When can an Assessing Officer reject books of accounts?

If the Assessing Officer is not satisfied regarding the authenticity or completeness of the books of accounts maintained by the assessee or where in his opinion the accounting method followed in the relevant year is inconsistent with the accounting standards or methods usually followed by the assessee, the Assessing Officer may go for an an assessment as provided in Section 144 of the Income Tax Act.

Section 145 of the Income Tax Act:

Section 145 of the Income Tax Act deals with computation of income from business or profession or income from other sources in accordance with the methods of accounting usually followed by the assessee.

Now an Assessing Officer has the power to make an assessment as provided in Section 144 in three cases –

(i)                  Where the Assessing Officer is not satisfied with the genuinity or completeness of accounts, or

(ii)                where the cash or mercantile system of accounting is not usually followed; or

(iii)               where the accounting standards are not been regularly followed.

Different methods of computing income:

Income is usually computed by any one of the three methods of accounting, such as,

(1) Cash or receipts basis,

(2) Accrual or mercantile basis, and

(3) Mixed method having components of both the aforesaid methods.

It is observed that assessees follow the mixed method in a way which does not reflect the correct income.

Amendment of section 145:

It was proposed to amend Section 145 to state that income chargeable under the heads like ‘Profits and gains of business or profession’ or ‘Income from other source’ are to be computed only in accordance with either the cash or the mercantile system of accounting, usually followed by an assessee.

The Institute of Chartered Accountants of India (ICAI) has directed its members that it is very much necessary to fix alternatives in many standards so that the income for tax purposes can be computed correctly.

The Bill proposed to amend the Act to empower the Central Government to prescribe through a notification in the Official Gazette, the accounting standards to be followed in computing the income of an assessee under the head ‘Profits and gains of business or profession’ or’ ‘Income from other sources’. These accounting standards will be followed in consultation with bodies comprising expert such as, the Institute of Chartered Accountants.

Accordingly, The Finance Act, 1995, has amended Section 145 of the Income Tax Act. The first proviso to section 145(1) has been deleted by way of amendment by the Finance Act, 1995.

In the old provision, the choice of selecting the method of accounting was with the assessee. The choice still remains with the assessee under the new provisions, but Section 145(1) restricts the choice to the cash system or the mercantile system. The concept of the mixed system has been given away.