ICDS IV : Revenue Recognition - Income Tax - Ready Reckoner - Income Tax

ICDS IV : REVENUE RECOGNITION This Income Computation and Disclosure Standard is based on Accounting Standard 9 Revenue Recognition. 1. Scope:- This standard covers activities of a person from sale of goods, rendering of services or income pertaining to interest, royalty, or dividends. This ICDS does not deal with the aspects of revenue recognition which are dealt with by other ICDS. Primarily, the ICDS deals with the point of time when the revenue should be recognised. It also indicates the method of measurement of revenue to be recognised. Note: This ICDS will not apply in such cases and situations where other ICDS apply. 2. Revenue:- Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of a person from the sale of goods, from the rendering of services, or from the use by others of the person s resources yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. 3. Sale of goods:- There are two cumulative criteria for recognising revenue from sale of goods: The seller has transferred the property in the goods to the buyer for a price or significant risks and rewards associated with the ownership of the goods have been transferred to the buyer and the seller has not retained effective control over the goods transferred. Control contemplated here is control that an owner usually has over the goods. In a situation, where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership, revenue in such a situation shall be recognised at the time of transfer of significant risks and rewards of ownership to the buyer. The other criteria for recognising the revenue is that there is reasonable certainty of ultimate collection of the revenue. If there does not exist reasonable certainty of ultimate collection of the revenue, recognition of revenue is postponed. 4. Rendering of service:- Revenue from service transactions shall be recognised by the percentage completion method. Under this method, revenue from service transactions is matched with the service transaction costs incurred in reaching the stage of completion, resulting in the determination of revenue, expenses and profit which can be attributed to the proportion of work completed. However, when services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognised on a straight line basis over the specific period. Revenue from service contracts with duration of not more than ninety days may be recognised when the rendering of services under that contract is completed or substantially completed. Note: There may be cases where one may have to consider whether the transaction is a service transaction. This will depend upon the facts and circumstances of the transaction. Often a transaction involves both, sale of goods and provision of service. In such a case, one will have to examine what is the predominant aspect of the transaction, whether consideration to be received for the transaction can be split into that for sale of goods and for provision of service, etc. Merely, because a transaction is liable to service tax it will not ipso facto mean that it is a service transaction as contemplated under this ICDS. For example, a real estate developer developing a property on his own account and not as a contractor will not be covered by this ICDS, since the predominant aspect of the transaction as understood under the Act is of sale of immovable property. Considering this, provisions of ICDS will not apply to recognition of the revenue by a developer of real estate. 5. The Use of Resources by Others Yielding Interest, Royalties or Dividends:- Interest:- ICDS requires that interest shall accrue on time basis and calculated on the basis of the amount outstanding and the applicable rate. Rate of interest is generally agreed between the parties. It may vary and such variation may, in some cases, be contingent upon certain events. Only the income which has accrued or arisen in the previous year relevant to the assessment year as contemplated u/s 5 shall be taxed. In the case of CIT v Vasisth Chay Vyapar Ltd.[ 2010 (11) TMI 88 - Delhi High Court ] it is held that where recovery of inter corporate deposits (ICD) itself had become doubtful due to precarious financial position of the borrower and the ICD had become a non performing asset as per the Directions of the Reserve Bank of India, the interest thereon could not be said to have accrued to the assessee. Royalties:- The ICDS requires that royalties shall accrue in accordance with the terms of agreement between the parties and be recognised accordingly. However, the ICDS provides that, considering the substance of the transaction, if it is more appropriate to recognise royalties on other systematic and rational basis, then such other basis shall be adopted for recognising the royalties. Note: Where royalty is taxed under the provisions of any DTA, provisions of such DTA will prevail over the provisions of the Act and consequently, provisions of the ICDS will not apply. Dividends:- Dividends are recognised in accordance with the provisions of the Act . It has been defined inclusively by section 2(22) of the Act . It includes certain distributions and payments. Although, dividends in respect of which dividend distribution tax is paid under section 115-O of the Act are exempt under section 10(34) of the Act, dividends received from a foreign company are chargeable to tax. Similarly, the amount deemed to be dividend under section 2(22) (e) of the Act is not subject to dividend distribution tax and is chargeable to tax. Dividends, when chargeable to tax, will be recognised as revenue in accordance with the provisions of section 8 of the Act . Note: Dividend for the purposes of the Act, does not include dividend from mutual funds. Under the various provisions of the Act , dividends from mutual funds are referred as `income in respect of units of mutual funds . Thus this ICDS has no application in respect of income in respect of units of mutual funds. 6. Transitional Provisions:- The transitional provisions of Income Computation and Disclosure Standard on construction contract shall m utatis mutandis apply to the recognition of revenue and the associated costs for a service transaction undertaken on or before the 31st day of March, 2016 but not completed by the said date. Revenue for a transaction, other than a service transaction referred to in Para 10, undertaken on or before the 31st day of March, 2016 but not completed by the said date shall be recognised in accordance with the provisions of this standard for the previous year commencing on the 1st day of April, 2016 and subsequent previous year. The amount of revenue, if any, recognised for the said transaction for any previous year commencing on or before the 1st day of April, 2015 shall be taken into account for recognising revenue for the said transaction for the previous year commencing on the 1st day of April, 2016and subsequent previous years. 7. Disclosure:- Following disclosures shall be made in respect of revenue recognition, namely:- in a transaction involving sale of good, total amount not recognised as revenue during the previous year due to lack of reasonably certainty of its ultimate collection along with nature of uncertainty the amount of revenue from service transactions recognised as revenue during the previous year for service transactions in progress at the end of previous year amount of costs incurred and recognised profits (less recognised losses) upto end of previous year the amount of advances received; and the amount of retentions.