Sections 145, 145A and 145B of Income Tax Act, 1961

CA Sapna Ghelani | Last updated: 05 February 2021

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Quick Summary

Sections 145, 145A, and 145B of the Income Tax Act, 1961, govern how business income is calculated. Section 145 outlines the permissible accounting methods (cash or mercantile) and mandates adherence to Income Computation and Disclosure Standards (ICDS) where applicable. Sections 145A and 145B, introduced retrospectively from April 1, 2017, clarify inventory valuation rules and specify the taxability of certain incomes like interest on enhanced compensation and government grants.

S.145 of Income Tax Act,1961 S.145 of Income Tax Act,1961, prescribes the method of accounting for the income chargeable under the head Profits and Gains from Business or Profession and Income from Other Sources. According to it, the assessee can normally follow the following two types of ac

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FAQ :

Under Section 145, assessees can generally follow either the cash system or the mercantile system of accounting, provided it is regularly followed. However, if Income Computation and Disclosure Standards (ICDS) are applicable, the accounting method must comply with ICDS.

ICDS are applicable to assessees with income chargeable under 'Profits and Gains from Business or Profession' and 'Income from Other Sources', who follow the mercantile system of accounting. They also apply to non-corporate taxpayers under presumptive taxation and all companies, regardless of accounting standards applicability. They are not applicable for MAT computation but are for AMT.

Section 145A provides rules for valuing various inventories for calculating income under 'Profits and Gains from Business or Profession' and 'Income from Other Sources'. It specifies that inventory valuation should be the lower of actual cost or Net Realisable Value (NRV), calculated according to ICDS.

Section 145B deals with the taxability of certain incomes. It deems income such as interest received on compensation or enhanced compensation, and subsidies, grants, or incentives received from the government, to be taxable in the year of receipt. Claims for price escalation in contracts or export incentives are taxable when the certainty of realisation is achieved.

Sections 145A and 145B were inserted by the Finance Act, 2018, and apply retrospectively from April 1, 2017. This retrospective application was intended to harmonise computations made by assessees in accordance with ICDS, which also became applicable from the same date.