Method of Accounting-Section 145
Method of Accounting –Section145(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
Income computation and disclosure standards –Section 145(2) The Central Government may notify in the Official Gazette from time to time accounting standards income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (amendment w.e.f. AY 2015-16)
- CBDT has notified the Income Computation and Disclosure Standards vide Notification No. 32/2015 Dt. 31.03.2015. It contains 10 Standards.
- It shall be applicable w.e.f Y. 2016-17.
Situations or conditions in which AO can resort to Best Judgement Assessment-Section 145(3)
The Assessing Officer may make an assessment in the manner provided in section 144 in the following situations:-
-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 section 145(1) has not been regularly followed by the assessee, or
-income has not been computed in accordance with the standards notified under section 145(2),
Hence, if provision of Section 145 is not followed, it may entail best judgement assessment.
Section 145 is not an assessment section but has been described as computation section or machinery section which does not qualify the charging section of the Act.CIT v Badridas Ram Rai Shop (1939) 7 ITR 613 (Nag); CIT v Standard Trium Motor Co. Ltd. (1979) 119 ITR 573 (Mad) affirmed (1993) 201 ITR 391 (SC)
Method acceptable but book rejected: There may be cases where the method of accounting regularly employed is acceptable to the AO as proper method but the entries in the books of account may be found to be false or fabricated.
Books accepted but method rejected: Conversely, the account books may be accepted as true but the method of accounting may be rejected by the AO as improper.
There can be different methods of accounting for different source of income or even for different parts of the same business.JK Bankers v CIT (1974) 94 ITR 107 (All); CIT v Sundararaj (EAET) (1975) 99 ITR 226 (Mad)
The accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Where they disclose defects and omissions the assessee should be given an opportunity and they can be rejected only where the assessee is not able to explain them satisfactorily. Jessaram Fatehchand (Sugar Dept)(RB) v CIT (1970) 75 ITR 33 (Bom)