4. Accounting Standard Authorities
• Accounting Standards issued by erstwhile National
Advisory Committee on Accounting Standards
(NFRA under Companies Act, 2013)
• Accounting Standards issued by ICAI.
• Tax Accounting Standards (TAS) proposed by
Accounting Standard Committee
• Powers to Central Government U/s 145(2) of the IT
Act, 1961 (NAS-1 and NAS-2 vis-a-viz AS1 and AS5)
• International Financial Reporting Standards in India
5. J.K. Industries Ltd. v. Union of India
 297 ITR 176 (SC)
Accounting Standards help in –
• Codification of Accounting rules
• Application of the fundamental rules
• Reduce the subjectivity
• Arrive at best possible estimate
• Reduces the need for tax laws dependency
upon artificial rules
6. Sec 133 of Companies Act, 2013
(Sec 211(3C) of the erstwhile act)
133. Central government to prescribe accounting
The Central Government may prescribe
the standards of accounting or any addendum
thereto, as recommended by the Institute of
Chartered Accountants of India, constituted under
section 3 of the Chartered Accountants Act, 1949
(38 of 1949), in consultation with and after
examination of the recommendations made by the
National Financial Reporting Authority.
7. Sec 44AA of the IT Act, 1961
(2) Every person carrying on business or
profession [not being a profession referred to in
sub-section (1)] shall –
keep and maintain such books of account and
other documents as may enable
the 52[Assessing] Officer to compute his total
income in accordance with the provisions of
8. Sec 145 of the IT Act, 1961
Method of accounting.
145. (1) Income chargeable under the head "Profits and gains
of business or profession" or "Income from other sources"
shall, subject to the provisions of sub-section (2), be computed
in accordance with either cash or mercantile system of
accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official
Gazette57 from time to time accounting standards to be
followed by any class of assessees or in respect of any class of
(3) Where the Assessing Officer is not satisfied about the
correctness or completeness of the accounts of the assessee,
or where the method of accounting provided in sub-section
(1) or accounting standards as notified under sub-section (2),
have not been regularly followed by the assessee, the
Assessing Officer may make an assessment in the manner
provided in section 144.]
9. Notification No. SO 69(E), dated 25-1-
1996 for Notified Accounting Standards
• Accounting Standard I relating to
disclosure of accounting policies
• Accounting standard II relating to
disclosure of prior period and
extraordinary items and changes in
11. Challapalli Sugars Ltd. v. CIT
 98 ITR 167
". . . As the expression ‘actual cost’ has not
been defined, it should, in our opinion, be
construed in the sense which no commercial
man would misunderstand. For this purpose
it would be necessary to ascertain the
connotation of the above expression in
accordance with the normal rules of
accountancy prevailing in commerce and
industry. . . ."
12.  130 TAXMAN 179 (SC)
Commissioner of Income-tax v.
Indo Nippon Chemicals Co. Ltd.
". . . The High Court took the view that unless the
Assessing Officer acted under circumstances indicated
in section 145 of the Act, the Assessing Officer is bound
to adopt the method of computation of income
regularly employed by the assessee. However, if he
comes to the conclusion that the method of accounting
employed by the assessee makes it impossible to
correctly compute the income, then the Assessing
Officer is entitled to adopt any other suitable
accounting method. We may add that, whatever
method the Assessing Officer adopts, the method
has to be consistent with the accepted principles of
accountancy.. . . ."
13. Commissioner of Income-tax
Woodward Governor India (P.) Ltd.
 294 ITR 451 (DELHI)
Section 5, read with section 145, of the Income-tax Act,
1961 - Income - Accrual of - Whether in determining
whether there has, in fact, been accrual of liability or
income, accountancy standards prescribed by ICAI would
have to be followed and applied ?
The judicially accepted position appeared to be that in
determining whether there has, in fact, been accrual of
liability or income, the accountancy standards prescribed by
the ICAI would have to be followed and applied. [Para 16]
14. Prakash Leasing Ltd.
Deputy Commissioner of Income-tax
 23 taxmann.com 3 (Kar.)
“When the Accounting Standard is now made the basis of
maintaining the accounts for the purpose of income-tax,
even if the Central Government has not notified in the
Official Gazette the Accounting Standards, certainly
the Accounting Standards prescribed by the Institute of
Chartered Accountants have to be followed.”
15. CIT v. Virtual Soft Systems Ltd.
205 Taxman 257 (Delhi) 
observed that "the guidance notes reflect the
best practices adopted by accountants the
world over" and further, that "as long as
there was a disclosure of the change in the
accounting policy in the accounts which had
a backing of a professional body such as ICAI,
it could not be discarded by the A.O."
16.  36 taxmann.com 74 (Mumbai - Trib.)
ACIT, Range -10(1) v.
ITD Cementation India Ltd
“It is a fact that AS-7 has not been notified by the Central
Government. This does not mean that the assessee is
precluded from following AS-7. A perusal of the
provisions of section 145 show that accounting standards
which have been notified by the Central Government have
to be mandatorily followed by the assessee. But this does
not mean that the assessee cannot follow the other
accounting standards issued by ICAI. The accounting
standards issued by ICAI cannot be brushed aside lightly.
On the contrary, if an assessee is following the
accounting standards issued by ICAI, it would give
more credibility and authenticity to its account.”
18. AS-2 (Inventory)
• IT gives more weightage to consistency
while AS more to correct representation
• AS requires provision. SC - expenditure
dependent upon the future events is not
allowable as deduction
AS-4 (Prior Period)
• Difference in appreciating what actually
qualifies as a prior period item
19. AS-6; AS-10; AS-16
• Concept of Block of Asset
• Deferred Revenue Expenses (AS-26) vis-
a-viz Sec 35AB; 35ABB; 35D; 35DD; 35E
• Interest on Temporary Investment
• Only WDV under IT Act, 1961
• Warranties and Contingences
• Retention Money
20. AS-9 (Revenue Recognition)
• Interest accrual a major grey area for
NBFC and banks.
• Export incentives
AS-11 (Foreign Exchange) v. Sec 43A
• Exchange fluctuation is to be adjusted in
cost of assets only on payment basis,
whereas for accounting purpose, the
entire outstanding liability is adjusted.
21. AS-13 (Investments)
• Permanent diminution to written off as
per AS. Not allowed under IT
• Non Compete fees for AS-26 is intangible
and debatable in IT Act.
AS-28 (Impairment of Asset)
• Mandatory to apply AS-28 though
provision not allowable under IT Act.
the Hon’able Apex Court in the case of Apollo Tyres Ltd. v. CIT [(2002) 255 ITR 273] has held that the A. O., while computing the profits u/s 115J, does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Sec.
115J, if the same are in accordance with the provisions of the Parts II and III of Schedule VI to the Companies Act, as contemplated in Sec. 115J(1A)
A perusal of section 145 shows that the income could be computed “in accordance with the method of accounting regularly employed by the assessee”. It is undoubtedly correct that the statute stipulates that the income shall be computed on the basis of the system of accounting ‘regularly’ followed by the assessee. It should mean during the period under consideration. However, the provision cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. ‘Regular’ cannot be in the present context mean permanent - CIT v. Punjab State Industrial Development Corpn. Ltd.  255 ITR 351 (Punj. & Har.).