; (d) foreign exchange gain or loss is taxable under s.43AA, subject always to s.43A; and (e) the reading down of s.145(2) and the principle that an ICDS cannot override the Act or a binding precedent survive, but operate only where the 2018 amendments have not themselves supplied the rule.
Not applicable — statutory position. Each proposition is taken from the enacting words of the corresponding section of the Finance Act 2018 as read on the Act's own text.
For section 145A of the Income-tax Act, the following sections shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017, namely:-
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 WhatsAppOnly in part, and for most of what was struck down the answer is no. The Finance Act 2018 inserted s.36(1)(xviii), s.40A(13), s.43AA and s.43CB, and substituted new sections 145A and 145B, in every case with the words "shall be deemed to have been inserted" or "deemed to have been substituted" with effect from the 1st day of April 2017 — that is, retrospectively from AY 2017-18, the very first year in which the ICDS operated. What Parliament could not do by executive notification it did by statute, so the substance of the struck-down ICDS provisions now stands in the Act itself and the 2017 judgment no longer answers the point. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 36(1)(xviii), section 40A(13), section 43AA, section 43CB, section 145A, section 145B, section 145(2), section 43A of the Income Tax Act 1961. It is reported as Finance Act 2018, s.10 (s.36(1)(xviii)), s.11 (s.40A(13)), s.13 (s.43AA), s.15 (s.43CB) and s.47 (substituted ss.145A and 145B), each expressed to be deemed inserted or substituted with effect from the 1st day of April, 2017. This is the single most dangerous half-truth in this area. An adviser who cites Chamber of Tax Consultants for the proposition that retention money cannot be taxed on a percentage-of-completion basis, or that a marked-to-market loss must be allowed on prudence principles, or that the LIFO-displacing inventory rule is ultra vires, is citing a judgment whose subject matter Parliament re-enacted with retrospective effect from the same assessment year. The provisions and what they now carry are: s.36(1)(xviii), which allows a marked to market loss or other expected loss only if computed in accordance with the ICDS; s.40A(13), which disallows any such loss except as allowable under s.36(1)(xviii); s.43AA, which taxes foreign exchange gain or loss computed in accordance with the ICDS, subject to s.43A; s.43CB, which mandates percentage of completion for construction and service contracts, includes retention money in contract revenue and bars reduction of contract cost by incidental interest, dividends or capital gains; substituted s.145A, which values inventory at lower of actual cost or net realisable value, applies the inclusive method to tax, duty, cess and fee, and deals with securities held as stock; and s.145B, which taxes interest on compensation or enhanced compensation on receipt, escalation claims and export incentives when reasonable certainty of realisation is achieved, and subsidies on receipt. What survives of the 2017 judgment is the reading down of s.145(2) itself and the principle that an ICDS cannot override the Act or a binding precedent — but that principle now bites only where an ICDS goes beyond what the 2018 amendments enacted. If it applies to you, the first step is this: Before citing Chamber of Tax Consultants on any ICDS point, check whether the Finance Act 2018 re-enacted that point as a section of the Act; if it did, the judgment is spent on that point from AY 2017-18 onwards.
On 8 November 2017 the Delhi High Court in The Chamber of Tax Consultants v Union of India read down s.145(2) to restrict the power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act, and struck down as ultra vires ICDS I so far as it does away with prudence, ICDS II on valuation of inventories, para 10(a) of ICDS III on retention money, para 12 of ICDS III read with para 5 of ICDS IX on borrowing costs, paras 5 and 6 of ICDS IV, ICDS VI so far as it disallows marked to market loss on forward exchange contracts held for trading or speculation, ICDS VII on government grants, and Part A of ICDS VIII on valuation of securities; Notification Nos. 87 and 88 of 29 September 2016 and Circular No. 10 of 2017 were struck down to that extent. The Finance Act 2018 then legislated. By s.10 it inserted s.36(1)(xviii) allowing 'marked to market loss or other expected loss as computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145'. By s.11 it inserted s.40A(13) providing that no deduction or allowance shall be allowed in respect of any marked to market loss or other expected loss except as allowable under s.36(1)(xviii). By s.13 it inserted s.43AA providing that, subject to s.43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss computed in accordance with the ICDS, in respect of all foreign currency transactions including monetary and non-monetary items, translation of financial statements of foreign operations, forward exchange contracts and foreign currency translation reserves. By s.15 it inserted s.43CB after s.43CA, requiring profits from a construction contract or a contract for providing services to be determined on the percentage of completion method in accordance with the ICDS, with a proviso applying the project completion method to a service contract of not more than ninety days' duration and the straight line method to a service contract involving an indeterminate number of acts over a specific period, and providing in sub-section (2) that contract revenue shall include retention money and that contract costs shall not be reduced by incidental income in the nature of interest, dividends or capital gains. By s.47 it substituted new sections 145A and 145B for the old s.145A. Every one of these five sections is expressed to be deemed inserted or substituted with effect from the 1st day of April, 2017. The matter was decided on 2017-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not applicable — statutory position. The operative propositions are: (a) the substance of most of what was struck down in Chamber of Tax Consultants was re-enacted by Parliament as provisions of the Act with retrospective effect from 1 April 2017, so that from AY 2017-18 the source of the obligation is the Act and not the notification; (b) retention money is contract revenue by force of s.43CB(2)(i) and incidental interest, dividends or capital gains cannot be set against contract cost by force of s.43CB(2)(ii); (c) a marked to market or other expected loss is deductible only if computed in accordance with the ICDS, s.40A(13) barring it otherwise; (d) foreign exchange gain or loss is taxable under s.43AA, subject always to s.43A; and (e) the reading down of s.145(2) and the principle that an ICDS cannot override the Act or a binding precedent survive, but operate only where the 2018 amendments have not themselves supplied the rule.
Not applicable — statutory position. Each proposition is taken from the enacting words of the corresponding section of the Finance Act 2018 as read on the Act's own text. In the words reproduced by the source cited on this page: "For section 145A of the Income-tax Act, the following sections shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017, namely:-"
It was decided by the CBDT Circulars & Instructions on 2017-04-01 and is reported as Finance Act 2018, s.10 (s.36(1)(xviii)), s.11 (s.40A(13)), s.13 (s.43AA), s.15 (s.43CB) and s.47 (substituted ss.145A and 145B), each expressed to be deemed inserted or substituted with effect from the 1st day of April, 2017. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 36(1)(xviii), section 40A(13), section 43AA, section 43CB, section 145A, section 145B, section 145(2), section 43A, 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 cuts both ways and is cited by both sides. Not applicable — statutory position. The operative propositions are: (a) the substance of most of what was struck down in Chamber of Tax Consultants was re-enacted by Parliament as provisions of the Act with retrospective effect from 1 April 2017, so that from AY 2017-18 the source of the obligation is the Act and not the notification; (b) retention money is contract revenue by force of s.43CB(2)(i) and incidental interest, dividends or capital gains cannot be set against contract cost by force of s.43CB(2)(ii); (c) a marked to market or other expected loss is deductible only if computed in accordance with the ICDS, s.40A(13) barring it otherwise; (d) foreign exchange gain or loss is taxable under s.43AA, subject always to s.43A; and (e) the reading down of s.145(2) and the principle that an ICDS cannot override the Act or a binding precedent survive, but operate only where the 2018 amendments have not themselves supplied the rule. It arises in Assessment & Scrutiny, How Tax Law Is Read and Deductions & Disallowances matters, on section 36(1)(xviii), section 40A(13), section 43AA, section 43CB, section 145A, section 145B, section 145(2), section 43A of the Income Tax Act 1961, and was decided by Not applicable — statutory text. 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. Date the assessment year first. For AY 2016-17 and earlier neither the operative ICDS nor the 2018 sections apply, and the older case law on accrual, method of accounting and retention money governs unaffected. For AY 2017-18 itself, note that the assessee filed his return before the Finance Act 2018 was passed; where the retrospective section works against him this is worth taking on penalty and on interest, though it does not defeat the charge. Where the officer relies on an ICDS clause that the 2018 amendments did NOT re-enact, the reading down of s.145(2) and the ratio of Chamber of Tax Consultants remain available — identify precisely which clause is being applied. Read s.43AA subject to s.43A: a foreign exchange difference on a capital asset acquired from outside India continues to be governed by s.43A and is adjusted to actual cost, not routed through s.43AA.
Still good law. The five Finance Act 2018 provisions were read on the text of the Act itself and, for s.43CB and s.145B, corroborated against the department's own section pages. I did not check whether s.36(1)(xviii), s.40A(13), s.43AA, s.43CB, s.145A or s.145B have been amended by any Finance Act after 2018; the departmental pages that corroborate s.43CB and s.145B are stamped Year 2020, so nothing later than 2020 is excluded from that source. I also did not check whether the retrospective operation of these provisions has been challenged on constitutional grounds; the Kerala High Court in P.A. Jose v Union of India (20 May 2024) entertained an Article 14 challenge to the effect of the substituted s.145A on assessees who had followed LIFO and gave relief without striking the section down. 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.
Each of the five Finance Act 2018 provisions was read on its own page of the Act text: s.10 of the Finance Act 2018 (inserting s.36(1)(xviii)) at indiankanoon.org/doc/74866601/; s.11 (inserting s.40A(13)) at /doc/91776392/; s.13 (inserting s.43AA) at /doc/144289657/; s.15 (inserting s.43CB) at /doc/94047925/; and s.47 (substituting s.145A and s.145B) at /doc/126354477/. The page for s.47 prints the substituted s.145A in full but stops before the text of s.145B; the s.145B text was read separately on the Finance Act 2018 page for that section at /doc/178229800/ and independently on the department's own page at incometaxindia.gov.in/w/section-145b, which carries the Year stamp '2020' and prints the same three sub-sections word for word. The s.43CB text was likewise corroborated against the department's page at incometaxindia.gov.in/w/section-43cb, Year stamp '2020'. Both departmental pages are year-stamped and therefore archived; they are used here only to corroborate the Finance Act text, not as the source of the current position. I could NOT find a current departmental page for s.145A: /w/section-145a is stamped Year 2000, /w/section-145a-1 Year 2009, /w/section-145a-2 Year 2001 and /w/section-145a-4 Year 2002, all printing the pre-2018 text — reading current s.145A off any of them would produce the pre-substitution provision. The full Finance Act 2018 page at /doc/75703920/ returned HTTP 403 and could not be read as a whole. I did not read CBDT Circular No. 8/2018 (explanatory notes to the Finance Act 2018); the attempted URL returned 404 and the department's circulars listing did not render. The date in decided_on is the date from which all five insertions take effect and is NOT a decision date; the Finance Act 2018 itself received assent in March 2018 and I did not verify the assent date. 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.
Not applicable — statutory position. The operative propositions are: (a) the substance of most of what was struck down in Chamber of Tax Consultants was re-enacted by Parliament as provisions of the Act with retrospective effect from 1 April 2017, so that from AY 2017-18 the source of the obligation is the Act and not the notification; (b) retention money is contract revenue by force of s.43CB(2)(i) and incidental interest, dividends or capital gains cannot be set against contract cost by force of s.43CB(2)(ii); (c) a marked to market or other expected loss is deductible only if computed in accordance with the ICDS, s.40A(13) barring it otherwise; (d) foreign exchange gain or loss is taxable under s.43AA, subject always to s.43A; and (e) the reading down of s.145(2) and the principle that an ICDS cannot override the Act or a binding precedent survive, but operate only where the 2018 amendments have not themselves supplied the rule.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I restated my foreign currency creditors at the closing rate and debited an unrealised loss. Can the AO throw it out as a contingent liability?
Can the CBDT use ICDS notified under s.145(2) to override a Supreme Court or High Court decision on how income is computed?
The Tribunal decided against me without dealing with a coordinate bench decision I had actually filed in the paper book. Can it recall that order under section 254(2), or is that a review it cannot do?
The Assessing Officer says my client's accounts must be redone under the ICDS. How far do the ICDS actually reach?