An assessee is free to adopt an accounting method -mercantile or cash – or even a method of accounting which is regularly employed by it . The basic thing is that the accounting system adopted should be fair and should be followed regularly. This is what section 145 of the I T Act provides. However, under Companies Act there is only one kind of accounting system allowed i’e mercantile accounting system. Section 209(3)(b ) of the Companies Act provides that a company must maintain the accounts on accrual basis .
The questions, therefore, are
- Can a company follow the cash system of accounting for the purpose of Income Tax Act even though it is following mercantile under Companies Act ?