# Method of Accounting for PGBP [Section 145]

PGBP income must be computed using either:

Cash system of accounting, OR
Mercantile/Accrual system of accounting.

The choice is the assessee's, but it must be applied consistently.

## Computation under Cash System

Particulars	Amount
Gross Receipts from Business (received basis: ignore if not received during P.Y.)	XX
(-) Business Expenses (paid basis: ignore if not paid during P.Y.)	(XX)
Income from Business / Profession (PGBP)	XX

Deductions follow PGBP provisions (sections 30 to 43B), but recognition is purely on cash basis.

## Section 145B — Government Subsidy/Grant

Subsidy or grant from the government is deemed to be income of the P.Y. in which it is received, regardless of whether the assessee follows cash or accrual system.

## Income Computation and Disclosure Standards (ICDS)

The Central Government has notified 10 ICDSs.
ICDS applies to computation of income under PGBP (and Income from Other Sources) when the accrual system is followed.
ICDS applies to all assessees EXCEPT Individuals and HUFs who are NOT liable for tax audit under section 44AB.

Implication: small individuals/HUFs (below 44AB threshold) are spared from ICDS compliance.

Worked example

### Example 1

Example 1 — Cash system: Mr. X follows cash basis. He earned bills of ₹10 lacs during P.Y. but actually received ₹7 lacs. He incurred expenses of ₹4 lacs but paid only ₹3 lacs. PGBP income = ₹7 lacs − ₹3 lacs = ₹4 lacs. The unreceived ₹3 lacs and unpaid ₹1 lac are ignored.

### Example 2

Example 2 — Government subsidy: An accrual-basis assessee was sanctioned a ₹20 lacs government subsidy on 1.3.2026 but actually received it on 5.4.2026 (i.e., in the next P.Y.). The subsidy is taxable in A.Y. 2027-28 (year of receipt), not A.Y. 2026-27, per section 145B.

### Example 3

Example 3 — ICDS applicability: An individual professional (not liable for tax audit) follows accrual basis. ICDS does NOT apply to him. But the moment his receipts cross the 44AB threshold, ICDS becomes applicable.

⚠️ Common exam mistakes

Mixing cash and accrual within one PGBP computation — must be consistent.
Treating government subsidy as accruable income — section 145B overrides this and uses receipt basis.
Applying ICDS to an individual/HUF not subject to 44AB audit.
Applying ICDS to cash-basis taxpayers — ICDS is for ACCRUAL basis only.
Forgetting that under cash basis, expenses not yet paid are NOT deductible even if accrued.

Bare-Act text Sections 145 and 145B · Income Tax Act, 1961 · click to expand

Section 145(1) provides that income chargeable under 'Profits and Gains of Business or Profession' or 'Income from Other Sources' shall, subject to the provisions of section 145(2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Section 145B(1) provides that interest received on compensation or on enhanced compensation shall be deemed to be the income of the year in which it is received. Section 145B(3) provides that any income referred to in section 2(24)(xviii) [subsidy/grant/cash incentive from Central/State Government] shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

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Method of Accounting [Section 145 & 145B] and ICDS

Worked example

⚠️ Common exam mistakes