TaxTMI 
TaxTMI 
Legal Framework and Practical Impact of Method of Accounting under Indian Income Tax : Clause 276 of the Income Tax Bill, 2025 Vs. Section 145 of the Income-tax Act, 1961
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....authority of the Central Government to prescribe standards, and the powers of the Assessing Officer (AO) to intervene when there is non-compliance or irregularities in the maintenance of accounts. Understanding the nuances of these provisions, their legislative intent, and practical implications is essential for taxpayers, tax professionals, and regulators alike. This commentary provides an in-depth analysis of Clause 276, explores its objectives, detailed provisions, and practical implications, and then undertakes a comparative examination with the existing Section 145. The analysis also highlights the evolution of the law, policy considerations, and areas where further clarity may be warranted. Objective and Purpose The core objective o....
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....tently and regularly. The choice is left to the taxpayer, but the regularity and consistency are paramount to prevent manipulation of income. * Cash System: Income and expenses are recognized when actually received or paid. * Mercantile System: Income and expenses are recognized when they accrue, regardless of actual receipt or payment. The requirement for regular employment of the chosen system is significant. It prevents taxpayers from switching methods year to year to gain tax advantages, thereby ensuring comparability and integrity in financial reporting. Sub-section (2): Power to Notify Income Computation and Disclosure Standards (ICDS) "The Central Government may notify income computation and disclosure standards to be followed....
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....tandards notified under sub-section (2)." This sub-section provides the AO with the authority to resort to a best judgment assessment (in the manner provided in section 271) in three situations: * Correctness or Completeness of Accounts: If the AO finds the accounts unreliable, incomplete, or manipulated, he can disregard them. * Non-Regular Method of Accounting: If the taxpayer has not consistently followed the chosen method, the AO can intervene. * Non-Compliance with ICDS: Failure to compute income as per notified standards triggers the AO's power to assess income independently. The reference to section 271 (presumably the best judgment assessment procedure under the new Bill) is analogous to the reference to section 144 in t....
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....'s goal of ensuring tax compliance and minimizing revenue leakage. * The introduction of ICDS provides a standardized framework, but may also increase the complexity of compliance and assessment, especially in cases where there are conflicts between ICDS and other accounting standards. For Regulators and Policymakers * The provision aligns with international best practices, where tax authorities prescribe specific rules or standards for income computation. * There is a need for clear guidance and transition provisions when new ICDS are notified, to minimize disputes and ensure smooth implementation. Comparative Analysis: Clause 276 of the Income Tax Bill, 2025 Vs. Section 145 of the Income-tax Act, 1961 Structural and Subs....
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....ed specific provisions regarding interest on securities and allowed the AO to intervene if the method of accounting, though correct and complete, did not permit proper deduction of income. These nuances have been streamlined in the current and proposed versions. * Scope of AO's Satisfaction: * Both provisions require the AO's "satisfaction" regarding the correctness or completeness of accounts. However, judicial precedents have clarified that such satisfaction must be based on objective material, and the AO cannot invoke best judgment assessment arbitrarily. Policy Continuity and the ICDS Regime * The introduction of ICDS represents a significant policy shift towards standardization in tax computation, reducing the discretion....
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....ce costs and complexity. For Individuals * Individuals with income under the relevant heads must also comply with the regularity requirement and ICDS, where applicable. * Non-compliance can expose them to the risk of income being assessed on a best judgment basis, which may not reflect their actual income. For Tax Authorities * The AO's discretion is balanced by the need for objective satisfaction and procedural fairness. * Training and guidance on the application of ICDS and assessment procedures will be essential to ensure consistency and minimize disputes. Conclusion Clause 276 of the Income Tax Bill, 2025 represents a continuation and consolidation of the principles laid down in Section 145 of the Income-tax Act, 19....