Opinion Of Eminent Legal Luminaries On Controversial Issues

Method of Accounting vis-a-vis ICDS – 2016

QUERY: In case of Income from Profession Cash system is followed. However income from Other Sources (interest on FD etc.) is declared up to 31-3-2016 (A.Y. 2016-17) following mercantile system.
Assessee desires to follow cash system since 1-4-2016 (A.Y. 2017-18) even in respect of Income from Other Sources.
Assessee is liable to get his accounts audited u/s. 44AB r.w.s. 44ADA of the Act.
It appears that the change in method of accounting is necessitated for bringing uniformity in respect of two heads of Income and as such must be held to be bona fide.
In Form No. 3CD what type of disclosure should be made ? In A. Y. 2017-18 if no interest income is actually received. Income to be offered to tax would be ` NIL. Is it correct?
ANSWER: The Finance Act, 1995 amended section 145 of the Income-tax Act, 1961 with effect from assessment year 1997-98 to provide that income chargeable under the heads “Profits and Gains of Business or Profession” or “Income from Other Sources” must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The hybrid system of accounting viz mixture of cash and mercantile is not permitted from assessment year 1997-98 and ownwards. However, assessee may adopt mercantile system of accounting for business and cash system of accounting for income from other sources.
So, now from the assessment year 2017-18, the assessee would like to follow cash system of accounting for income from other sources which was hitherto followed mercantile system of accounting. But this system should be followed by the assessee consistently in future to prove the consistency.
In clause 13(b) of Form No. 3CD the assessee would have to show change in method of accounting employed for computing income from other sources vis-a-vis method employed in the immediately preceding previous year. If due to change in the method of accounting, no interest income is received, then, it would have show NIL.
ICDSs, are mandatorily apply to all taxpayers (other than an individual or a HUF who is not subject to the audit u/s. 44AB of the Act) following mercantile system of accounting for the purpose of computation of income under the head “Profits and Gains of Business or Profession” or “Income from Other Sources”, so they are not applicable to cash system of accounting.
From the query it is clear that the assessee is entitled to get accounts audited u/s. 44AB r.w.s. 44ADA of the Act. These sections are applicable if income falls under the head “Profits and Gains of Business or Profession” and not when income falls under the head “Income from Other Sources”.

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