Raj Jaggi
Quick Summary
1. Accounting Profit vs Taxable Income - Judicial Recognition of the Divide One of the most fundamental yet frequently misunderstood principles of income taxation is that profit as per the books of account is not necessarily equivalent to taxable income. While commercial accounting aims to evaluate
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FAQ :
Accounting profit aims to evaluate business performance over a period, while taxable income is determined by the Income-tax Act to calculate legally taxable income, which can differ from accounting outcomes.
Accrual accounting recognises income and expenditure when they accrue, rather than when they are actually received or paid, providing a better reflection of economic reality for ongoing businesses.
Section 43B was introduced to curb the practice of taxpayers claiming deductions for statutory liabilities based on book entries while postponing actual payment, linking deductions to actual payment.
Employee contributions to PF and ESI are considered held in trust by the employer and are not merely business expenses. Delaying their deposit constitutes a breach of statutory obligation, and deduction is linked to actual payment.
No, Section 43B does not convert the mercantile system to a cash system. It merely postpones the allowability of a deduction until actual payment, while the accounting method itself remains accrual-based.
Ordinary commercial expenses like rent, professional fees, and utilities are generally allowed on an accrual basis once the liability has crystallised and is reasonably ascertainable.
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