Parts of ICDS are struck down and held ultra vires by Delhi High Court

This writ Petition was filed to seeks a declaration on the constitutional invalidity of section 145(2) of Income Tax Act, 1961. Through power conferred by this section Central Government notified ten ‘Income Computation and Disclosure Standards’ (“ICDS‟), which to be followed by all Assessee (excluding Individual or HUF who is not required to get his accounts audited as per ITL) following the mercantile system of accounting, for the purposes of computation of income chargeable to income tax under the head “Profits and gains of business or profession” or “income from other sources”.

The major premise on which the impugned ICDS is based is that the income computed for the purposes of income tax under the above two heads need not be (as is often not) the income as reflected in the books of accounts maintained by such Assessee. Although the computation of such taxable income would normally be based on the books of accounts of the Assessee, and dependant on the method of accounting followed by the Assessee subject to the adjustments for allowances and deductions under the Act. Assessing Officer (AO) can reject the books of accounts maintained by the Assessee if he is not satisfied about their correctness or completeness and can resort to best judgment assessment.

Petitioner’s counsel submitted that the impugned notification notifying ICDS is contrary to the settled law since its implementation would nullify the judgments of the Supreme Court and the High Courts. Reference was made to the various judgments which would now stand virtually inapplicable on account of the ICDS. It was clarified by the CBDT itself that in the case of conflict between the provisions of the ICDS and the Act, the provisions of the Act shall prevail. Consequently, with the ICDS being made mandatory it was no longer open to an Assessee to compute taxable income in terms of the Act as explained by the judgments of the Supreme Court and High Courts.

Question of law:

  • Whether the amendments to Section 145 are an instance of delegation by the Parliament of essential legislative powers to the Central Government?
  • Are the ICDS an instance of excessive delegation of legislative powers? Whether the impugned ICDS are contrary to the settled law as explained in various judicial precedents and are, therefore, liable to be struck down?
  • Whether the impugned amendments to Section 145 of the Act and the consequential ICDS and Circular violate Articles 14, 19 (1) (g), 141, 144 and 265 of the Constitution?

High Court Judgment:

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