Maintenance of Accounts AY 2026-27

By | May 9, 2026
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Maintenance of Accounts

Taxpayers are required to maintain books of accounts if their income, turnover, or receipts exceed prescribed thresholds. Books must be maintained at the place of business or profession for six years from the end of the relevant assessment year.

Who Must Maintain Books of Accounts?

  • Specified Professions:Legal, medical, engineering, architecture, technical consultancy, interior decoration, film artists, accountancy, information technology, etc.
  • Mandatory, unless opting for presumptive taxation under Section 44ADA.
    • Non-specified Professions and Businesses:Thresholds apply:
  • Individual/HUF: Income exceeding ₹2,50,000 or turnover exceeding ₹25 lakhs in any of the last three years.
  • Others: Income exceeding ₹1,20,000 or turnover exceeding ₹10 lakhs in any of the last three years.

Presumptive Taxation Cases:

Books to Be Maintained

  • Specified Professions (other than company secretary and IT):
  • Cash book, journal, ledger, carbon copies of bills above ₹25, original bills, and signed vouchers for expenditures.
    • Medical Profession:
  • Additional requirements include Form 3C for daily cases and inventory of drugs and consumables.
    • Non-Specified Professions and Businesses:
  • Books necessary for computing taxable income if thresholds are exceeded.

Where and How Long to Maintain Books

  • Location:At the place of business or profession; for multiple locations, at the principal or respective locations.
  • Duration:Six years from the end of the relevant assessment year. If the assessment is reopened under Section 147, books must be retained until the reassessment is completed.

 

Method of Accounting under Sections 145 and 145A of the Income-tax Act

 

Introduction
Sections 145 and 145A govern the method of accounting for computing income under the heads Profits and gains of business or profession and Income from other sources. Assessees may follow either the cash system or the mercantile system of accounting, subject to regularity and compliance with notified Income Computation and Disclosure Standards (ICDS).

When Method of Accounting Shall Be Used

Income under the above heads shall be computed in accordance with the method of accounting regularly employed by the assessee. These provisions do not apply to income taxable under Salaries, House Property and Capital Gains.

Certain incomes are deemed taxable in the year of receipt or as specifically prescribed, irrespective of the accounting method. These include:

  • Dividend income (including deemed dividend), with interim dividend taxable on payment;
  • Interest on securities where no regular method is followed, taxable on becoming due;
  • Interest on income-tax refund as per ICDS-IV, taxable on receipt;
  • Interest on compensation or enhanced compensation, taxable on receipt;
  • Claims for escalation of price or export incentives, taxable when reasonable certainty of realisation arises;
  • Government grants or subsidies covered under Section 2(24)(xviii), taxable on receipt if not earlier charged to tax.

Types of Method of Accounting

Mercantile system records income and expenditure on an accrual basis.
Cash system records income and expenditure only on actual receipts or payments.

Different methods may be used for different sources, if regularly and consistently followed and capable of yielding true profits.

Income Computation and Disclosure Standards

The Central Government has notified 10 ICDS applicable from 01-04-2016 for computation of income under the relevant heads. These relate to Accounting Policies, Inventories, Construction Contracts, Revenue Recognition, Tangible Fixed Assets, Foreign Exchange Effects, Government Grants, Securities, Borrowing Costs, and Provisions/Contingent Liabilities.

Rejection of Books of Account

The Assessing Officer may reject books and make a best-judgment assessment where:

  • Accounts are incorrect or incomplete;
  • Method of accounting is not regularly followed;
  • Income is not computed in accordance with ICDS.

A definite finding must be recorded before rejection.

Valuation of Stock

Valuation of stock-in-trade is essential for determining profits.

  • Inventory is to be valued at the lower of actual cost or net realisable value in accordance with ICDS-II.
  • Section 145A requires inclusion of taxes, duties, cess or fees actually paid or incurred for bringing goods or services to their present location and condition.
  • Under the inclusive method, no further adjustments are required. Under the exclusive method, profit or loss must be adjusted for taxes such as GST.
  • Unlisted or unquoted securities are valued at actual cost; listed and quoted securities are valued at cost or net realisable value, whichever is lower, category-wise, as per ICDS-VIII.
  • For banks, valuation follows RBI guidelines.

Specific situations:

  • On conversion of a capital asset into stock-in-trade, fair market value on the date of conversion is deemed sale consideration and becomes the cost of such stock.
  • On capital contribution by a partner or member, the amount recorded in the firm’s or entity’s books becomes the value of stock if treated as stock-in-trade.
  • On partition of an HUF, the cost to the transferor member is deemed the cost of acquisition, increased by cost of improvement and transfer expenses.
  • On inheritance or gift of a non-depreciable asset treated as stock-in-trade, the cost is determined as per the Act based on prior ownership.

 

Treatment of Tax Paid on Goods: Inclusive vs. Exclusive Approach under Section 145A

 

The Income-tax Act recognizes two methods for recording transactions related to sales, purchases, and inventories:

  • Exclusive Method:Excludes duties or taxes.
  • Inclusive Method:Includes duties or taxes.
    Section 145A mandates adjustments for taxes, duties, cess, or fees while computing taxable income under “Profits and Gains of Business or Profession.”

Key Provisions

  • Mandatory Adjustments:
  • Taxes or duties on purchases, sales, and inventories must be included in income computation, even if excluded from books maintained using the exclusive method.
  • Inclusive adjustments ensure accurate disclosure in the Income-tax Return (ITR).
    • Treatment in Books of Account:
  • Assessees following the exclusive approach in their books need not alter their accounting system.
  • Adjustments can be made solely for income computation and ITR preparation.
    • Specific Scenarios:
  • Capital Goods:
    • If GST is included in the cost of assets, depreciation is claimed on the gross amount.
    • If Input Tax Credit (ITC) is availed, unutilized ITC is disclosed in “Other Current Assets” in the ITR.
  • Inventory and Sales:
    • GST components for purchases and sales must be disclosed separately in relevant ITR sections.
  • Composite Dealers:
    • Dealers ineligible for ITC must account for GST paid as part of purchase cost.
  • Disclosure Requirements in ITR:
  • GST on purchases and sales must be distinctly reported in the trading account or profit and loss section.
  • Unutilized ITC is recorded under “Balance with Revenue Authorities.”
    • Compliance Guidance:
  • Adjustments ensure adherence to Section 145A without necessitating changes to accounting practices.

 

Sales Turnover and Gross Receipts under the Income-tax Act

 

Introduction

  • Sales Turnover:Aggregate amount of sales made by an enterprise, considering gross or net turnover (before/after discounts and returns).
  • Gross Receipts:All receipts from a profession or business, used for determining tax audit applicability, presumptive taxation, and maintenance of accounts.

Key Considerations

  • Inclusions and Exclusions:
  • Discounts:
    • Upfront and trade discounts linked to sales are excluded.
    • Cash discounts unrelated to turnover are included.
  • Sales Returns:Deducted from turnover, even if from prior years.
  • Fixed Assets and Investments:Proceeds from sales are excluded unless held as stock-in-trade.
  • Taxes:GST and similar taxes are generally excluded unless specified under Section 145A for income computation.
    • Special Cases:
  • Commission Agents:Turnover is limited to the commission unless the agent assumes ownership risks, in which case the full sale price is included.
  • Speculative Transactions:Aggregate of favorable and unfavorable differences from contract settlements is considered turnover.
  • Derivative Transactions:Turnover includes differences from squared-off trades, premiums on options, and reverse trade differences. Open positions are accounted for when settled.
  • Delivery-Based Transactions:Full sale value is included as turnover.
  • Investments:Transactions in securities held as investments are excluded unless they are part of business activities.
    • GST Treatment:
  • For businesses under GST, taxes charged to customers are excluded from turnover unless integrated under Section 145A for profit computation.
    • Multiple Businesses:
  • Aggregate turnover from all businesses is considered unless excluded under specific schemes like presumptive taxation.
    • Professional Receipts:
  • Gross receipts include all amounts arising from the profession, such as fees, reimbursements, and incidental charges, but exclude rental income, dividends, and agricultural income.

 

Specified Modes of Payment

 

Rule 6ABBA prescribes electronic modes for acceptable receipt and payment of amounts under the Income-tax Act. These modes include credit cards, debit cards, net banking, BHIM, UPI, NEFT, and others.

Relevant Provisions

The following sections mandate payments or receipts through prescribed electronic modes:

  • Section 13A: Donations exceeding 2,000.
  • Section 35AD: Capital expenditure exceeding 10,000.
  • Section 40A: Payments exceeding 10,000 (Rs. 35,000 in specific cases).
  • Section 43: Payments exceeding 10,000 for acquiring capital assets.
  • Section 43CA, 50C, and 56: Consideration of agreement dates for computing the full value of consideration.
  • Section 44AD: Modes for receiving payments to declare presumptive income at 6%.
  • Section 80JJAA: Payment of employee emoluments.
  • Section 269SS: Loans, deposits, or specified sums of 20,000 or more.
  • Section 269ST: Receipts exceeding 2 lakh.
  • Section 269T: Repayment of loans or deposits of 20,000 or more.

Prescribed Electronic Modes

The Central Board of Direct Taxes (CBDT) has approved the following modes:

  • Credit Cards
  • Debit Cards
  • Net Banking
  • Immediate Payment Service (IMPS)
  • Unified Payment Interface (UPI)
  • Real Time Gross Settlement (RTGS)
  • National Electronic Funds Transfer (NEFT)
  • BHIM Aadhaar Pay

 

Recognition of Stock Exchange for Derivative Transactions

 

Derivative transactions in shares and commodities are not considered speculative if carried out on a recognized stock exchange. Recognition is granted upon fulfilling specified conditions under Rules 6DDA , 6DDB , 6DDC , and 6DDD .

Key Conditions for Recognition

Share Derivatives ( Rule 6DDA )

A stock exchange must:

  • Have SEBI approval and comply with its guidelines.
  • Maintain client data, including PAN and unique client identity numbers.
  • Retain a 7-year audit trail for cash and derivative market transactions.
  • The stock exchange shall ensure that once a transaction in respect of cash and derivative market is registered in the system, it shall not be erased.
  • Prevent erasure of registered transactions. Modifications must be limited to genuine errors and reported monthly via Form 3BB.

Commodity Derivatives ( Rule 6DDC )

An association must:

  • Have Forward Markets Commission approval and adhere to its guidelines.
  • Store client data, including PAN and unique client identity numbers.
  • Retain a 7-year audit trail for derivative transactions.
  • Prevent erasure of registered transactions. Modifications must be limited to genuine errors and reported monthly via Form 3BC .

Application for Recognition

Submission Process ( Rules 6DDB and 6DDD )

  • Applications must be addressed to the Member (Income Tax), CBDT, New Delhi.
  • Documents required:
  • SEBI/Forward Markets Commission approval.
  • Up-to-date rules, bye-laws, and trading regulations.
  • Confirmation of compliance with conditions.
  • Any additional relevant information.

Decision Timeline

The Central Government must issue a notification for recognition or rejection within four months from the application month’s end.

Validity of Recognition

Recognition remains valid until:

  • SEBI or Forward Markets Commission approval is withdrawn or expires.
  • The Central Government rescinds the notification.