What is Section 145 of the Income Tax Act, 1961?

This income tax act comes under the headings of Profits and Gains from Business and Profession and Income from Other Sources. Business owners and other professionals fall under this heading. The income of these people would be chargeable based on the standards of Section 145 of the Income Tax Act. This offers a method of accounting for individual taxpayers. It comes up with standards for maintaining a record of income details, expenses, liabilities, and assets of your business. These are known as methods of accounting. Section 145 is divided into three sections, namely 145(1), 145(2), and 145(3).

Types of Methods of Accounting

It is the process of recording your expenditures, income, asset details, and liabilities for your business. It is of two types the cash method and the mercantile method. This is done based on certain specific standards called "methods of accounting."

Cash Method

In this type of accounting, the transactions recorded in the book of accounts are based on cash flow, both inflow and outflow. To put it in simple terms, cash is what comes in and what goes out. For example, if a person purchases something on a particular date but makes payment on a later date. The cash received at a later date would be recorded in the book of accounts, not on the date of purchase. There are various benefits to the cash method of accounting. It is simple and recognised by the Companies Act. Your income statement reflects a low income. There would be an inflow and outflow of cash.

Mercantile Method

In this type of accounting, the transaction in the book of accounts is recorded as and when the income or expenditure occurs. It does not take into consideration whether the amount is received or not. It is a complex method and is recognized by the Companies Act. Your income statement reflects a high income. The accuracy of this method is high. Section 145 includes 145(1), 145 (2), 145 (3)

Section 145(1)

The section 145(1) of the Income Tax Act details the income of individuals that comes under profits and gains of business owners and other professionals. It also includes the income from other sources recorded based on cash accounting and mercantile accounting for a regular employee. Some follow the combined accounting methods.

Section 145(2)

Section 145(2) of the Income Tax Act details the accounting standards and provisions of the Act offered by the Central Government and mentioned in the official gazette. It notifies the following accounting standards

• Financial statement
• Accounting statement
• Prudence
• Substance over form
• Materiality

Section 145 (3)

Section 145(3) of the Income Tax Act details that when the assessing officer is not satisfied with the correctness or completeness of the accounts of the assessee, the method of accounting is regularly assessed by the assessee, and income is not calculated based on the standards.

Section 145(A)

Sec. 145(A) of the Income Tax Act deals with the profits and gains of business owners and professionals.

Section 145(B)

This act is divided into three subsections.

• 145 (B) 1: Any contradiction of income tax act section 145 comes under this act. Compensation to the assessee shall be deemed.
• 145 (B) 2: Claim for escalation of price in contract is deemed from the income of the assessee.
• 145 (B) 3: Income generated from the subsidy, reimbursement, or grant is deemed from the income of the previous year.

The above gives a detailed outlook on Section 145 of the Income Tax Act of 1961.