Method of Accounting [Section 145] :

Under section 145(1), income chargeable under the heads “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee. Section 145(2) empowers the Central Government to notify in the Official Gazette from time to time, income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. Accordingly, the Central Government has, in exercise of the powers conferred under section 145(2), notified ten income computation and disclosure standards (ICDSs) to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “Income from other sources”. This notification shall come into force with effect from 1st April, 2015, and shall accordingly apply to the A.Y.2016-17 and subsequent assessment years.

All the notified ICDSs are applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of the Income‐ tax Act, 1961 and the notified ICDSs, the provisions of the Act shall prevail to that extent.

For a detailed understanding of ICDSs, refer Chapter 12 on “Inter-relationship between accounting and taxation”.

Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee or income has not been computed in accordance with the standards notified under sub section (2), the Assessing Officer may make a best judgement assessment in the manner provided in section 144 [Section 145(3)].