Income Computation
and Disclosure
Standards (ICDS) on
Leases
Nidhi Bothra
Executive Vice President
Vinod Kothari Consultants Pvt Ltd.
1006 – 1009, Krishna
224 AJC Bose Road
Kolkata – 700017
Phone 033-22811276/ 22813742/7715
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Mumbai 400002
Phone 022-22817427
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Email: nidhi@vinodkothari.com
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Income Computation and
Disclosure Standards(ICDS) Introduction
 Section 145 of the Income Tax Act, 1961
(I.T. Act) provides that the Central government (CG) may notify in the
official Gazette, ICDS to be followed by any class of tax payers or in respect of any class of income.
 Aligned to the above provision, CG constituted a committee in December 2010 to suggest accounting standards
for tax compliance under income tax laws. The Committee recommended 18 standards for harmonizing the
Accounting standards issued by the Institute of Chartered Accountants of India (ICAI AS) with the tax laws and
released a draft of 14 standards , which were released for public comments in Oct, 2012.
 Finally the Central Board of Direct taxes (CBDT) released revised draft of 12 ICDS for comments from public
and various stakeholders , to be submitted by 8th February, 2015.
 According to the Ministry, ICDS is applicable for computation of income chargeable under the head 'profits and
gains of business or profession' or 'income from other sources' and not for the purpose of maintenance of books
of accounts.
The 12 Income Computation Disclosure Standards released by CBDT and the corresponding
Accounting Standards issued by ICAI are :
 Accounting Policies (ICAI AS 1)
 Valuation of Inventories(ICAI AS 2)
 Construction Contracts(ICAI AS 7)
 Revenue Recognition (ICAI AS 9)
 Tangible Fixed Assets (ICAI AS 10)
 The Effects of Changes in Foreign Exchange Rates (ICAI AS 11)
 Government Grants (ICAI AS 12)
 Securities (ICAI AS 13)
 Borrowing Costs (ICAI AS 16)
 Leases (ICAI AS 19)
 Intangible Assets (ICAI AS 26)
 Provisions, Contingent Liabilities and Contingent Assets (ICAI AS 29)
Overview of Leases
 The lessor grants the lessee the right to use the asset in exchange for a series
of lease payments.
 Leasing refers to an arrangement wherein lessor intends to lease out an asset
to lessee for a certain period of time in exchange for lease rentals.
 Lease transactions are governed by Accounting Standard 19 (accounting for
leases) as issued by the ICAI.
 AS 19 provides classification of leases either as an operating lease (i.e. a lease
in which the risk and reward are not transferred to the lessee) or as a
financial lease.
Accounting treatment under AS 19
Operating Lease
In the books of Lessor
Assets given shall
be recorded in
balance sheet as
Fixed Asset
Depreciation on
the asset shall be
recognized in the
profit and loss
account
In the books of Lessee
Lease rentals
receivable during
lease period shall be
recognized in profit
and loss on a
Lease rentals
receivable during
lease period shall be
recognized in profit
and loss on a
straight line basis
straight line basis
Accounting treatment under AS 19
Financial Lease
In the books of Lessee
In the books of Lessor
Assets are
recognized in the
balance sheet as
receivable instead
of fixed asset
Assets so acquired
are recognized in
the balance sheet
as an asset and as
a liability
Depreciation on
the leased asset
will be charged to
profit and loss
account
Lease payments
required to be paid
should be
segregated into
principle component
and finance charges
Taxation on Leasing – Points of dispute in AS
and the I. T. Act (1/1)
 AS 19 provides that in financial leases, lessee shall recognize the asset in its
books and claim depreciation. However, claim for depreciation under the I.
T. Act is allowed only when it satisfies the dual conditions of ownership and
usage of the asset.
 CBDT in its Circular No. 2/2001 dated 9th February 2001, has clarified that
the claim for depreciation in case of lease transaction will not have any
implications due to the accounting standard issued by ICAI. Further Supreme
Court in the case of ICDS Ltd., has also affirmed that depreciation claim in a
leasing transaction will be allowed to the lessor.
Taxation on Leasing – Points of dispute in AS
and the I.T. Act (1/2)
 ICDS harmonizes the anomaly in the dual treatment of depreciation in
accountancy and taxation by incorporating features of AS 19 and clearly
states the following:
 Leases shall be classified either as an operating lease or a financial lease by
satisfying the conditions of risk and reward ; Conditions for classifying a lease as a
financial lease are similar to the one provided in AS 19;
 Para 10 of ICDS on Leases provides that where a lease qualifies to be a financial
lease, lessee shall recognize the asset in its books and hence eligible to claim
depreciation on the same
ICDS for Lease transactions (corresponding to
ICAI AS-19) – Salient Features (1/1)
 ICDS provides for uniformity of definitions and requires a joint confirmation
to ensure the consistency in classification of lease as operating lease or
financial lease between both the lessor and lessee.
 Though the standard clearly provides that in case of financial leases, lessee
will be entitled to claim depreciation, section 32 of the Act needs to be
amended to insert any subsection or explanation to provide a reference to
this standard on leasing transaction;
ICDS for Lease transactions (corresponding to
ICAI AS-19) – (1/2)
 The Committee has also recommended amendments in the income tax
provisions relating to transfer, block of assets, ownership etc in line with the
provisions of this ICDS provisions.
 ICDS states that sale and lease back transaction will be governed by the
provisions of the I.T. Act, hence explanation 4A to section 43 will come into
picture. Thus, in such case the cost of acquisition of the buyer/lessor shall be
the written down value of the asset of seller/lessee. AS 19 provides a different
treatment to the same.