![]() ![]() ![]() The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited (see Keshav Mills Ltd. The profits earned and credited in the books of account constitute the basis of computation of income. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. ![]() Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Basically, it is a double entry system of accounting. The mercantile system of accounting is based on accrual. The cause and effect relationship is the basis for the matching principle. The principle is at the core of the accrual basis of accounting and adjusting entries. I.This basic accounting principle has been a huge bone of contention in numerous matters and is an oft misunderstood concept leading to oversimplification and misinterpretation which in turn results in litigation. I.This basic accounting principle has been a huge bone of contention in numerous matters and is an oft misunderstood concept leading to oversimplification and misinterpretation which in turn results in litigation.The article proposes to explain the concept in terms of settled law by numerous SC decisions and is expected to be useful to new entrants in field of litigation law ,esp the lawyers who may not have had a formal and detailed exposure to accountancy with reference to income tax law.This is a basic exposition and the author shall welcome advanced queries on the subject.I am deeply obliged to my exposure on the subject through my adjudicatory attempts as first appellate authority specially relating to coal fields and to my senior CA colleagues with whom my endless debates over endless cups of tea in my chambers, on accountancy principles and accounting standards vis-a –vis income tax law sharpened my understanding of tax accounting inspite of not being formally instructed on the issue save and except my training days in National Academy Of Direct Taxes. ![]()
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