Answer:

• The main objective of ICDS VII is to provide clarity on the treatment of government grants for income computation purposes under the Income Tax Act, 1961.
• It aims to ensure uniformity in accounting treatment across taxpayers.
• It provides guidelines on recognition, measurement, and treatment of different types of grants.
• Helps in reducing disputes between taxpayers and tax authorities regarding timing and nature of grant recognition.

Answer:

A government grant should be recognized when BOTH of the following conditions are satisfied:

• Condition 1: There is reasonable assurance that the assessee will comply with the conditions attached to the grant
• Condition 2: There is reasonable assurance that the grant will be received

Important Points:

• Recognition follows accrual basis, not cash basis
• Actual receipt of cash is not mandatory for recognition
• Reasonable assurance can be established through approval letters, completion of conditions, and legal entitlement

Answer:

Aspect	Capital Grant	Revenue Grant
Purpose	For purchase/construction of fixed assets	To supplement income or compensate expenses
Examples	Investment subsidy, machinery grant	Export incentive, interest subsidy
Treatment	Deducted from asset cost or deferred income	Recognized as income
Taxability	Indirectly affects tax through reduced depreciation	Directly taxable as income
Time Period	Long-term benefit	Relates to current period

Answer:

• Nature: Export incentives are revenue grants
• Recognition Timing: Should be recognized in the year when:
  • Export obligation is completed
  • Entitlement is established (right to receive becomes vested)
  • Reasonable assurance of receipt exists
• Not Dependent On: Actual receipt of scrips or cash
• Accounting: Accrual basis applies
• Example: If export is completed in March 2024 and all conditions met, recognize in F.Y. 2023-24 (A.Y. 2024-25), even if scrips received in next year

Answer:

Two Methods:

Method 1: Deduction from Asset Cost (Preferred)

• Grant amount is deducted from gross cost of asset
• Depreciation is calculated on reduced amount
• Results in lower depreciation claim
• Example: Asset ₹10 lakh, Grant ₹2 lakh → Depreciation on ₹8 lakh

Method 2: Deferred Income Method

• Grant is treated as deferred income (liability)
• Amortized over useful life of asset
• Depreciation calculated on full asset cost
• Example: Grant ₹2 lakh for 10-year asset → ₹20,000 income annually

Preferred Method:

• ICDS VII prefers Method 1 (Deduction from Asset Cost)
• More practical for tax computation
• Aligned with Supreme Court decisions

Answer:

Given:

• Cost of Machinery = ₹20,00,000
• Government Grant = ₹5,00,000
• Depreciation Rate = 15% (WDV method)

Solution (Method 1 - Deduction from Cost):

• Step 1: Net Cost = ₹20,00,000 - ₹5,00,000 = ₹15,00,000
• Step 2: Depreciation for Year 1 = ₹15,00,000 × 15% = ₹2,25,000
• Step 3: WDV at end of Year 1 = ₹15,00,000 - ₹2,25,000 = ₹12,75,000

Tax Impact:

• Depreciation allowed = ₹2,25,000 (instead of ₹3,00,000 without grant adjustment)
• Difference = ₹75,000 less depreciation claimed

Answer:

"Reasonable assurance" means there is sufficient evidence to conclude that:

For Compliance with Conditions:

• The assessee has the capability to meet the grant conditions
• All necessary actions have been taken or will be taken
• No significant obstacles exist in meeting conditions
• Past track record of compliance (if applicable)

For Receipt of Grant:

• Formal approval or sanction letter received
• Government has allocated budget for the grant
• No legal challenges or disputes pending
• Past precedents of similar grants being paid
• Documentation is complete and in order

Practical Indicators:

• ✓ Sanction order received
• ✓ Conditions fulfilled
• ✓ No contingencies pending
• ✓ Legal right established
• ✗ Mere application filed (insufficient)
• ✗ Conditions yet to be met (insufficient)

Answer:

Refund of grant should be treated as a change in accounting estimate.

For Capital Grant Refund:

• If originally deducted from asset cost:
  • Increase the carrying amount of asset by refund amount
  • Recompute depreciation prospectively
• If treated as deferred income:
  • Reduce unamortized deferred income balance
  • Excess (if any) charged to profit and loss

For Revenue Grant Refund:

• First apply against unamortized deferred credit (if any)
• Balance treated as expense in current period
• Can be netted off against similar grant income (if any)

Example:

• Grant of ₹10 lakh received in 2020 for machinery (10-year life)
• In 2024, ₹10 lakh to be refunded (4 years elapsed)
• If deducted from cost: Restore original cost, recalculate depreciation
• If deferred income: Remaining 6 years amortization reversed + excess as expense

Answer:

ICDS VII is applicable to:

• All assessees (other than individuals and HUFs not subject to tax audit)
• Who follow mercantile system of accounting
• Computing income under:
  • Profits and Gains of Business or Profession (Section 28), OR
  • Income from Other Sources (Section 56)

Specifically includes:

• ✓ Companies (Private and Public)
• ✓ Partnership Firms
• ✓ LLPs (Limited Liability Partnerships)
• ✓ Trusts and Institutions
• ✓ Individuals/HUFs subject to tax audit

Not applicable to:

• ✗ Individuals not subject to tax audit
• ✗ HUFs not subject to tax audit
• ✗ Assessees following cash system of accounting

Answer:

Given:

• Fair Market Value of Land = ₹80,00,000
• Concessional Price Paid = ₹15,00,000
• Grant Element = ₹80,00,000 - ₹15,00,000 = ₹65,00,000

Treatment under ICDS VII:

• Step 1: Record land at fair value = ₹80,00,000
• Step 2: Recognize grant element = ₹65,00,000
• Step 3: Apply Method 1 (deduction from cost):
  • Net cost of land = ₹80,00,000 - ₹65,00,000 = ₹15,00,000

Accounting Entry:

• Land A/c Dr. ₹80,00,000
•     To Bank A/c ₹15,00,000
•     To Capital Grant A/c ₹65,00,000

Tax Implications:

• Since land is not depreciated, grant benefit is not immediately taxable
• Tax impact arises when land is sold (capital gains computed on net cost ₹15 lakhs)
• Grant of ₹65 lakhs is capital receipt - not taxable as income

Answer:

Key Differences:

Aspect	ICDS VII	AS 12
Purpose	Income computation for tax	Financial reporting and disclosure
Capital Grant Treatment	Prefers deduction from asset cost	Allows choice between both methods
Flexibility	Less flexible, tax-focused	More flexible, accounting-focused
Disclosure	Limited disclosure requirements	Extensive disclosure requirements
Legal Backing	Income Tax Act, 1961	Companies Act, 2013
Consequences of Non-compliance	Tax implications, penalties	Financial statement issues, audit qualifications

Important Note:

• ICDS VII is largely based on AS 12 but with modifications for tax purposes
• Companies must maintain books as per AS 12 but compute taxable income as per ICDS VII
• This may lead to differences between book profit and taxable profit

Answer:

Given:

• Actual Interest Paid = ₹15,00,000
• Interest Subsidy Receivable = ₹3,00,000
• Net Interest Burden = ₹12,00,000

Treatment under ICDS VII:

Interest subsidy is a revenue grant and can be treated in two ways:

Option 1: Gross Method (Recommended)

• Show Interest Expense: ₹15,00,000 (full amount)
• Show Subsidy Income: ₹3,00,000 (as other income)
• Better transparency and disclosure

Option 2: Net Method

• Show Net Interest Expense: ₹12,00,000 (₹15,00,000 - ₹3,00,000)
• Subsidy directly reduces interest expense

Recognition Timing:

• Recognize in the same period as the related interest expense
• Matching principle applies
• If subsidy for FY 2023-24 interest, recognize in FY 2023-24

Tax Treatment:

• Subsidy is taxable as business income
• Net effect: Interest ₹15 lakh deductible, Subsidy ₹3 lakh taxable