Section 145 — Method of Accounting

Section 145 of the Income-tax Act, 1961, governs the method of accounting that taxpayers must follow for computing income under the heads 'Profits and gains of business or profession' and 'Income from other sources.' Taxpayers can choose either the cash or mercantile system of accounting, but once chosen, the method must be consistently followed. The section empowers the Assessing Officer to make an assessment in the manner provided in Section 144 if the accounts are not correct or complete, or if the method employed is not regularly followed. This section is significant as it ensures uniformity and consistency in the accounting practices of taxpayers, thereby facilitating accurate computation of taxable income. The burden of proof lies on the taxpayer to demonstrate that the chosen method of accounting is regularly followed and provides a true and fair view of the financial position.

Common Litigation Flashpoints

1. Dispute over the consistency in following the chosen method of accounting
2. Challenges regarding the completeness and correctness of accounts
3. Disagreements on the applicability of cash versus mercantile system
4. Contentions about the Assessing Officer's power to reject the books of accounts

Judgments on Section 145 — Method of Accounting

• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.
• ACIT vs M/s Majestic Properties (P) Ltd. — ITAT,
  Mere jottings on loose papers without corroborative evidence cannot form the basis for assessing undisclosed income.
• DCIT, Circle 13(1) vs M/s. National Fertilizers Ltd. — ITAT,
  Demurrage and wharfage charges are compensatory and not penalties, and accrued interest is not taxable until it is realized.
• Commissioner of Income Tax, Bangalore vs B. C. Srinivasa Setty — SC,
  Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head 'capital gains'