The Assessing Officer says my client's accounts must be redone under the ICDS. How far do the ICDS actually reach?
Not as far as the notice usually assumes. The ten ICDS notified under s.145(2) apply only to a person following the mercantile system of accounting, and only for computing income under "Profits and gains of business or profession" and "Income from other sources" — the preamble to every ICDS says in terms that they are "not for the purpose of maintenance of books of accounts", and that where an ICDS conflicts with the Act, the Act prevails to that extent. They do not apply to an individual or Hindu undivided family whose accounts are not required to be audited under s.44AB, and they do not apply to a person on the cash system at all.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2016-09-29, reported as Section 145(2) and section 145(3), Income-tax Act 1961 (s.145(3) as amended by the Finance Act 2016); CBDT Notification No. 87/2016 dated 29 September 2016 notifying ten Income Computation and Disclosure Standards with effect from AY 2017-18. It bears on section 145, section 145(1), section 145(2), section 145(3), section 144, section 44AB of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
Two practical consequences follow and both are commonly missed. First, no ICDS requires a second set of books: the adjustment is made in the computation, and a demand that the client re-cast his audited accounts is outside the notification. Second, the Finance Act 2016 added a third limb to s.145(3) — income not computed in accordance with the standards notified under s.145(2) is now, by itself, a ground on which the Assessing Officer may proceed to a best judgment assessment under s.144. That limb did not exist before and it is the reason an ICDS disclosure default has teeth from AY 2017-18. The countervailing point is the preamble: the Act prevails over an ICDS, so where the ICDS treatment conflicts with a provision of the Act the officer cannot use s.145(3) to enforce the ICDS against the Act.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to sub-section (2), be computed in accordance with either the cash or the mercantile system of accounting regularly employed by the assessee. Section 145(2), as amended, provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Section 145(3), as it now stands after the Finance Act 2016, provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. By Notification No. 87/2016 dated 29 September 2016 the Central Government, in exercise of the power under s.145(2), notified ten income computation and disclosure standards to be followed by all assessees following the mercantile system of accounting, for the purposes of computation of income chargeable under the heads "Profits and gains of business or profession" and "Income from other sources", the expression 'assessee' excluding an individual or a Hindu undivided family who is not required to get his accounts of the previous year audited under s.44AB. An earlier notification of 31 March 2015 had notified ten ICDS for AY 2016-17; that set was not brought into operation and the AY 2017-18 notification is the operative one. The preamble to each ICDS states that the standard is applicable for computation of income chargeable under those two heads and not for the purpose of maintenance of books of accounts, and that in the case of conflict between the provisions of the Act and the standard, the provisions of the Act prevail to that extent.
Not applicable — statutory position. The operative propositions are: (a) the ICDS are computation standards notified under s.145(2), not book-keeping standards, and by their own preamble do not govern the maintenance of books of accounts; (b) they bind only a person on the mercantile system, and not an individual or HUF outside the s.44AB audit requirement; (c) they operate only for income under the heads "Profits and gains of business or profession" and "Income from other sources"; (d) where an ICDS conflicts with the Act, the Act prevails to that extent; and (e) since the Finance Act 2016, failure to compute income in accordance with the notified standards is itself a ground on which the Assessing Officer may make an assessment in the manner provided in s.144.
Not applicable — statutory position. The limits stated are drawn from the terms of s.145(2) and s.145(3) themselves, from the class of assessees identified in Notification No. 87/2016, and from the two sentences of the standard preamble that appear at the head of each of the ten ICDS.
(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of Assessees or in respect of any class of income.
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Handle my notice → Ask a CA on WhatsAppNot as far as the notice usually assumes. The ten ICDS notified under s.145(2) apply only to a person following the mercantile system of accounting, and only for computing income under "Profits and gains of business or profession" and "Income from other sources" — the preamble to every ICDS says in terms that they are "not for the purpose of maintenance of books of accounts", and that where an ICDS conflicts with the Act, the Act prevails to that extent. They do not apply to an individual or Hindu undivided family whose accounts are not required to be audited under s.44AB, and they do not apply to a person on the cash system at all. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 145, section 145(1), section 145(2), section 145(3), section 144, section 44AB of the Income Tax Act 1961. It is reported as Section 145(2) and section 145(3), Income-tax Act 1961 (s.145(3) as amended by the Finance Act 2016); CBDT Notification No. 87/2016 dated 29 September 2016 notifying ten Income Computation and Disclosure Standards with effect from AY 2017-18. Two practical consequences follow and both are commonly missed. First, no ICDS requires a second set of books: the adjustment is made in the computation, and a demand that the client re-cast his audited accounts is outside the notification. Second, the Finance Act 2016 added a third limb to s.145(3) — income not computed in accordance with the standards notified under s.145(2) is now, by itself, a ground on which the Assessing Officer may proceed to a best judgment assessment under s.144. That limb did not exist before and it is the reason an ICDS disclosure default has teeth from AY 2017-18. The countervailing point is the preamble: the Act prevails over an ICDS, so where the ICDS treatment conflicts with a provision of the Act the officer cannot use s.145(3) to enforce the ICDS against the Act. If it applies to you, the first step is this: Establish first whether the client is inside the notification at all — mercantile system, and either not an individual/HUF or an individual/HUF whose accounts are subject to audit under s.44AB. A cash-system assessee is outside it.
Section 145(1) provides that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to sub-section (2), be computed in accordance with either the cash or the mercantile system of accounting regularly employed by the assessee. Section 145(2), as amended, provides that the Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Section 145(3), as it now stands after the Finance Act 2016, provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. By Notification No. 87/2016 dated 29 September 2016 the Central Government, in exercise of the power under s.145(2), notified ten income computation and disclosure standards to be followed by all assessees following the mercantile system of accounting, for the purposes of computation of income chargeable under the heads "Profits and gains of business or profession" and "Income from other sources", the expression 'assessee' excluding an individual or a Hindu undivided family who is not required to get his accounts of the previous year audited under s.44AB. An earlier notification of 31 March 2015 had notified ten ICDS for AY 2016-17; that set was not brought into operation and the AY 2017-18 notification is the operative one. The preamble to each ICDS states that the standard is applicable for computation of income chargeable under those two heads and not for the purpose of maintenance of books of accounts, and that in the case of conflict between the provisions of the Act and the standard, the provisions of the Act prevail to that extent. The matter was decided on 2016-09-29 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 ICDS are computation standards notified under s.145(2), not book-keeping standards, and by their own preamble do not govern the maintenance of books of accounts; (b) they bind only a person on the mercantile system, and not an individual or HUF outside the s.44AB audit requirement; (c) they operate only for income under the heads "Profits and gains of business or profession" and "Income from other sources"; (d) where an ICDS conflicts with the Act, the Act prevails to that extent; and (e) since the Finance Act 2016, failure to compute income in accordance with the notified standards is itself a ground on which the Assessing Officer may make an assessment in the manner provided in s.144.
Not applicable — statutory position. The limits stated are drawn from the terms of s.145(2) and s.145(3) themselves, from the class of assessees identified in Notification No. 87/2016, and from the two sentences of the standard preamble that appear at the head of each of the ten ICDS. In the words reproduced by the source cited on this page: "(2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of Assessees or in respect of any class of income."
It was decided by the CBDT Circulars & Instructions on 2016-09-29 and is reported as Section 145(2) and section 145(3), Income-tax Act 1961 (s.145(3) as amended by the Finance Act 2016); CBDT Notification No. 87/2016 dated 29 September 2016 notifying ten Income Computation and Disclosure Standards with effect from AY 2017-18. 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 145, section 145(1), section 145(2), section 145(3), section 144, section 44AB, 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 ICDS are computation standards notified under s.145(2), not book-keeping standards, and by their own preamble do not govern the maintenance of books of accounts; (b) they bind only a person on the mercantile system, and not an individual or HUF outside the s.44AB audit requirement; (c) they operate only for income under the heads "Profits and gains of business or profession" and "Income from other sources"; (d) where an ICDS conflicts with the Act, the Act prevails to that extent; and (e) since the Finance Act 2016, failure to compute income in accordance with the notified standards is itself a ground on which the Assessing Officer may make an assessment in the manner provided in s.144. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 145, section 145(1), section 145(2), section 145(3), section 144, section 44AB 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. Check the assessment year. The ICDS were first notified on 31 March 2015 for AY 2016-17, that notification was withdrawn, and the operative Notification No. 87/2016 dated 29 September 2016 applies from AY 2017-18. Nothing before AY 2017-18 is governed by the operative ICDS. If the officer asks for ICDS-compliant books, answer with the preamble: the standard is for computation, not for maintenance of books of accounts, and the adjustment belongs in the computation of income. Where the ICDS treatment collides with a provision of the Act, say so expressly and invoke the second limb of the preamble — the Act prevails to that extent — before the officer records a s.145(3) satisfaction. Read this together with the entry on the Finance Act 2018 restoration: several ICDS provisions were struck down in 2017 and then re-enacted as sections of the Act, so the ICDS text alone is no longer the whole answer.
Still good law. This states the framework as it stands for the assessment years governed by the Income-tax Act 1961. It must be read with the Delhi High Court's decision in The Chamber of Tax Consultants v Union of India (8 November 2017), which read down s.145(2) and struck down parts of several ICDS, and with the Finance Act 2018, which re-enacted the substance of much of what was struck down as sections of the Act with retrospective effect from 1 April 2017 — see the separate entry on that. I did not locate a current, correctly year-stamped departmental page for s.145 and therefore cannot certify from a departmental source that s.145 has not been amended since 2017; the text stated is as reproduced in a 2017 and a 2024 High Court judgment. I did not check whether Notification No. 87/2016 has been superseded or amended by any later notification. 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.
The text of s.145(2) and s.145(3) relied on here was read as reproduced inside the Delhi High Court's judgment in The Chamber of Tax Consultants v Union of India (8 November 2017), which sets out both sub-sections as amended by the Finance Act 2016, and s.145(3) was read a second time as reproduced at para 17 of the Delhi High Court's judgment in Pr. Commissioner of Income Tax (Central)-1 v M/s Forum Sales Pvt. Ltd. (1 March 2024). The two renderings agree. The department's own page at incometaxindia.gov.in/w/section-145 carries the Year stamp '2000' and prints the PRE-2016 text (sub-section (2) still speaks of 'accounting standards' and sub-section (3) has no third limb); it is an archived page and was NOT used to state the current position. I could not locate a current, correctly year-stamped departmental page for s.145, so I cannot exclude from a departmental source an amendment to s.145 after 2017; the two judicial reproductions, one of them from 2024, are the basis for saying the text stands as stated. The ICDS preamble was read as reproduced at para 51 of the Chamber judgment; the same fetch printed the opening words once as 'Profits and gain of business or profession' and once as 'Profits and gains of business or profession', so no quotation from the preamble is offered here. The scope and exclusion (individual or HUF not subject to s.44AB audit) were read from para 1 of the Chamber judgment describing Notification No. 87/2016; para 1 as transcribed mis-prints 'Section 44 AB' as 'Section 44B' in one place in the petitioners' summarised contention at clause (vi), which is plainly a typographical error in the report. The date in decided_on is the date of Notification No. 87/2016 and is NOT a decision 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 ICDS are computation standards notified under s.145(2), not book-keeping standards, and by their own preamble do not govern the maintenance of books of accounts; (b) they bind only a person on the mercantile system, and not an individual or HUF outside the s.44AB audit requirement; (c) they operate only for income under the heads "Profits and gains of business or profession" and "Income from other sources"; (d) where an ICDS conflicts with the Act, the Act prevails to that extent; and (e) since the Finance Act 2016, failure to compute income in accordance with the notified standards is itself a ground on which the Assessing Officer may make an assessment in the manner provided in s.144.
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