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Can the notified ICDSs be stated as ultra vires, to the extent they are in contravention with the provisions of the Income-tax Actand/or settled judicial precedents?

Chamber of Tax Consultants and Anr v. Union of India W.P.(C) 5595/2017 & CM APL 23467/2017

High Court’s Observations: On this issue, the Delhi High Court made the following observations -
• Section 145(2) empowers the CG to notify ICDSs to be followed by any class of assessees or any class of income. However, section 145(2) has to be read down to restrict power of CG to notify ICDSs that do not seek to override binding judicial precedents or provisions of Income-tax. The power to enact a validation law is an essential legislative power that can be exercised, in context of the Act, only by Parliament and not by Executive.
In case of a conflict between ICDS and provisions of Income-tax Act, 1961 and settled judicial precedents, the latter would prevail.
• ICDS I which does away with the concept of 'prudence' is contrary to the Act and binding judicial precedents and is, therefore, unsustainable in law.
• ICDS II pertaining to valuation of inventories eliminates distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution. This is contrary to the Supreme Court’s judgment in Shakti Trading Co. (2001) 250 ITR 871 (SC). It fails to acknowledge that the valuation of inventory at market value upon settlement of accounts of the outgoing partner is distinct from valuation of the inventory in the books of the business which is continuing. ICDS II is thus, ultra vires the Act.
• The treatment to retention money under Paragraph 10(a) in ICDS-III will have to be determined on a case to case basis by applying settled principles of accrual of income. ICDS-III seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the facts. Hence, to that extent para 10 (a) of ICDS III is ultra vires.
• Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing cost. This is contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited (1999) 236 ITR 315.
• Para 5 of ICDS-IV requires an assessee to recognize income from export incentive in the year of making of the claim if there is 'reasonable certainty' of its ultimate collection. This is contrary to the decision of the Supreme Court in Excel Industries (2015) 358 ITR 295, and is, therefore, ultra vires.
• As far as para 6 of ICDS IV is concerned, the proportionate completion method as well as the contract completion method have been recognized as a valid method of accounting under the mercantile system of accounting by the Supreme Court in CIT v. Bilhari Investment Pvt. Ltd. (2008) 299 ITR 1 (SC). Therefore, to the extent that para 6 of ICDS IV permits only one of the methods, i.e., proportionate completion method, it is contrary to the above decisions and thus, ultra vires.
• Para 8 (1) of ICDS-IV is not ultra vires the Income-tax Act, 1961 or judicial precedents. It is valid.
• ICDS VI which states that marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed, is not in consonance with the ratio laid down by the Supreme Court in Sutlej Cotton Mills Limited v. CIT (1979) 116 ITR 1 (SC), insofar as it relates to marked to market loss arising out of forward exchange contracts held for trading or speculation purposes. It is, therefore, ultra vires the Act.
• ICDS VII which provides that recognition of government grants cannot be postponed beyond the date of actual receipt, is in conflict with the accrual system of accounting. To that extent it is ultra vires the Act.
• ICDS VIII pertains to valuation of securities. For those entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS. The Preamble to the ICDS stated that the standards were not meant for the purpose of maintenance of books of accounts. However, such entities will now be required to maintain separate records for income tax purposes for every year since the closing value of the securities would be valued separately for income tax purposes and for accounting purposes. To this extent Part A of ICDS VIII is ultra vires the Act.
• To the extent the specific ICDS are ultra vires, the impugned notification 29th September 2016 and Circular No. 10/2017 are also ultra vires.