The new Financial Year begins on 1st of April every year and ends on 31st March of the followin...
Section 145 of the Income Act, 1961 deals with the process of standards which the following persons are required to follow when it comes to non-compliances to accounting standards.
In this topic we will discuss the following contents:
Overview of Section 145
Method of Accounting
What is Section 145?
What is Section 145A?
What is Section 145B?
Income chargeable under the head “Profits & Gains from Business & Profession” or “Income from Other Sources” shall be computed in accordance with the method of accounting to be followed by the assessee.
Provided that in the case where the accounts maintained are correct but the method employed by the assessee is not proper in such a case in the opinion of the Assessing officer in such a case the income cannot be properly deducted therefrom. However, in such a case the computation shall be done in such manner as the Assessing officer may think fit.
Method of Accounting is a simple process of recording income, expenses, assets and liabilities of every business on the basis of certain standards which is known as a method of accounting. There are two methods of accounting:
In cash method of accounting, transactions in the books of accounts where there is inflow or outflow of cash. In simple words cash what comes in and cash what goes out.
Mr. Rahul has sold 100 tube lights to Mr. Ram at Rs.15000/- on 13th April 2018 but he had made the payment on 15th July 2018. In spite of Cash received on 13th July 2018 but the entry in the books of accounts will be entered on 15th July 2018 as and when the cash is received.
In the mercantile method of accounting, transactions in the books of accounts are recorded at the time when the income or expenses accrue. It does not depend on whether cash is received or not.
Mr. Rahul has sold 100 tube lights to Mr. Ram at Rs.15000/- on 13th April 2018 but he had made the payment on 15th July 2018. In spite of Cash received on 13th July 2018 but the entry in the books of accounts will be entered on 13th April 2018. It does not depend on whether cash is received or not and recorded on the day when transactions take place.
While following the Mercantile method of accounting the assessee has to follow the following set of standards:
ICDS I: Accounting Policies
ICDS II: Valuation of Inventory
ICDS III: Construction Contracts
ICDS IV: Revenue Recognition
ICDS V: Tangible Fixed Assets
ICDS VI: Effects of changes in foreign exchange rates
ICDS VII: Government Grants
ICDS VIII: Securities
ICDS IX: Borrowing Costs
ICDS X: provisions, Contingent Liabilities, and Contingent Assets
Read our article:What are the Income Tax Laws for Startups in India
Section 145 of the Income Tax Act, which basically deals with the method of accounting to be, followed which is divided into 3 subsections:
Section 145(1) deals with the provides that Income under the head “Profits & Gains from Business & Profession” or Income from Other Sources shall be either cash or mercantile system of accounting to be regularly employed by the assessee paying taxes. However, some assessee follows the combined method of accounting. cash and mercantile method of accounting. This method is normally not allowed. They have to either use cash or mercantile method.
Provision 1 of Section 145 states that when accounts are correct and complete but the method of accounting deployed does not compute accurate income, in that case, income will be computed by the assessing officer with regard to accounting method of his preference.
Provision 2 of Section 145 states that where the assessee has no regular method of accounting the income in such a case will be calculated as per the method of account deployed in the last financial year
Provision 3 of Section 145 states that any interest in security that an individual receives has not been charged in the earlier years that does not mean that he will not be charged for that this year.
Section 145(2) deals with the provisions related to the accounting standards which are provided by Central Government from time to time in the official gazette. Following accounting standards are notified under section 145(2):
Accounting Standard I:
Accounting Standard II:
Section 145(3) provides that where the Assessing Officer is not satisfied with
If the Assessing Officer finds any of the discrepancies, he can reject the books of accounts on the following criteria:
After the rejection of the books of accounts due dissatisfaction with the correctness of the accounts produced by the assessee, the Assessing Officer must pass the judgment on the basis of best judgment as per section 145 of the Income Tax Act,1961.
Method of Accounting in certain cases: Notwithstanding anything to the contrary as contained in Section 145 the valuation of purchase and sale of inventory under the head Income from Business & Profession shall be calculated in accordance with
Section 145B is mainly divided into 3 subsections:
Section 145B (1):
Notwithstanding anything to the contradictory as contained in Section 145, interest or any compensation or any enhanced compensation received by the assessee as the case may be shall be deemed to be the income of the assessee in the previous year in which it is received.
Section 145B (2):
Any claim for escalation of price in a contract or export incentives shall be deemed to be the income of the assessee in the previous year in which it is received subject to realization. These schemes generate two types of income:
Section 145B (3):
Any income from subsidy, grant or reimbursement shall be deemed to be the income for the previous year when it is received if the same is not chargeable to income tax in the previous year
In this article, we discussed the cash or mercantile method of accounting which is to be followed by the assessee for their income from business and profession and income from other sources. Central Government has the authority to make changes in the provisions of accounting standards. All the assesses should follow the changes and calculate the income as per the Income Tax Slab. The Assessing Officer has a right to assess the books of accounts and reject them on the basis of completeness or correctness of the books of accounts and pass judgment on the basis of best judgment.
After explaining the complete section, it is very tedious to maintain such books of accounts and maintaining this type of records can be confusing and abiding which will be difficult for the assessee to handle. We have a Tax Expert who can guide you through the entire process of maintaining books of accounts and filing your Income Tax Return. For more details visit Enterslice.
Read our article:Flashback 2018: 25 major influential Income Tax Judgments