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What Is Section 145
What Is Section 145
What Is Section 145
Section 145 of the Income Tax Act, 1961 provides the method of accounting by the
individual taxpayer.
Section 145(1) provides that income chargeable under the head “Profits and gains of
business or profession” or “Income from other sources” shall be computed by either cash or
mercantile system of accounting regularly employed by the individual who is paying taxes.
There are some assessees which follow the mixed method of accounting, i.e. both Cash
method and Mercantile Method which does not compute the accurate income. Now the
assessees cannot use the mixed method. They have to either use Cash method or Mercantile
Method.
Provision 1: When the accounts are correct and complete but the method of accounting
deployed does not compute accurate income then, the computation of income will be done
by the assessing officer with the accounting method of his choice.
Provision 2: When an assessee has no regular method of accounting his income will be
calculated as per the method of accounting deployed for the last financial year.
Provision 3: If any interest on security that an individual receives has not been charged in
the earlier years, that does not mean that he won’t be charged for that in this year.
Section 145(2)
The Central Government may change the provisions related to the accounting standards in
the official gazette from time to time. These accounting standards must be followed by all
the assessees irrespective of the income slab he or she falls in.
All significant accounting policies adopted in the preparation and presentation of financial
statements shall be disclosed.
The financial statements should be made up of the significant accounting policies
Any change in an accounting policy from the previous year or years earlier to that shall be
disclosed. Also, the impact it would have on the previous year and years earlier to that.
Accounting policies adopted by an assessee should represent true and fair business proceedings:
1. Prudence – Provisions should be made for all known liabilities and loss, even though the
amount cannot be determined with certainty and represents only the best estimate in the
light of available information;
2. Substance over form – The accounting treatment and presentation in financial statements of
transactions and events should be governed by their substance and not merely by the legal
form;
3. Materiality – Financial statements should disclose all material items, the knowledge of
which might influence the decisions of the user of the financial statements.
If a fundamental accounting assumption is not followed, such fact shall be disclosed.
Accounting Standards II
Prior period items shall be disclosed separately in the profit and loss account in the previous
year together with their nature and amount in a manner that their impact on profit or loss in the
previous year can be perceived.
A change in an accounting policy shall be made only if the adoption of a different accounting
policy is required by statute or if it is considered that the change would result in a more
appropriate preparation or presentation of the financial statements by an assessee.
Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and
loss account as part of taxable income. The nature and amount of each such item shall be
separately disclosed in a manner so that their relative significance and effect on the operating
results of the previous year can be perceived.
A change in an accounting estimate that has a material effect in the previous year shall be
disclosed and quantified. Any change in an accounting estimate which is reasonably expected to
have a material effect in the year subsequent to previous year shall also be disclosed.
If a question arises as to whether a change is a change in accounting policy or a change in an
accounting estimate, such a question shall be referred to the Board for decision.
Section 145(3)
For the purpose of determining the income chargeable under the head “Profits and Gains of
business or profession”:
i. the valuation of inventory shall be made at lower of actual cost or a net realisable value
computed in accordance with the income computation and disclosure standards notified under
sub-section (2) of section 145.
ii. the valuation of purchase and sale of goods or services and of inventory shall be adjusted to
include the amount of any tax, duty, cess or fee actually paid or incurred by the assessee to bring
the goods or services to the place of its location and condition as on the date of valuation.
iii. the inventory being securities not listed on a recognised stock exchange, or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be valued at actual cost
initially recognised in accordance with the income computation and disclosure standards
iv. the inventory being securities other than those referred to in clause (iii), shall be valued at lower
of actual cost or net realisable value in accordance with the income computation and disclosure
standards notified under sub-section (2) of section 145.
What is Section 145B?
Section 145B is broadly categorized into three sub-sections 145B(1), 145B(2) and 145B(3)
Notwithstanding anything to the contrary contained in section 145, the interest received by
an assessee on any compensation or on enhanced compensation, as the case may be, shall
be deemed to be the income of the previous year in which it is received.
Provision of Section 145B(2)
Any claim for escalation of price in a contract or export incentives shall be deemed to be the
income of the previous year in which reasonable certainty of its realisation is achieved.
The income from subsidy, grant or reimbursement shall be deemed to be the income of the
previous year in which it is received, if not charged to income-tax in any earlier previous
year.
The assessee must follow any one of the accounting methods Cash Accounting or
Mercantile Accounting for their income from profit and gains of business or profession
and income from other sources. The Central Government can make changes in the
provisions related to the accounting standards. All the assessees should follow those
changes despite their income slab. The Assessing Officer, before rejecting the books of
account, has to bring on record material on the basis of which he has arrived at the
conclusion with regard to correctness or completeness of the accounts of the assessee or
the method of accounting employed by it. The obligation on the part of the assessee is to
bring the accounts/documents before the Assessing Officer whenever it is required. The
Assessing Officer may resort to best assessment, the power of which shall be exercised
judicially and not violate the principles of natural justice. The valuation of purchase and sale
of goods and the deemed to be income of the previous year shall be followed as per the
provisions made by the Income Tax Department.
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