Method of the Accounting under Section 276

Section 276 of the Income-tax Act, 2025 prescribes the method of accounting for computing income under the heads “Profits and Gains of Business or Profession” and “Income from Other Sources.” An assessee may regularly follow either the cash system or the mercantile system of accounting. The Central Government may also notify Income Computation and Disclosure Standards (ICDS) for specified classes of assessees or income. Where the Assessing Officer is not satisfied with the correctness or completeness of accounts, the method is not regularly followed, or notified standards are not followed, assessment may be made under Section 271.

Method of the Accounting under Section 276:

1. Cash System of Accounting

Under Section 276(1), income chargeable under Profits and Gains of Business or Profession or Income from Other Sources may be computed according to the cash system of accounting, if it is regularly employed by the assessee. Under this system, income is generally recognised when it is actually received, while expenditure is generally recognised when it is actually paid. The method must be followed regularly and consistently. A change in the method cannot be made merely to manipulate taxable income. The Assessing Officer may question the accounts where the method is not regularly followed.

2. Mercantile System of Accounting

Under Section 276(1), an assessee may also regularly employ the mercantile system of accounting. Under this method, income and expenditure are generally recognised on the basis of accrual, rather than actual receipt or payment. Therefore, income is recognised when the right to receive it arises, while expenditure is recognised when the liability is incurred, subject to the applicable provisions of the Act. The assessee must regularly follow the selected method. If the method is not regularly followed, the Assessing Officer may make an assessment in the manner provided under Section 271.

3. Income Computation and Disclosure Standards

Under Section 276(2), the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or in respect of any class of income. Where such standards are applicable, the assessee must compute income in accordance with the notified standards. ICDS provides rules for determining taxable income in specified areas and seeks to bring consistency in income computation and disclosure. Therefore, maintaining books under the cash or mercantile system does not remove the requirement to comply with applicable notified standards under the Act.

4. Failure to Follow the Regular Method

Section 276(3)(b) provides that the Assessing Officer may make an assessment in the manner provided under Section 271 where the accounting method prescribed under Section 276(1) has not been regularly followed by the assessee. Regularity is therefore an important requirement. An assessee should consistently follow the chosen cash or mercantile system while computing taxable income. If the accounting method is changed or applied inconsistently without satisfying the applicable requirements, the Assessing Officer may reject the computation and proceed according to the statutory assessment provisions.

5. Incorrect or Incomplete Accounts

Under Section 276(3)(a), the Assessing Officer may make an assessment in the manner provided under Section 271 if he is not satisfied about the correctness or completeness of the accounts of the assessee. Thus, merely maintaining books of account is not sufficient; the accounts should be reliable and complete for determining taxable income. Proper vouchers, invoices, receipts, payment records and supporting documents should be maintained. Where the accounts do not provide a satisfactory basis for determining income, the statutory provisions relating to assessment may be invoked.

6. Failure to Comply with Notified Standards

Under Section 276(3)(c), the Assessing Officer may make an assessment in the manner provided under Section 271 where income has not been computed according to the standards notified under Section 276(2). Thus, applicable ICDS requirements must be considered while computing taxable income. The provision operates independently of whether the assessee maintains cash or mercantile accounts. Therefore, an assessee following a valid accounting system must also ensure that the final computation complies with the applicable notified standards under the Income-tax Act, 2025.

Comparison of Cash and Mercantile System: