INCOME-TAX ACT, 2025 | CHAPTER XVI | ASSESSMENT PROCEDURE
Section 276 Income Tax Act 2025: Can You Choose Cash or Mercantile Accounting?
Section 276 sets out the method of accounting for income under Profits and gains of business or profession and Income from other sources. It recognises the cash and mercantile systems when regularly followed, subject to notified Income Computation and Disclosure Standards (ICDS).
What does Section 276 of the Income-tax Act, 2025 provide?
Section 276(1): Regularly employed accounting method
Income taxable under the heads Profits and gains of business or profession or Income from other sources is computed in accordance with either the cash system or the mercantile system of accounting regularly employed by the assessee, subject to subsection (2).
Section 276(2): Notified computation standards
The Central Government may notify Income Computation and Disclosure Standards for any class of assessees or class of income. These standards affect computation of taxable income and must be considered alongside the accounting method.
Section 276(3): Best judgment assessment
The Assessing Officer may assess income in the manner prescribed under Section 271 where any one of the following circumstances exists:
- The Assessing Officer is not satisfied about the correctness or completeness of the accounts.
- The assessee has not regularly followed the cash or mercantile method.
- Income has not been computed in accordance with standards notified under Section 276(2).
The existence of one of these statutory grounds does not remove the procedural safeguards applicable to best judgment assessment.
What is the difference between cash and mercantile accounting?
| Feature | Cash system | Mercantile system |
|---|---|---|
| General recognition | Income and expenses generally recognised on receipt and payment, subject to tax law | Income and expenses generally recognised when accrued or incurred, subject to tax law |
| Unpaid customer invoice | Generally recognised when payment is received | Generally recognised when the right to receive accrues |
| Unpaid business expense | Generally recognised when paid | Generally recognised when liability accrues |
| Section 276 requirement | Method must be regularly followed; applicable statutory provisions and notified ICDS still apply | |
Important: The recognition rules above are simplified illustrations. Specific provisions of the Act may prescribe a different timing or treatment for particular receipts, deductions or transactions.
How do Income Computation and Disclosure Standards affect taxable income?
Section 276(2) authorises the Central Government to notify ICDS. These are tax-computation standards, not a general replacement for financial reporting standards. Taxpayers should identify which notified standards apply to their category and income and reconcile differences between financial accounts and taxable income.
For example, valuation of inventory is separately addressed by Section 277. Other special timing rules may apply under Section 278. A consistent book-accounting method does not override an express tax computation rule.
When can the Assessing Officer reject accounts?
Under Section 276(3), a best judgment assessment may be made if accounts are incorrect or incomplete, if the chosen method is not regularly followed, or if the computation does not comply with applicable notified standards. The assessment must follow the procedure in Section 271, including applicable notice and hearing safeguards.
Examples of concerns include material omissions in sales records, unreconciled transactions, unexplained changes in recognition methods or failure to apply applicable ICDS. A mere difference of opinion should not automatically be treated as proof that accounts are incorrect; the statutory conditions and evidence matter.
Relevant statutory and accounting definitions
- Assessee
- A person in relation to whom income-tax or another sum is payable under the Act, including persons treated as assessees under the statutory definition in Section 2.
- Assessing Officer
- The income-tax authority vested with the relevant assessment jurisdiction and powers under the Act.
- Cash system
- An accounting method that generally recognises receipts and payments when cash is received or paid, subject to specific tax rules.
- Mercantile system
- An accrual-based accounting method that generally recognises income when earned and expenditure when incurred, subject to specific tax rules.
- ICDS
- Income Computation and Disclosure Standards notified by the Central Government for specified assessees or income under Section 276(2).
- Best judgment assessment
- An assessment made under Section 271 on relevant material and in accordance with its statutory procedure where specified defaults or grounds exist.
Practical examples of Section 276
Example 1: Professional using cash accounting
A professional who consistently follows the cash method receives payment in June for services invoiced in March. Subject to applicable statutory provisions, receipt-based recognition generally follows the cash method. The taxpayer should maintain records showing consistent treatment.
Example 2: Business using mercantile accounting
A trading business sells goods on credit in March and receives payment in May. Under the mercantile method, revenue may be recognised when the right to receive accrues, even though the customer pays later.
Example 3: Incomplete records
An Assessing Officer identifies substantial unrecorded sales and finds the accounts incomplete. Section 276(3)(a) may permit an assessment under Section 271, subject to the required process and opportunity to respond.
Example 4: ICDS non-compliance
A taxpayer follows a consistent mercantile system but computes taxable income contrary to an applicable notified ICDS. Section 276(3)(c) may be invoked independently of whether the book entries are otherwise consistent.
How does Section 276 compare with the Income-tax Act, 1961?
Section 276 of the Income-tax Act, 2025 broadly corresponds to Section 145 of the Income-tax Act, 1961. Both address regularly followed cash or mercantile accounting, notified computation standards and circumstances permitting best judgment assessment. Do not confuse Section 276 of the 2025 Act with Section 276 of the 1961 Act, which concerned a different subject.
Frequently asked questions
Can I choose between cash and mercantile accounting?
Section 276(1) recognises both methods for the specified heads of income, provided the chosen method is regularly employed and applicable statutory standards are complied with.
Does Section 276 apply to salary income?
Section 276(1) expressly concerns profits and gains of business or profession and income from other sources. Salary income is governed by its own charging and computation provisions.
Can the Assessing Officer reject my books merely because I use cash accounting?
No. Cash accounting is expressly recognised by Section 276(1). Rejection requires a statutory ground such as incorrect or incomplete accounts, inconsistent application or failure to follow applicable notified standards.
What happens if ICDS is not followed?
Under Section 276(3)(c), failure to compute income in accordance with applicable notified standards can permit assessment under Section 271, subject to the statutory procedure.
Is Section 276 the same as Section 145 of the 1961 Act?
It is the corresponding provision on method of accounting under the Income-tax Act, 2025. The applicable tax year and transition rules should be checked when citing either enactment.
Statutory references and further reading
- Income-tax Act, 2025, as amended by Finance Act, 2026 - Income Tax Department (official PDF)
- Income Tax Department - Income-tax Act, 2025 and Rules, 2026
- Section 271 - Best judgment assessment
- Section 275 - Dispute Resolution Panel
Legal note: This article is general information. Verify the applicable notified ICDS, tax-year-specific amendments and facts before taking a filing or assessment position.