Section 145(2)

Section 145(2) — the law in short

What the courts have decided on section 145(2), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• P.A. Jose v Union of India — ICDS II displaced LIFO from AY 2017-18, but opening and closing stock cannot be valued on two different methods High CourtHelps taxpayer
  ICDS II forced my client off LIFO in AY 2017-18 and the whole switching difference has been taxed in that one year. Is there any answer?
  Yes, and the Kerala High Court has given it. It quashed the notices and directed the department either to accept the LIFO valuation of both opening and closing stock for AY 2017-18, or to permit the assessees to value their stocks by applying FIFO or weighted average cost — in other words, the same method must be applied to both ends of the year. What the court did not do is strike down the substituted s.145A or ICDS II.
• PCIT v Forum Sales Pvt Ltd — an estimate cannot be made without first rejecting the books under s.145(3) High CourtHelps taxpayer
  The Assessing Officer has disallowed forty per cent of my client's purchases on an estimate, but has not rejected the books. Is that open to him?
  No. The Delhi High Court held that it is the settled position of law that the books of account have to be necessarily rejected before the Assessing Officer proceeds to a best judgment assessment on fulfilment of the conditions in the Act, and that any pick and choose method of rejecting certain entries while accepting others, without appropriate justification, is arbitrary. Since the additions in question had been made on an estimate basis without rejecting the books, no substantial question of law arose and the Revenue's appeals were dismissed.
• The Chamber of Tax Consultants v UOI High CourtHelps taxpayerSuperseded by amendment
  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.
• Embassy Property Developments Pvt Ltd v ACIT — a provision for onerous contracts is an expected loss barred by s.40A(13) unless it is really accrued cost ITATCuts both waysNo later treatment found
  My developer client has debited a provision for loss on onerous sale contracts. The Assessing Officer has disallowed it under s.36(1)(xviii) and s.40A(13). What is the argument?
  The argument is to show that the amount is not an expected loss at all but cost that has already accrued against revenue already recognised. The Tribunal held that from AY 2017-18 the disallowance rests on three connected provisions — s.36(1)(xviii), which permits a marked to market or other expected loss only if computed in accordance with the ICDS; s.40A(13), which disallows any such loss except to the extent allowable under s.36(1)(xviii); and para 4(ii) of ICDS I, which bars recognition of expected losses unless another ICDS permits it — and that ICDS X does not recognise provisions for onerous executory contracts. It then restored the issue to the Assessing Officer to verify the assessee's project-wise computation, directing deletion if the claim is made out and, if not, determination of how much is an expected loss hit by s.40A(13).
• IL&FS Tamilnadu Power Company v DCIT — a forward contract gain that cannot be adjusted on capital account must be taxed as revenue ITATHelps departmentNo later treatment found
  My client hedged a loan given to its foreign subsidiary and made a gain on the forward contract. It says the gain is capital. Will that hold?
  It did not hold here. The Chennai Tribunal upheld the Commissioner (Appeals) and taxed a forward exchange contract gain of Rs.19,90,79,300 as revenue, reasoning that where the exchange fluctuation gain or loss cannot be adjusted on capital account — as it can be under s.43A where a capital asset is acquired from outside India — it must be treated as revenue and offered to tax, because there cannot be a situation in which the fluctuation gain or loss is adjusted neither on capital account nor on revenue account. The Tribunal reached that conclusion after considering, among other things, the ICDS notified on 29 September 2016 and operative from AY 2017-18.
• Aryacon Contractors and Engineers Pvt Ltd v ACIT — retention money is contract revenue from AY 2017-18, whatever the older case law says ITATHelps departmentNo later treatment found
  My contractor client did not offer performance retention withheld by the awarder. The Assessing Officer has added it for AY 2017-18. Can I rely on the accrual cases?
  Not for AY 2017-18 onwards. The Tribunal held that where the assessee follows the mercantile system it must account for all receipts on accrual basis, and that retention money could not be excluded when there is an express provision in the Act brought in by the Finance Act 2018 with retrospective effect from 1 April 2017. Section 43CB and ICDS III state that contract revenue shall include retention money, so the earlier case law is not relevant in determining the taxability of retention money in the case of a contractor.
• Hi-Tech Estates and Promoters Pvt Ltd v PCIT — s.43CB cannot be used to revise an assessment for a year before AY 2017-18 ITATHelps taxpayerNo later treatment found
  The Commissioner has revised my client's assessment under s.263 saying he should have followed percentage of completion. The year is before AY 2017-18. Is that revision good?
  No. The Tribunal held that percentage of completion became mandatory for revenue recognition only from 1 April 2017, that is AY 2017-18, by the insertion of s.43CB, and that this method was not mandatory or compulsory for AY 2013-14; the Commissioner therefore could not revise or revisit the assessment order by pressing s.43CB into service. It quashed the s.263 order, the s.263 notice and all proceedings and orders passed in pursuance of it.
• ADIT (International Taxation) v Shandong Tiejun Electric Power Engineering Co. Ltd — where s.44BBB(2) is complied with, the officer cannot reject the books under s.145(3) and fall back on the 10 per cent ITATHelps taxpayerNo later treatment found
  We are a foreign company on an approved turnkey power project. We keep books, they are audited, and we recognise revenue on percentage of completion under AS-7. The Assessing Officer has rejected the books under section 145(3) and taxed 10 per cent of our billings under section 44BBB(1). Can he do that?
  The Ahmedabad Bench of the Tribunal held he could not, on these facts, and dismissed the Revenue's appeal. Section 44BBB(2) gives the assessee an option to be assessed on lower profits on two conditions only — that it keeps and maintains books and other documents as required under s.44AA(2) and that it gets its accounts audited and furnishes the s.44AB report — and where those are satisfied and a recognised method of accounting under AS-7 has been regularly followed and disclosed, the officer's action in rejecting the books under s.145(3) and assessing under s.44BBB(1) on a presumptive basis is not justified.
• Statutory position — the Finance Act 2018 answer to Chamber of Tax Consultants: s.36(1)(xviii), s.40A(13), s.43AA, s.43CB, s.145A and s.145B CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — what the ICDS actually govern: s.145(2), s.145(3) and the preamble limits CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — the proviso to s.36(1)(vii), s.36(2)(v) and Explanation 2: how a bank's bad-debt write-off is set against the s.36(1)(viia) provision account CBDT Circulars & InstructionsCuts both ways
  My client bank has claimed under s.36(1)(viia) and has also written off bad debts. The Assessing Officer says the write-off must first be set against the provision account and only the excess is deductible. Where does that come from, and does it reach non-rural debts?
  It comes from three places that must be read together. The proviso to s.36(1)(vii) says that where clause (viia) applies to the assessee, the deduction for a bad debt written off is limited to the amount by which the debt exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia). Section 36(2)(v) adds a condition precedent: where the debt relates to advances made by an assessee to whom clause (viia) applies, no deduction is allowed at all unless the assessee has debited that debt, in that previous year, to the clause (viia) provision account. Explanation 2 to clause (vii), inserted by section 7 of the Finance Act, 2013 with effect from 1 April 2014, then declares that for the purposes of that proviso and of s.36(2)(v) the account referred to is "only one account" and that it "shall relate to all types of advances, including advances made by rural branches". Whether Explanation 2 displaces the Supreme Court's construction in Catholic Syrian Bank for a sub-clause (a) bank is contested and is dealt with separately in this library.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.