Section 145 of the Income-tax Act, 1961 provides that the income of a person under the heads ”profit and gains of business or profession” or “income from other sources’ shall be computed in accordance with either cash or mercantile system of accounting that is regularly employed by the person. It further provides that the Central Government may notify in the Official Gazette, from time to time, accounting standards to be followed by any class of taxpayers or in respect of any class of income. Since the introduction of this provision in the Act, the Central Govt has notified two standards in 1996: (a) Accounting Standard I, relating to disclosure of accounting policies; and (b) Accounting Standard II, relating to disclosure of prior period and extraordinary items and changes in accounting policies. Subsequently, CBDT constituted the Committee to harmonize the Accounting Standards issued by ICAI with the provisions of the Act and also to suggest amendments to the Act necessitated by transition to IFRS. 

Tax Accounting Standards: Key Differences