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 accounting systems.

Cash system or
Mercantile system which is regularly followed by the assessee.

However, if Income Computation and Disclosure Standards(ICDS) are applicable to the assessee, the method of accounting should be in accordance with ICDS.

Applicability of ICDS

Applicability of ICDS is notified by the Central Government from time to time in the Official Gazette.

ICDS is applicable to all the assessees who have income chargeable to tax under the heads " PGBP" and " Income from Other Sources" and are following mercantile system of accounting.

They are applicable to the non corporate taxpayers who are computing income under presumptive scheme of taxation and the companies irrespective of the applicability of accounting standards.

They are not applicable in case of computation of MAT but are applicable for computation of AMT.

They are not applicable to those assessees being an individual or a HUF who are not required to get their books of accounts audited under S.44AB of the Act.

Further, if the Assessing Officer is not satisfied that

Income has not been declared correctly and completely or
The method of accounting is not the one regularly followed by the assessee or
Income has not been properly computed in accordance with ICDS,

He may, make an assessment in accordance with S.144

S.145A and S.145B of Income Tax Act,1961

New sections 145A and 145B have been inserted vide Finance Act,2018 in place of the existing section 145A.

These two sections apply retrospectively from 01/04/2017. These sections have been inserted to bring certainty regarding the applicability of ICDS. Since, ICDS are made applicable from 01/04/2017 and a lot of assessees have made the computation of income in accordance with ICDS, to bring in harmony among the assessees, these two sections have been inserted with a retrospective effect.

Income Tax Act 1961: Sections 145, 145A, 145B Explained

Section 145A

This section provides for valuation of various types of inventories for the purpose of calculation of income chargeable to tax under the heads " Profits and Gains from Business or Profession" and " Income from Other Sources".

Valuation of inventory	Lower of actual cost or NRV
Valuation of purchase and sale of goods or services and of inventory	Amount of any tax,duty,cess or fees paid or incurred by the assessee to bring goods or services to the location shall be included.
Valuation of inventory being securities not listed or listed but not quoted on a recognised stock exchange	At actual cost initially recognised.
Valuation of inventory being listed securities	Lower of actual cost or NRV
Valuation of inventories held by a scheduled bank or public financial institution	Lower of actual cost or NRV after taking into account, the extant guidelines of the RBI

The cost or NRV shall be calculated in accordance with ICDS.

Comparison of cost or NRV shall be made category wise.

As per ICDS, NRV and actual cost are defined as follows:

Net Realisable Value(NRV)

Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Actual cost in case of securities

The actual cost of a security shall comprise its purchase price and include acquisition charges such as brokerage, fees, tax, duty or cess.
Where a security is acquired in exchange for other securities, the fair value of the security so acquired shall be its actual cost
Where a security is acquired in exchange for another asset, the fair value of the security so acquired shall be its actual cost

Actual cost in case of other inventories

Consist of purchase price including duties and taxes, freight inwards and other expenditure directly attributable to the acquisition.
Trade discounts, rebates and other similar items shall be deducted in determining the costs of purchase.
Interest and other borrowing costs shall not be included in the costs of inventories, unless they meet the criteria for recognition of interest.

Section 145B

This section provides for taxability of certain income.

This section starts with a non obstante clause and hence has an overriding effect on the provisions of S.145.

According to it, the following incomes are deemed to be the income of the previous year in which it was received or certainty of its realisation is achieved if it is not charged in the previous year.

Interest received by the assessee on the compensation or enhanced compensation AND Subsidy/grant/cash incentive/duty drawback/waiver/concession/reimbursement by the Central Government/a State Government/any authority/body/agency in cash or kind to the assessee[2(24)(xviii)]	Deemed to be income of the PY in which it was received
Claim for escalation of price in a contract or export incentives	Deemed to be income of the PY in which the certainty of realisation is achieved.