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Difference between Accounting Standards and Income Tax Act, 1961


Accounting Standards are formulated by the Accounting Standards Board of ICAI to reduce the complications involved in the application of Accounting Principles, As well to improve the comparability of Financial Statements and to promote the transparency and fairness in their presentation.

There are certain fiscal policies formulated by Income Tax Department, where Deductions and Exemptions are allowed in the computation of Taxable Income. And there might be different than that of the Accounting Standard Policies. Thus and Expense Chargeable against revenue by an Accounting Standards does not imply that the same is always deductable for Income Tax purpose.

For instance, An Asset is taken for lease by X Company from Y Person. Regarding the Depreciation there are deviations found between the Accounting Standards and Income Tax Act 1961, while implementing them in Accounting, for general purpose and Computation of Income Tax purpose, which are citied below.

  1. Depreciation on Assets taken on Finance Lease is charges in the Books of Lessee (here X Company) as per Accounting Standard 19.
  2. But for Income Tax purpose it is allowed to Lessor (here Y Person), being the legal owner of the asset, rather than to the Lessee (X Company).

Likewise, recognition of revenue in the financial statements can not be avoided simply because it is exempted under Section 10 of the Income Tax Act, 1961.

The Central Government has notified the following Accounting Standards for Income Tax purpose.

  • Tax Accounting Standard 1 (TAS 1)
  • Tax Accounting Standard 2 (TAS 2)

As well the Government has mentioned the following two required disclosures for Tax purpose.

  • Disclosures of Accounting Policies.
  • Disclosures of Prior Period and Extra Ordinary Items and Changes in Accounting Policies.

Section 145 of Income Tax Act, 1961 implies that all the Enterprises keeping their Books on the basis of Mercantile System of Accounting must comply with TAS 1 and TAS 2.

And the requirements of TAS1 and TAS 2 are practically same as the corresponding Accounting Standards 1 and Accounting Standards 5 issued by the ICAI. The Mandatory compliance of TAS 1 and TAS 2 are nevertheless required for the limited purpose of Income Tax.

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