{"id":14567,"date":"2019-03-08T18:15:19","date_gmt":"2019-03-08T12:45:19","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=14567"},"modified":"2021-01-29T15:31:47","modified_gmt":"2021-01-29T10:01:47","slug":"section-145-of-the-income-tax-act","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/section-145-of-the-income-tax-act\/","title":{"rendered":"Section 145 of the Income Tax Act,1961\ufeff"},"content":{"rendered":"<p class=\"has-drop-cap\">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 <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting is the language of business, serving as the backbone of financial management and decision-making. It involves the systematic recording, analysis, and reporting of financial(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accounting<\/a> standards.<\/p>\n\n\n\n<p><strong><em>In this topic we will discuss the following contents:<\/em><\/strong><\/p>\n\n\n\n<p>Overview of Section 145<br>Method of Accounting<br>What is Section 145?<br>What is Section 145A?<br>What is Section 145B?<br><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Overview of Section 145<\/strong><\/h2>\n\n\n\n<p>Income\nchargeable under the head &ldquo;Profits &amp; Gains from Business &amp; Profession&rdquo;\nor &ldquo;Income from Other Sources&rdquo; shall be computed in accordance with the method\nof accounting to be followed by the assessee.<\/p>\n\n\n\n<p>Provided\nthat in the case where the accounts\nmaintained are correct but the method employed by the assessee is not proper in\nsuch a case in the opinion of the Assessing officer in such a case the income\ncannot be properly deducted therefrom. However, in such a case the computation\nshall be done in such manner as the Assessing officer may think fit.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Method of Accounting<\/strong><\/h2>\n\n\n\n<p>Method of Accounting is a simple process of recording income, expenses, assets and liabilities of every business on the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a> of certain standards which is known as a method of accounting. There are two methods of accounting:<\/p>\n\n\n\n<ul><li><strong>Cash method: <\/strong><\/li><\/ul>\n\n\n\n<p>In\ncash method of accounting, transactions in the books of accounts where there is\ninflow or outflow of cash. In simple words cash what comes in and cash what\ngoes out.<\/p>\n\n\n\n<p><strong><em>For Example:<\/em><\/strong> <\/p>\n\n\n\n<p>Mr.\nRahul has sold 100 tube lights to Mr. Ram at Rs.15000\/- on 13<sup>th<\/sup> April 2018 but he had made the payment on 15<sup>th<\/sup>\nJuly 2018. In spite of Cash received on\n13<sup>th<\/sup> July 2018 but the entry\nin the books of accounts will be entered on 15<sup>th<\/sup> July 2018 as and\nwhen the cash is received.<\/p>\n\n\n\n<p><strong><em>Benefits:<\/em><\/strong><\/p>\n\n\n\n<ol><li>It is a simple method of accounting.<\/li><li>This method is not recognized by the Companies Act.<\/li><li>The income statement under this method depicts lower income<\/li><li>The matching concept is not applicable.<\/li><li>There are outflows and inflows of cash.<\/li><li>The degree of accuracy in the cash method is very low.<\/li><\/ol>\n\n\n\n<ul><li><strong>Mercantile\nMethod:<\/strong><\/li><\/ul>\n\n\n\n<p>In the mercantile method of accounting, transactions in the books of accounts are recorded at the time when the income or expenses <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;ACCRUE&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accrue, in financial terms, refers to the gradual accumulation of financial obligations or benefits over time. It typically involves the recognition of expenses or revenue as they are earned or(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accrue\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accrue<\/a>. It does not depend on whether cash is received or not.<\/p>\n\n\n\n<p>Mr. Rahul has sold 100 tube lights to Mr. Ram at Rs.15000\/- on 13<sup>th<\/sup> April 2018 but he had made the payment on 15<sup>th<\/sup> July 2018. In spite of Cash received on 13<sup>th<\/sup> July 2018 but the entry in the books of accounts will be entered on 13<sup>th<\/sup> April 2018. It does not depend on whether cash is received or not and recorded on the day when transactions take place.<\/p>\n\n\n\n<p><strong><em>Benefits:<\/em><\/strong><\/p>\n\n\n\n<ol><li>This\nis a complex method of accounting.<\/li><li>This\nmethod is recognized by the Companies Act.<\/li><li>The\nincome statement under this method depicts higher income.<\/li><li>Matching\nConcept is applicable.<\/li><li>There\nis a concept of revenue earned and\nexpenses incurred.<\/li><li>The\ndegree of accuracy id high<\/li><\/ol>\n\n\n\n<p><strong><em>While following the Mercantile method of accounting the assessee has to follow the following set of standards:<\/em><\/strong><\/p>\n\n\n\n<p>ICDS I:\n<a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting Policies&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting policies are regulations or guidelines that businesses must follow when creating and presenting their financial statements. They establish a consistent framework for producing(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting-policies\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>Accounting Policies<\/a><\/p>\n\n\n\n<p>ICDS II:\nValuation of Inventory<\/p>\n\n\n\n<p>ICDS III:\nConstruction Contracts<\/p>\n\n\n\n<p>ICDS IV:\nRevenue Recognition<\/p>\n\n\n\n<p>ICDS V:\nTangible Fixed Assets<\/p>\n\n\n\n<p>ICDS VI:\nEffects of changes in foreign exchange rates<\/p>\n\n\n\n<p>ICDS VII:\nGovernment Grants<\/p>\n\n\n\n<p>ICDS VIII:\nSecurities<\/p>\n\n\n\n<p>ICDS IX:\nBorrowing Costs<\/p>\n\n\n\n<p>ICDS X: provisions, Contingent Liabilities, and Contingent Assets<\/p>\n\n\n\n<p><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/income-tax-laws-for-startups\/\" target=\"_blank\" rel=\"noopener noreferrer\">What are the Income Tax Laws for Startups in India<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong> What is Section 145?<\/strong><\/h2>\n\n\n\n<p>Section 145 of the <strong><a href=\"https:\/\/enterslice.com\/learning\/section-201-of-the-income-tax-act1961\/\">Income Tax Act<\/a><\/strong>, which basically deals with the method of accounting to be, followed which is divided into 3 subsections:<\/p>\n\n\n\n<ul><li><strong>Section 145(1):<\/strong><\/li><\/ul>\n\n\n\n<p>Section\n145(1) deals with the provides that Income under the head &ldquo;Profits &amp; Gains from\nBusiness &amp; Profession&rdquo; or Income from Other Sources shall be either cash or\nmercantile system of accounting to be regularly employed by the assessee paying\ntaxes. However, some assessee follows the\ncombined method of accounting. cash and\nmercantile method of accounting. This method is normally not allowed. They have\nto either use cash or mercantile method.<\/p>\n\n\n\n<p>Provision\n1 of Section 145 states that when accounts are correct and complete but the method of accounting deployed does not compute\naccurate income, in that case, income will\nbe computed by the assessing officer with regard to accounting method of his preference.<\/p>\n\n\n\n<p>Provision\n2 of Section 145 states that where the assessee has no regular method of\naccounting the income in such a case will be calculated as per the method of\naccount deployed in the last financial\nyear<\/p>\n\n\n\n<p>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.<\/p>\n\n\n\n<ul><li><strong>Section 145(2):<\/strong><\/li><\/ul>\n\n\n\n<p>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):<\/p>\n\n\n\n<p><strong>Accounting Standard I: <\/strong><\/p>\n\n\n\n<ul><li>AS 1 deals with all significant accounting policies adopted in the preparation and presentation of <strong>Financial Statement<sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Financial_statement\"><strong>[1]<\/strong><\/a><\/sup>.<\/strong><\/li><li>Any changes in the accounting policy from the previous year or years earlier to that shall be disclosed. Also, the impact of the same on the financial statement should be disclosed.<\/li><li>Accounting Policies adopted by the assessee shall present a true and fair view stating the following:<\/li><li>Prudence: Provisions should be made for all known liabilities and losses even if the amount cannot be determined by certainty and represents only the best estimate on the basis of available information.<\/li><li>Substance over form: The accounting treatment and preparation of the financial statement have to be done on the basis of certain of the transactions and the vents should be governed by their substance not by their legal form.<\/li><li>Materiality: Financial statement should disclose all the material effects the knowledge of which can influence the decision of the user of the financial statement<\/li><\/ul>\n\n\n\n<p><strong>Accounting Standard II:<\/strong><\/p>\n\n\n\n<ol><li>This AS II deals with the prior period items which are to be disclosed properly in the profit and loss account in the previous year together with the nature and amount and its impact on the profit and loss account.<\/li><li>A Change in the accounting policy shall be made only if the adoption of different accounting policies is required by the statue or if the change would result in more appropriate preparation or presentation of financial statements by the assessee.<\/li><li>Extraordinary items of the business during the previous year shall be disclosed in the profit and loss account as a part of taxable income, the nature and amount of such item should be disclosed separately with relevant significance and its effect on the operating results on the previous year.<\/li><li>A change in account entry having a material effect on the previous year shall be quantified and disclosed. Also, any changes which reasonably expect to have a material effect in the years subsequent to the previous year have also to be disclosed.<\/li><li>However, if any question arises with regards to change in accounting policy or change in accounting estimate such question shall be referred to the Board of Decision.<\/li><\/ol>\n\n\n\n<ul><li><strong>Section 145(3):<\/strong><\/li><\/ul>\n\n\n\n<p>Section 145(3) provides that where the Assessing Officer is not satisfied with<\/p>\n\n\n\n<ol><li>About\nthe correctness or completeness of the accounts of the assessee.<\/li><li>Where\nthe method of accounting has been regularly followed by the assessee<\/li><li>Income\nhas not been computed by the standards notified.<\/li><\/ol>\n\n\n\n<p>If the\nAssessing Officer finds any of the discrepancies, he can reject the books of\naccounts on the following criteria:<\/p>\n\n\n\n<ol><li>Improper\naccounting Method<\/li><li>Non-Production\nof Accounts for verification<\/li><li>Failure\nto produce records<\/li><li>Defective\nAccounts<\/li><li>No maintenance\nof Stock Register<\/li><\/ol>\n\n\n\n<p>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 <strong>Income Tax Act,1961<\/strong><sup><a href=\"https:\/\/www.incometaxindia.gov.in\/pages\/acts\/income-tax-act.aspx\">[1]<\/a><\/sup>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong> What is Section 145A?<\/strong><\/h2>\n\n\n\n<p>Method\nof Accounting in certain cases: Notwithstanding\nanything to the contrary as contained in Section 145 the valuation of purchase\nand sale of inventory under the head Income from Business &amp; Profession\nshall be calculated in accordance with<\/p>\n\n\n\n<ol><li>Method\nof accounting regularly employed by the assessee.<\/li><li>Further\nadjusted to include any tax, duty or cess or fee by whatever name called\nactually paid or incurred by the assessee to bring the goods on the basis of place of its location and condition on the valuation date.<\/li><\/ol>\n\n\n\n<ul><li>Section 145A determines that income chargeable under the head &ldquo;Profits &amp; Gains from Business &amp; Profession.<\/li><\/ul>\n\n\n\n<ul><li>The valuation of inventory shall be done at lower of actual cost or a net realizable value computed in accordance with the Income Computation and disclosure standard notified under subsection (2) of Section 145.<\/li><\/ul>\n\n\n\n<ul><li>The\nvaluation of sale and purchase of goods and services shall be adjusted to\ninclude any tax, duty, cess or fee actually paid\nor incurred by the assessee to bring the goods or service to the place\nof its location and its condition as on the date of valuation.<\/li><\/ul>\n\n\n\n<ul><li>The\nInventory being securities not listed on a recognized stock exchange or listed but not quoted on recognized stock exchange\nregularly from time to time shall be valued at an actual cost initially recognized in accordance with income\ncomputation and disclosure standards.<\/li><\/ul>\n\n\n\n<ul><li>The\ninventory being securities other than those mentioned above shall be valued at\nlower of actual cost or net realizable value in accordance with income\ncomputation and disclosure standard notified under subsection (2) of Section 145.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is Section 145B?<\/strong><\/h2>\n\n\n\n<p>Section\n145B is mainly divided into 3\nsubsections:<\/p>\n\n\n\n<p><strong>Section 145B (1):<\/strong><\/p>\n\n\n\n<p>Notwithstanding\nanything to the contradictory as contained in Section 145, interest or any\ncompensation or any enhanced compensation received by the assessee as the case\nmay be shall be deemed to be the income of the assessee in the previous year in\nwhich it is received.<\/p>\n\n\n\n<p><strong>Section 145B (2):<\/strong><\/p>\n\n\n\n<p>Any\nclaim for escalation of price in a contract or export incentives shall be\ndeemed to be the income of the assessee in the previous year in which it is\nreceived subject to realization. These schemes generate two types of income:<\/p>\n\n\n\n<ol><li>Any\nclaim for escalation of price in a contract<\/li><li>Export\nIncentives.<\/li><\/ol>\n\n\n\n<p><strong>Section 145B (3):<\/strong><\/p>\n\n\n\n<p>Any\nincome from subsidy, grant or reimbursement shall be deemed to be the income\nfor the previous year when it is received if the same is not chargeable to income\ntax in the previous year<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<p>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.<\/p>\n\n\n\n<p>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 <a href=\"https:\/\/enterslice.com\/\"><strong>Enterslice<\/strong><\/a>.<\/p>\n\n\n\n<p><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/income-tax-judgments-2018\/\">Flashback 2018: 25 major influential Income Tax Judgments<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 145Method of AccountingWhat is Section 145?What is Section 145A?What is Section 145B? Overview of [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":14569,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1473,2435],"tags":[961,2474],"acf":{"service_id":"215"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Section 145 of the Income Tax Act,1961\ufeff | Enterslice<\/title>\n<meta name=\"description\" content=\"Section 145 of the Income Act, 1961 deals with the process of standards which following persons are required to follow when it comes.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/section-145-of-the-income-tax-act\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Section 145 of the Income Tax Act,1961\ufeff | Enterslice\" \/>\n<meta property=\"og:description\" content=\"Section 145 of the Income Act, 1961 deals with the process of standards which following persons are required to follow when it comes.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/section-145-of-the-income-tax-act\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:author\" content=\"enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-03-08T12:45:19+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-01-29T10:01:47+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Section-145-of-the-Income-Tax-Act1961.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"653\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Narendra Kumar","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/04\/nk-1.jpg","authorDescription":"Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.","postViews":592,"readingTime":7,"nextPost":{"id":14580,"slug":"foreign-investors-under-fema"},"prevPost":{"id":14534,"slug":"cheque-truncation-system"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/03\/Section-145-of-the-Income-Tax-Act1961.png","postTerms":"Income Tax","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14567"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=14567"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/14567\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/14569"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=14567"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=14567"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=14567"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}