[FAQs] ICDS and Form 3CD – Reporting | Compliance | Adjustments

The ICDS preamble states that these standards apply to the computation of income under ‘profit and gains of business or profession’ or ‘Income from other sources.’ It does not extend to the maintenance of books of accounts. Additionally, the Central Board of Direct Taxes (CBDT[1]) has specified that books of account should be maintained according to the accounting policies applicable to the assessee. Therefore, it is evident that reporting in Form 3CD should align with the books of account maintained by the assessee. Any adjustments to profits or losses as per the ICDS should be detailed in Clause 13 of Form 3CD.

Pursuant to the powers granted by Section 145(2) of the Income-tax Act, 1961, the Central Government has notified[2] the Income Computation and Disclosure Standards (ICDS). These standards are designed to ensure uniform accounting policies for the computation of taxable income under the Income-tax Act and aim to decrease litigation.

All assesses whose income falls under the categories of ‘profit and gains from business or profession’ or ‘Income from other sources,’ or both, must compute their taxable income in accordance with the ICDS. However, adherence to the ICDS is required only if the assessee uses the ‘Mercantile system’ of accounting.
There are no minimum limits on turnover or taxable income for the enforcement of ICDS; therefore, every assessee generating business or residual income must comply with ICDS in determining their income. Nonetheless, the application of ICDS is subject to certain exceptions.

The Central Board of Direct Taxes (CBDT) has clarified[3] that ICDS’s general rules are applicable to all entities, including banks, non-banking financial companies (NBFCs), and insurance companies, unless overridden by sector-specific provisions in the ICDS or the Act itself. For instance, ICDS-VIII includes particular guidelines for banks and certain financial institutions regarding securities, while Schedule I of the Act lays down distinct rules for the insurance sector.

Exception 1 – Exemption to Individual or HUF not Liable for Tax Audit

An individual or Hindu Undivided Family (HUF) not mandated to audit their books of account for the previous year under section 44AB is exempt from adhering to the Income Computation and Disclosure Standards (ICDS).

Additionally, those choosing a presumptive taxation scheme are not obligated to maintain or audit their books, according to ICDS. However, the Central Board of Direct Taxes (CBDT) has clarified [4] that certain ICDS provisions still apply to entities other than individuals or HUFs that opt for this scheme. For example, when calculating presumptive income for a partnership firm under section 44AD, ICDS rules related to construction contracts or revenue recognition must be used to assess receipts or turnover.

Exception 2 – Exemption for MAT Computation

The Central Board of Direct Taxes (CBDT) has clarified [5] that the Income Computation and Disclosure Standards (ICDS) are relevant for calculating income according to the standard provisions of the Act. However, for Minimum Alternate Tax (MAT), which is calculated based on ‘book profit’—net profit as outlined in the Profit and Loss Account prepared in accordance with the Companies Act, with specific adjustments—ICDS does not apply. Conversely, in cases where an assessee is subject to the Alternate Minimum Tax (AMT) under Section 115JC, ICDS are applicable. The computation of AMT involves adjusting the total income, as calculated under the regular tax provisions, according to specified adjustments outlined in the Act.

Clause 13(d) mandates that the tax auditor indicate whether any adjustments are needed to the profits or losses to conform to the Income Computation and Disclosure Standards (ICDS). If the response to clause 13(d) is yes, then the required adjustments for each specific ICDS must be clearly detailed. These adjustments are solely for the purpose of computing taxable income and should not result in any corresponding changes to the financial statements prepared according to the Accounting Standards or Ind AS.

Clause 13(e) of Form 3CD requires disclosure of any increase or decrease in profits resulting from the application of ICDS. To compute the revised profits in accordance with ICDS IV, follow the specified method. The final outcome from this calculation should be reported in the mentioned clause:

Accounting Standards (AS) – Reconciliation

 Indian Accounting Standards (Ind AS) – Reconciliation

* Generally, industry practice is to book such interest only when it is received. So, this item may not be a reconciling item in some of the cases.

Note – The reconciliation shall be done with respect to every ICDS.

According to the requirements, the tax auditor should record a consolidated figure reflecting the total increase or decrease in profit. There is no need to separate these adjustments into different income categories.