Section 145- Method of Accounting under Income Tax Act, 1961
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You might be wondering that why Method of Accounting is important under Income Tax Act?
Method of accounting enable us to compute that how Income specially Income computation under the head Profit and gains under Business or Profession (or more commonly known as “PGBP”) or Income from other sources would be computed.
Income Tax Act recommends two methods of accounting i.e., Cash System or Mercantile system as per Assessee choice. This means Assessee can either adopt cash accounting system or he may adopt Mercantile system for maintenance of his books of accounts.
The provisions of method of accounting is stated under Section 145 of Income Tax Act, 1961. This Section also highlights the importance of Income Computation and Disclosure standards (or ICDS) which maybe notify by Central Government from time to time.
Accordingly, Central Government recommends 10 ICDS which is to be followed by certain class of assessee’s.
In event of non-satisfaction of Assessing officer regarding correctness or completeness of books of accounts then he has a power to reject books of accounts and may make an assessment in accordance with Section 144 (ex-party assessment).
This section is recommended to read in conjunction to Section 145A, which talks about “Method of accounting in certain cases” and Section 145B which deals with “Taxability of certain Income”
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Team Taxation Insight
